Asset allocation: optimising returns in a low return
environment
Glyn Owen
October 2010
RMB Asset Management International Limited (Company Registration No. 3733094) is authorised and regulated by the Financial Services
Authority and is a member of the FirstRand Group, and has its registered office at Twenty Gracechurch Street, London, EC3V 0BG
Global imbalances
3000
2500
2000
USD, 000's billions
1500
1000
Chinese reserves
500
0
The US twin deficit
-500
-1000
-1500
-2000
-2500
2001
2002
2003
Source : Bloomberg, Old Mutual. September 2010.
2004
2005
2006
2007
2008
2009
2010
If we go down they come with us
5%
ISM PMI (Manufacturing)
75
US Imports from China
70
4%
65
3%
60
2%
55
Chinese reserves
50
1%
The US twin deficit
45
0%
40
-1%
35
-2%
30
2004
2005
Source : Bloomberg. September 2010.
2006
2007
2008
2009
2010
But does superior GDP growth lead to market
outperformance?
120
Index level (Rebased)
100
80
60
40
20
0
Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10
SHANGHAI SE COMPOSITE
Source : Bloomberg, Old Mutual. September 2010.
NIKKEI 225
Still too much debt
180%
160%
Non-federal debt as a % of GDP
140%
120%
80%
100%
Federal debt as a % of GDP
70%
60%
50%
40%
30%
140%
120%
100%
80%
60%
Mar 80 Mar 82 Mar 84 Mar 86 Mar 88 Mar 90 Mar 92 Mar 94 Mar 96 Mar 98 Mar 00 Mar 02 Mar 04 Mar 06 Mar 08 Mar 10
Source : Bloomberg, BCA Research. September 2010.
Household debt as a % of
personal disposable income
It’s a two speed world……
6
Source: Bloomberg, Sarasin & Partners, IMF and WEO September 2010
…..but developed economies still dominant
Share of global
GDP
Source: Bloomberg, September 2010
Global real money growth – pushing on a string
Source: Schroders. September 2010.
Any bets on this reversing?
200
EM currency index vs. 50:50 USD / EUR
190
180
Return (Rebased)
170
160
150
140
130
120
110
100
90
Dec
95
Dec
96
Dec
97
Dec
98
Dec
99
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
EM Currency Index versus 50:50 USD:EUR Cash
Source : Bloomberg, Investec Asset Management. September 2010.
Dec
07
Dec
08
Dec
09
Source : Bloomberg. September 2010.
UK
US
GERMANY
30/06/2010
30/12/2009
30/06/2009
30/12/2008
30/06/2008
30/12/2007
30/06/2007
30/12/2006
30/06/2006
30/12/2005
30/06/2005
30/12/2004
30/06/2004
30/12/2003
30/06/2003
30/12/2002
30/06/2002
30/12/2001
30/06/2001
30/12/2000
30/06/2000
10 year Government bond yields – US, UK, Germany
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Market expectations of inflation are falling
%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
Jan 05
Jul 05
Jan 06
Jul 06
Jan 07
Jul 07
Jan 08
Jul 08
US Breakeven 5 Year
Source : Bloomberg. September 2010.
Jan 09
Jul 09
Jan 10
Jul 10
G7 implied forward rates ex. Japan
G7 ex. Japan Forward Rates
6.5
6
5.5
5
4.5
%
4
3.5
Market Implied Official Rates in 5 Years Time
3
Market Implied 5 Year Yields in 5 Years Time
2.5
Source : Bloomberg. September 2010.
Mar-10
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
Mar-05
Sep-04
Mar-04
Sep-03
Mar-03
Sep-02
Mar-02
Sep-01
Mar-01
Sep-00
2
US existing home sales
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
US Existing Homes Sales SAAR
13
Source: Bloomberg, September 2010
Dec
08
Dec
09
US unemployment
Unemployment in the US
10
9
8
7
Rate (%)
6
5
4
3
2
1
0
Feb-07
Aug-07
Source : Bloomberg. September 2010.
