the evolution of absolute return: robert thorpe, cazenove

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The Evolution of Absolute Return Cazenove Capital Management Limited 12 Moorgate London EC2R 6DA Telephone +44 (0) 20 7155 5600 www.cazenovecapital.com Registered Office 12 Moorgate London EC2R 6DA Registered in England No 3017060 Authorised and regulated by the Financial Services Authority Cazenove Capital Management Limited provides independent advice For professional advisers authorised and regulated by the FSA only. This document must not be distributed to non-regulated persons or retail investors Robert Thorpe - Director, UK Advisory Sales

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Page 1: The Evolution of Absolute Return: Robert Thorpe, Cazenove

The Evolution of Absolute Return

Cazenove Capital Management Limited 12 Moorgate London EC2R 6DA Telephone +44 (0) 20 7155 5600 www.cazenovecapital.com

Registered Office 12 Moorgate London EC2R 6DA Registered in England No 3017060 Authorised and regulated by the Financial Services AuthorityCazenove Capital Management Limited provides independent advice

For professional advisers authorised and regulated by the FSA only. This document must not be distributed to non-regulated persons or retail investors

Robert Thorpe - Director, UK Advisory Sales

Page 2: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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Agenda

Part 1

Demand for Absolute Return

Part 2

Absolute returns - reducing marketing risk and volatility

Part 3

The Evolution of Absolute return

Page 3: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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Defining Absolute Return

IMA: Absolute Return Sector: A return above zero in any market condition

A return above inflation

A return above cash

Page 4: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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What Absolute Funds are not

Guaranteed to deliver positive returns each month - but potential for fewer negative months

Immune from volatility - but expect volatility to be lower than traditional funds

A new way of investing - but techniques now accessible to retail investors

Hedge funds - but borrow techniques from them, and are regulated funds

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Page 6: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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A truly global crisis

Page 7: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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Page 8: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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A truly global crisis

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2008: Correlation Year

Average UK All Companies Fund -32.07% over 12 months

Average UK Corporate Bond Fund -10.01% over 12 months

Average UK Property Fund -30.43% over 12 months

Average Global Equity Fund -24.37% over 12 months

Average Asian Equity Ex Jap Fund -33.59% over 12 months

Average Emerging Markets Fund -37.14% over 12 months

Source: Lipper mid to mid, net income reinvested over one year to 31/12/08

Page 10: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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Reduced return from cash

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Who could Absolute Funds be suitable for?

Investors seeking positive returns above cash

Investors seeking low correlated asset classes

Investors seeking the potential for excellent returns with low volatility

Investors seeking to reduce risk in their portfolio

Investors seeking exposure to outstanding investment talent

Most investors….?

Investors close to retirement/drawdown

With-profit holders?

Those who didn’t invest last year!

Page 12: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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Absolute return funds – enhancing returns/reducing risk

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

6.00 6.50 7.00 7.50 8.00 8.50

Core Portfolio 95% Core - 5% Abs Ret Fund 90% Core - 10% Abs Ret Fund

85% Core - 15% Abs Ret Fund 80% Core - 20% Abs Ret Fund

Source: Cazenove Capital. Abs Ret Fund (50% Caz UK EQ Abs Ret GBP/50% Threadneedle Abs Rtn Bond Fund)

3 years to 31st Dec 08. Core Fund is average IMA Cautious Managed Fund

Volatility

Re

turn

Page 13: The Evolution of Absolute Return: Robert Thorpe, Cazenove

Absolute Returns – reducing market risk and volatility

Part 2

Page 14: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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Shorting – simple explanation of profit from falling prices

£100k profit

Sell £200k

Buy back £100k

20

60

100

140

180

Property market crashes 50%!

Page 15: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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FSA: Alternate Strategies to enter retail space

March 2007 – Consultation Paper CP07/6

1.2 A wider range of investment products is increasingly entering the retail market

and there is little, if any, possibility of preventing this. Indeed, because of the

recent downturns in the equity market retail consumers appear to be actively

seeking out alternative investments to increase their returns.

