Diversification Based Investing (DBI)
by QS Investors Research Group
Diversification Based Investing, or DBI, is an investment strategy that seeks
to take advantage of macro and behavioral inefficiencies in global and
international equity markets by developing a diversified exposure to macro
risk factors. DBI focuses purely on top-down portfolio construction rather
than bottom-up stock selection and uses analysis of correlations to create a
portfolio that is highly diversified across countries and sectors. In this paper,
we explain the rationale for DBI, the details of the investment process, and
present detailed analysis of its performance and characteristics to show why
we believe it can deliver:
1. Higher absolute and risk-adjusted returns than cap-weighted indices
2. Lower downside risk
3. Low correlation of excess returns to indices and other investment managers
Executive Summary
Over 10 years ago, QS Investors developed an investment approach aimed at taking advantage of macro inefficiencies in equity markets by developing a portfolio construction process with a greater degree of diversified
exposure to macro risk factors. Through analysis of country and sector correlations, this strategy, called Diversification Based Investing (DBI), constructs a portfolio that is highly diversified across these factors.
It is based on three key beliefs:
l
Geography and sector are key drivers of global equity risk and return
l Market
sentiment generates momentum effects in indices, which leads to concentration risk
that builds and collapses
l A more diversified portfolio can help mitigate concentration risk and downside risk
Recent academic and practitioner research lends
support to these beliefs by pointing out that a large
part of returns in global equity markets are driven by
macro effects: the business a company is in (sector)
and where the business is located (geography).
This provides broader investment opportunities to add
value at the macro level through portfolio construction
rather than stock selection. DBI’s top-down portfolio
construction process takes advantage of these findings
and has consistently added value, delivering:
Jung and Shiller have asserted that markets show
macro-inefficiency “in the sense that there are long
waves in the time series of aggregate indices of
security prices below and above various definitions of
fundamental values.”1
l
However, most active equity managers focus on stock
selection to beat their benchmarks despite the
argument from academic research that equity markets
show considerable micro efficiency.2 Individual security
mispricings tend to be wiped out fairly quickly.
From inception through December 31, 2012, the DBI
World and DBI EAFE strategies have outperformed
their benchmarks with a similar level of volatility, as
outlined below. In 2011, a DBI ACWI strategy was
launched which has also outperformed the benchmark
over the past two years (FIGURE 26).
DBI World performance
August 1, 2001 (inception) to December 31, 2012
Higher risk-adjusted returns than the MSCI World
and MSCI EAFE indices*
l Outperformance in both up and down markets*
lL
ow correlation of excess return to both indices and
stock selection managers*
Annualized
Return
Excess Return
Annualized
Volatility
Active Risk
Information
Ratio
DBI World Composite (Gross)
5.52%
1.57%
15.95%
2.55%
0.62
DBI World Composite (Net)
5.36%
1.40%
—
—
—
MSCI World Index Net USD
3.96%
—
16.64%
—
—
Annualized
Return
Excess Return
Annualized
Volatility
Active Risk
Information
Ratio
DBI EAFE Composite (Gross)
8.25%
1.92%
18.12%
2.95%
0.65
DBI EAFE Composite (Net)
7.88%
1.55%
—
—
—
MSCI EAFE Index USD
6.33%
—
18.43%
—
—
DBI EAFE performance
February 1, 2002 (inception) to December 31, 2012
Source: QS Investors, MSCI
*Past performance is not an indication of future results. The historical returns achieved by the account are not a prediction of future performance and there can be no assurance that these or comparable returns will be achieved or that the account’s performance objective will be
achieved. Please see the accompanying composite description for additional composite information. Fees are described in detail in QS Investors
Form ADV 2A.
Jung and Shiller (2005)
Irrational Exuberance, 2nd Ed. (2001), p. 243
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Introduction
Many active equity managers focus on stock selection
to beat their benchmarks. QS Investors has developed
a very different active management approach—
aimed at creating a high level of diversification across
geography and sectors, rather than identifying individual mispriced securities. We believe this approach
can outperform consistently.
The strategy, called Diversification Based Investing
(DBI), uses analysis of correlations to create a portfolio
that is highly diversified across countries and sectors.
In this paper, we explain the rationale for DBI, present
detailed analysis of its performance and characteristics, and show why we believe it can deliver:
l
Better risk-adjusted returns than its benchmark
l
Lower downside risk
l
Low correlation of excess returns to other managers
The paper is structured as follows:
1 | Rationale and Philosophy of DBI
2 | DBI Investment Process
3 | Performance Analysis
4 | Risk and Exposures inherent in the strategies
5 | The next step in diversification
1 | Rationale and philosophy
DBI is based on three key beliefs:
l
eography and sector are key drivers of global equity
G
risk and return
l
Market sentiment generates momentum effects in
indices, which leads to concentration risk that builds
and collapses
l
A diversified portfolio can help mitigate concentration risk and downside risk
The rationales for the first two beliefs are given below.