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Industrial production
40
30
20
Level
10
0
-10
-20
-30
-40
-50
Jan 90
Jan 92
Jan 94
Jan 96
Jan 98
Jan 00
US Industrial Production
Germany Industrial Production
Source: Bloomberg. September 2010.
Jan 02
Jan 04
Jan 06
Jan 08
UK Industrial Production
Japan Industrial Production
Jan 10
10 year Government bond yields – PIGS
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Jun
04
Dec
04
Jun
05
Dec
05
Jun
06
PORTUGAL
Source : Bloomberg. September 2010.
Dec
06
Jun
07
Dec
07
IRELAND
Jun
08
Dec
08
GREECE
Jun
09
SPAIN
Dec
09
Jun
10
Liquidity conditions have stabilized
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
Jan 07
Jul 07
Jan 08
US LIBOR - OIS Spread
Source : Bloomberg. September 2010.
Jul 08
Jan 09
Euro LIBOR - OIS Spread
Jul 09
Jan 10
UK LIBOR - OIS Spread
Jul 10
700.00
2100.00
600.00
1800.00
500.00
1500.00
400.00
1200.00
300.00
900.00
200.00
600.00
100.00
300.00
0.00
Jan 94 Jan 95 Jan 96 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
US Investment Grade Spreads
Source: Bloomberg. September 2010.
US High Yield Spreads
0.00
US High Yield Spreads
US Investment Grade Spreads
Credit spreads
Corporate sector in excellent shape
Corporates are sitting on a mountain of cash
Source: RMB Asset Management, BCA. September 2010
M&A activity
Consumer confidence Germany
Source: Bloomberg. September 2010.
German business confidence also strong
100
Level (Germany ZWE)
50
0
-50
-100
-150
Aug
00
Aug
01
Aug
02
Source: Bloomberg. September 2010.
Aug
03
Aug
04
Aug
05
Aug
06
Aug
07
Aug
08
Aug
09
Aug
10
Fiscal consolidation
Historical fiscal rebalancing
Projected fiscal rebalancing
3.0
3.0
2.5
2.5
2.5
2.3
2.2
2.0
1.9
1.8
1.5
1.5
1.3
1.0
1.3
2.0
2.0
1.5
1.6
1.5
1.3
1.0
0.8
0.5
0.5
0.0
0.0
Spain Italy '91- UK '94- Germany US '94'96-03
97
00
'05-07
98
Canada Sweden
'93-97 '94-98
Portgual
'11-14
UK '11-14 US '11-13 Spain '11- Greece
13
'10-14
Ireland
'10-14
 Historical precedent suggests economies can shrug off some fiscal rebalancing…
but there is a limit

Ireland, Greece and likely Spain will be significantly impacted by fiscal cuts
 With 2012 election looming US likely to push spending cuts back
Source: IMF, Economist, Eurostat. September 2010.
Equity valuations provide strong support
Source : Bloomberg. September 2010.
Equities…… the income asset class?
Dividend Yld
(%)
10 Year Gov
Bond Yld (%)
Investment
Grade Corp
Bond Yld (%)
Dow Jones Industrial Average
2.60
2.54
3.68
S&P 500
1.97
2.54
3.68
FTSE All-Share
3.19
2.99
5.05
FTSE 100
3.30
2.99
5.05
Euro Stoxx 50
4.03
2.32
3.26
Nikkei 225
1.75
0.96
0.66
Source : Bloomberg. September 2010.
Dividend yields higher than corporate bond yields
Source : Bloomberg. September 2010.