1.3 For this reason we have considered how we might create a regime to

accommodate these diverse products in a well-regulated environment. The

advances that have taken place in portfolio management mean that the

traditional, long-only style of management typically found in retail investment

products may no longer be the only appropriate strategy for every investor.

Page 16: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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A market neutral fund

50% Long (beta +1)

50% Short (beta -1)= Zero Beta

Beta: Sensitivity of a share price to wider market movement (e.g tracker has a beta of 1)

Alpha: Return over and above market or index

Market neutral: no sensitivity to market risk (e.g beta of zero)

Page 17: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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Example

Source: Datastream 1 December 2008Source: Datastream 1 December 2008

Stock: Reed ElsevierSector: Media & EntertainmentStyle: Growth Defensive

Stock: ITVSector: Media & EntertainmentStyle: Consumer Cyclical

20

3040

5060

7080

90100

110

120130

140150

160170

180

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

ITV relative to FTSE All Share Reed Elsevier relative to FTSE All Share

Page 18: The Evolution of Absolute Return: Robert Thorpe, Cazenove

The Evolution of Absolute Return

Part 3

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Cash+/above zero

UCITS 3 (EPM plus derivatives)

CGT qualifying

Daily dealing

1-3 year outlook

High transparency

Absolute

Absolute evolution

Relative objective

UCITS 3 (EPM)

CGT/Income tax (up to 32%)

Daily dealing

3-5 year outlook

High transparency

Traditional

Range of targets

Unregulated collective investment

Income tax only (to 32%)

Monthly dealing

6-18 month outlook

Lack of transparency

Hedge

Efficient Portfolio Management: A set of standards in the U.K. for prudent management of investment accounts. The standards call for economically appropriate transactions, i.e., transactions that reduce risk, reduce cost, or generate additional capital or income.

Page 20: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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Aide memoire to Absolute Due Diligence

What is the volatility compared to the market? What is the Beta?

Has the fund manager used a rising market to achieve performance?

How much has the fund lost in any one month?

How many negative months?

Where have the returns come from?

How successful has the shorting record been?

Experience and evidence is crucial

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Cazenove UK Absolute Target Fund

Launched July 2008

Targeting between 8 and 10% per annum, net of fees (Not guaranteed*)

Volatility significantly less than the equity market

UCITS Fund, daily priced and liquid

Managed by Tim Russell. Experienced, track record

Rated by OBSR and S&P

£213m under management

* There is no guarantee that either the target or positive returns will be achieved

Broadly market neutral (BETA 0)

Cazenove UK Absolute Target fund

Page 22: The Evolution of Absolute Return: Robert Thorpe, Cazenove

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Tim Russell’s Absolute Record at Cazenove Capital (rebased) GBP Class

80

100

120

140

160

180

200

Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09

Inde

xed

Cazenove UK Equity Absolute Return Fund (Class A GBP) FTSE All Share - TR UK Interbank 7 Day

Source: Cazenove Capital/Bloomberg at 31/03/09.Source: Cazenove Capital/Bloomberg at 31/03/09.

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1 Yr to 31/03/09 UK Hedge Long Short TotalsAerospace & Defence -53 36 -17Automobiles & Parts 0 16 16Banks -271 95 -177Beverages -15 -7 -22Chemicals 0 87 87Construction & Materials -63 386 324Electricity 11 33 44Electronic & Electrical Equipment -2 37 35Equity Investment Instruments -4 11 8Food & Drug Retailers 3 21 24Food Producers -47 102 55Forestry & Paper -16 0 -16Future -103 8 -95Gas, Water & Multiutilities -8 9 1General Financial -262 35 -227General Industrials -45 2 -44General Retailers -148 157 9Healthcare Equipment & Services -97 8 -88