The third is explained in section three, “Performance
analysis.”
Belief 1 | Macro factors (Geography, Currency and Sector) drive global equity risk
and return
In 2001, Hopkins and Miller found that geography
(where a company does business) and sector (the
type of business that a company is engaged in)
explained 40% of the MSCI World Index returns
during the time period 12/92-12/00.3 The remaining
60% included stock specific information and the
randomness in the stock return data. Given that
equity returns exhibit a great deal of randomness,
they concluded that country and industry factors
were the key drivers of return. We extended this
analysis and found similar results; from December
1999 through June 2011 we found that country,
currency, and industry explain 41% of returns for the
MSCI World Index. Their importance is even more
significant over the recent past, explaining 47% of
returns over the last three years.
This is quite apparent in FIGURE 1. Despite this, most
active equity strategies focus primarily on identifying
mispricings of individual companies. In contrast, DBI’s
investment process focuses on geography and sector.
FIGURE 1: Drivers of Global Equity Market Returns
Importance of Country, Currency and Industry Rolling 12 Month Average (December 1999–March 2012)
60%
Weight in Index
50%
40%
30%
20%
Dec 11
Mar 12
Dec 10
Dec 09
Dec 08
Dec 07
Dec 06
Dec 05
Dec 04
Dec 03
Dec 02
Dec 00
Dec 99
0%
Dec 01
10%
Source: QS Investors
Factor returns are regressed cross-sectionally on country, currency and industry.
opkins and Miller (2001) “Country, sector, and company factors in global equity portfolios,” The Research Foundation of AIMR
H
and Blackwell Series in Finance
3
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Belief 2 | Market sentiment leads to
concentration risk
In the 1980s, an equity and real estate market bubble
in Japan drove domestic equity prices up much faster
than stock prices in the rest of the world. At the peak
of the bubble in July 1989, Japanese stocks accounted
for 35% of the MSCI World Index by weight, up three
and a half times from only 10% four years earlier
(FIGURE 2). The concentration was even higher in the
MSCI EAFE index, with Japan representing over 65% of
the benchmark. As investors came to realize they had
been overly optimistic on Japan’s prospects, the
country’s stocks started to fall in value. They continued
to do so over the next 10 years—a period that was to
become known as Japan’s “lost decade.”4
Broad equity indices are often considered highly
diversified investments. And yet, market sentiment—
or, put another way, investors’ collective enthusiasm
—can cause dangerous concentrations in certain
index constituents.
The MSCI World Index is one of many benchmarks to
have experienced concentrations that build up and
then collapse. Two prime examples—from different
decades—involved Japanese equities and Technology,
Media and Telecom (TMT) stocks.
FIGURE 2: Market Sentiment Led to Concentration in Japan Equities
Index Weight of Japan in MSCI World Index
December 31, 1985–November 30, 2007
40%
July 1989
Weight in Index
30%
20%
10%
0%
Jan
1985
Jan
1987
Jan
1989
Jan
1991
Jan
1993
Jan
1995
Jan
1997
Jan
1999
Jan
2001
Jan
2003
Jan
2005
Jan
2007
Source: MSCI World Index
FIGURE 3: Market Sentiment Led to Concentration in TMT Equities
Index Weight of Technology, Media and Telecommunications (TMT) Stocks in the MSCI World Index
December 31, 1991–November 30, 2001
Capitalization Weight
30%
Weight in Index
February 2000
20%
10%
0%
Dec
1991
Dec
1992
Dec
1993
Dec
1994
Dec
1995
Dec
1996
Dec
1997
Dec
1998
Dec
1999
Dec
2000
Nov
2001
Source: MSCI World Index
MSCI
4
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A similar example occured in the late 1990s. The weight
of TMT stocks in the MSCI World Index surged from
just over 10% to almost 25% (FIGURE 3). The increased
weight reflected a strong enthusiasm for TMT stocks.
But it also generated momentum that propelled the
collective market capitalization of TMT stocks even
higher, as index tracking funds and active managers
bid up the stocks.5
In our view, these concentrations resulted from
consistent and repeated patterns of investor behavior.
Over the long-term, investors tend to agree on the
intrinsic value of a stock. But in the short-term—and
for more extended periods during bubbles—market
cap-weighted benchmarks often overweight overvalued stocks as investors become too optimistic about
their growth potential, and underweight undervalued
stocks for the opposite reason. This phenomenon has
been widely documented in academic literature over the
last several years.6
More recent examples include the excessive optimism
surrounding financial stocks from 2005 to 2007 and
relative pessimism for healthcare stocks. Financial
stocks increased in weight in the MSCI World Index to
more than 25% by 2007, by which time the weighting
of healthcare stocks had declined to less than 10%
(FIGURE 4). In 2008, Financials was the worst performing sector in the index, while the healthcare sector
outperformed all others.
DBI’s investment process is designed to counteract the
concentration risk seen in market capitalizationweighted indices.