Dividend Yld
(%)
Corporate
Bond Yld (%)
Banco Santander
6.45
4.16
Chevron Corp
3.51
2.95
Commonwealth Bank of Australia
8.14
7.06
Deutsche Telecom
7.73
3.59
E.ON AG
6.42
3.20
ENI
6.27
3.46
France Telecom
8.76
3.25
GDF Suez
8.69
2.99
General Electric
2.96
4.31
GlaxoSmith Kline
5.03
2.91
MacDonalds
3.28
3.83
Microsoft
2.61
2.99
National Australia Bank
8.40
3.99
Nestle SA
3.07
1.44
Novartis AG-REG
3.79
3.05
Petro China
3.67
3.95
Roche Holding
4.44
3.22
Sanofi-Aventis
4.89
3.05
Tesco
3.07
3.91
Total SA
5.92
4.18
Vodafone
5.27
4.09
Where is investor money flowing…….?
+USD560 billion
Source : EPFR Global. September 2010.
Emerging bubble?
Source : EPFR Global. September 2010.
Gold: not the only game in town?
160
140
Index level (Rebased)
120
100
80
Volatility
60
Gold 4.4%
40
Yen 2.6%
20
0
Jun
08
Aug
08
Oct
08
Dec
08
Feb
09
Apr
09
Jun
09
GOLD SPOT $/OZ
Source : Bloomberg. September 2010.
Aug
09
Oct
09
Dec
09
JPY-USD X-RATE
Feb
10
Apr
10
Jun
10
Aug
10
Inflation protection: gold vs. TIPS
115
110
Index level (Rebased)
105
100
95
Volatility
Gold 3.1%
90
TIPS 2.0%
85
80
Nov 09
Dec 09
Jan 10
Feb 10
Mar 10
Apr 10
GOLD SPOT $/OZ
Source : Bloomberg. September 2010.
May 10
Jun 10
Jul 10
TSYINFL
INFLLINKED
IX N/B BONDS
Aug 10
But gold could run further……
Daily Data (Log Scale)
Gold Bullion Cycles - 1970 vs. 2001
(
(
2260
2071
1898
1739
1594
1460
1338
1226
1124
1030
943
865
792
726
665
609
558
512
469
429
393
360
330
303
277
254
233
213
195
179
164
150
137
126
115
105
) 1970 Gold Bullion (1/16/1970 - 11/11/1981)
) 2001 Gold Bullion (2/15/2001 - 7/02/2010)
Concept Courtesy of Boeckh Investment Letter
1970 Gold
Cycle
(
)
2001 Gold
Cycle
(
)
M J
S D M J
1971
M J
S D M J
2002
S D M J
S D M J
1972
S D M J
2003
1973
S D M J
2004
(COD201007061A_C)
S D M J
1974
S D M J
2005
S D M J
1975
S D M J
2006
S D M J
1976
S D M J
2007
Source: Ned Davis September 2010
S D M J
S D M J
1977
S D M J
1978
S D M J
2008
2009
S D M J
1979
S D M J
2010
S D M J
1980
S D M J
2011
S D M J
S
1981
S D M J
S D
2012

Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at
31
2260
2071
1898
1739
1594
1460
1338
1226
1124
1030
943
865
792
726
665
609
558
512
469
429
393
360
330
303
277
254
233
213
195
179
164
150
137
126
115
105
(Lines indexed to 100 at start.)
www.ndr.com/copyright.html
. For data vendor disclaimers refer to
www.ndr.com/vendorinfo/
.
Asset allocation policy
 Liquidity underpins asset values
 But uncertainty and tail risks are exceptionally high
 Therefore diversify across asset classes and avoid extreme positions
 Government bonds are expensive – but offer ultimate deflation hedge
 High yield credit still reasonable value
 Equities on attractive valuations
 Bias towards defensiveness within equities
 Cash rates close to zero for extended period
 Emerging markets offer superior growth but beware of valuations
 Still too early for inflation hedges
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33
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Financial Services Authority and is a member of the FirstRand Group, and has its registered office at 20 Gracechurch Street,
London EC3V 0BG.
© RMB Asset Management International Limited 2010
34