12 Months to 31/03/09 UK Hedge Long Short TotalsHousehold Goods & Textiles -51 2 -49Industrial Engineering -81 121 40Industrial Transportation -79 159 79Life Insurance -350 28 -322Media -95 6 -89Mining -231 352 120Mobile Telecommunications -125 34 -91Nonlife Insurance 17 32 49Oil & Gas Producers -93 25 -68Oil Equipment, Services and Distribution -17 -28 -45Pharmaceuticals & Biotechnology 73 26 99Real Estate -13 279 266Software & Computer Services -27 10 -17Support Services 19 176 194Technology Hardware & Equipment -9 23 14Tobacco -35 2 -33Travel and Leisure 45 138 183TOTALS -2171 2419 248

Tim Russell Absolute Portfolio 12 Months period

Performance attribution by sector – UK Equity Absolute Return Fund1 year to end March 2009 (basis points)

1 Yr to 31/03/09 UK Hedge Long Short Totals

Mining -231 352 120

1 Yr to 31/03/09 UK Hedge Long Short Totals

General Retailers -148 157 9

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Tim Russell’s Absolute Record at Cazenove Capital

UK Equity Absolute ReturnFTSE All Share

Index

Months since launch 65 n/a

Monthly positives 57 40

Monthly negatives 8 25

Best monthly return (%) 2.5 6.26

Maximum monthly loss (%) -3.50 -13.24

Average net exposure (%) 14.40 n/a

Average gross exposure (%) 131.60 n/a

Beta -0.02 1

Volatility 3.36 13.3

Annualised return (%) 7.50 2.20

As at 30 March 2009Source: Cazenove Capital

As at 30 March 2009Source: Cazenove Capital

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Tim Russell’s Absolute Strategy Performance: 10 biggest fall of FTSE since launch

-4.78

-3.33

-4.75

-8.67

-7.06

-3.60

-13.24

-11.90

-5.83-6.52

0.17

1.80

0.501.09 1.12

-0.03

1.98

0.23

-0.76

-3.50

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

May-06 Jul-07 Nov-07 Jan-08 Jun'08 Jul-08 Sep-08 Oct-08 Jan-09 Feb-09

FTSE All-Share UK Core Fund

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Cazenove UK Absolute Target Fund

Monthly statistics since launch July 2008 to May 2009

Months since launch 10

Fund positive months since launch 8

Index positives month since launch 5

Fund negative months since launch 2

Index negative months since launch 5

Number of months fund out-performed index 6

Number of months fund fell further than index 1

Fund Volatility since launch 9%

Index Volatility since launch of fund 39%

Relative performance to all-share since launch: +15.6%

Fund return since launch +1.3% (avg IMA Absolute +1.2%)

Index return -14.3%

*Performance 18.7.08 to 27.05.09. P2 share class mid to mid, source Financial Express. Index FTSE All-Share

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Disclaimer

This document is issued by Cazenove Capital Management Limited (Cazenove Capital). It is for information purposes only and does not constitute an offer to enter into

any contract/agreement nor a solicitation to buy or sell any investment or to provide any services referred to therein.

This document is solely for the use of professional intermediaries and is not for general public distribution.

The contents of this document are based upon sources of information believed to be reliable, however, save to the extent required by applicable law or regulations, no

guarantee, warranty or representation (express or implied) is given as to its accuracy or completeness, and Cazenove Capital or connected companies, directors, officers

and employees do not accept any liability or responsibility in respect of the information or any recommendations expressed herein which, moreover, are subject to

change without notice.

This document has been produced based on Cazenove Capital Management’s research and analysis and represents our house view. Unless otherwise stated all views

are those of Cazenove Capital Management. It may not be reproduced in any form without the express permission of Cazenove Capital Management and to the extent

that it is passed on, care must be taken to ensure this is in the form which accurately reflects the information given here. Unless otherwise indicated, the source for all

data is Cazenove Capital.

Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down as well as up and an

investor may not get back the amount invested and may be affected by fluctuations in markets and exchange rates.

Cazenove Capital Management is the name under which Cazenove Capital Management Limited (registered No. 3017060) and Cazenove Investment Fund Management

Limited (registered No. 2134680) each authorised and regulated by the Financial Services Authority and of 12 Moorgate London EC2R 6DA provide investment products

and services.