FIGURE 4: Concentration Risk Can Detract from Diversified Benefits
Index Weight of Financials and Health Care
June 30, 1999–May 15, 2009
Financials
Health Care
30%
Weight
25%
20%
15%
5/15/2009
12/31/2008
6/30/2008
12/31/2007
6/29/2007
12/29/2006
6/30/2006
12/30/2005
6/30/2005
12/31/2004
6/30/2004
12/31/2003
6/30/2003
12/31/2002
6/28/2002
12/31/2001
6/29/2001
12/29/2000
6/30/2000
12/31/1999
5%
6/30/1999
10%
Source: MSCI World Index
Ibid
Financial Analysts Journal (Treynor, 2005), Journal of Investing (Hamza, et al, 2007)
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Academic foundations
out the individual stories of the firms and the reasons
for changes in the aggregate are more subtle and
harder for the investing public to understand, having
to do with national economic growth, stabilizing
monetary policy and the like…factors such as stock
market booms and busts swamp out the effect of
information about future dividends in determining
price…”8 Consistent with this theory, countries and
sectors have shown consistent and persistent
patterns of bubbles and busts; people become overly
optimistic and overshoot on the upside and become
overly pessimistic and undershoot on the downside.
As mentioned above, examples of bubbles include
Japan in the 1980’s, TMT (Technology, Media, and Telecom) in the 1990’s and Financial Stocks in the 2000’s.
Rather than diminishing, this pattern has become
broader, more persistent and increasing in frequency.9
The charts below provide additional illustrations of
greater than average valuation swings at both the
country and sector level over the last 25 years.
Academics, theorists and practitioners have argued
for decades over whether active stock selection can
consistently add value. However, when it comes to
global and international equity management, we
believe that perhaps their focus has been misdirected. A growing body of academic literature and
empirical data point to greater inefficiency – and
therefore better investment opportunities – when
looking across macro markets. Nobel prize winner
Paul Samuelson theorized that “Modern markets
show considerable micro efficiency…I had hypothesized considerable macro inefficiency, in the sense of
long waves in the time series of aggregate indices of
security prices below and above various definitions of
fundamental values.” 7 In other words, when two
companies with similar products and clients have a
large divergence in valuation, stock pickers step in
and arbitrage away any micro inefficiency. In 2006,
Jung and Shiller concluded, “the aggregate averages
FIGURE 5: Investors Become Overly Optimistic & Pessimistic
Valuation
January 1986–January 2011
Basic Materials Price/Book vs Average
Price/Book
Hong Kong Price/Book vs Average
Average
Price/Book
4
4
3
3
2
2
1
1
0
Average
0
1986
1991
1996
2001
2006
2011
Health Care Price/Book vs Average
Price/Book
1986
1991
1996
2001
2006
2011
2001
2006
2011
Sweden Price/Book vs Average
Average
Price/Book
8
8
6
6
4
4
2
2
0
Average
0
1986
1991
1996
2001
2006
2011
1986
1991
1996
Source: Datastream, QS Investors analysis
Jung and Shiller (2006) “Samuelson’s dictum and the stock market” Cowles Foundation, Yale University
Ibid
9
Norman and Thiagarajan (2009) “Asset bubbles and market crisis” Journal of Investing, vol 18, no. 4
7
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2 | The DBI investment process
DBI takes into account the observed characteristics of
markets and indices described earlier, and uses them
to create a more diversified portfolio. The strategy’s
investment process has five steps:
artition: Classify all stocks by the key drivers of risk/
1|P
return: geography and sector
2|C
luster: Identify highly correlated geographies and
sectors, and group them together in “clusters”
3|W
eight: Equal weight the clusters. The objective
of equal weighting is to achieve a high level of
diversification
4 | I mplement Efficiently: Convert the model portfolio
weights into the live portfolio via an “optimization”
process
ebalance: Capture changes in market dynamics
5|R
quarterly
These five steps are described in more detail.
Step 1 | Partition
The objective of this step is to group together stocks
with common drivers of risk and return. We use the
MSCI index company’s classifications of stocks by
region and sector as a starting point. We then divide
the stock universe—for example, the MSCI World
Index—into “region/sector risk units,” which are
determined by both geography and sector, and based
on the index providers classification of each. Typical
region/sector risk units include Americas Energy (Unit
1) and EMU Healthcare (Unit 2), shown in FIGURE 6.
Step 2 | Cluster
In this step, we cluster the region/sector risk units
together into what, we believe, are the key drivers of
risk and return. We use statistical analysis and research
based on correlations over the last five years to identify
region/sector risk units that are highly correlated with
each other. Highly correlated region/sector risk units
are grouped into the same clusters. The resulting
portfolio exhibits high correlations within clusters and
low correlations between clusters. Examples of clusters
are shown in FIGURE 7.
Some clusters are based primarily around sectors, while
others are driven more by geography. In FIGURE 7, the
region/sector units in the Global Commodities Cluster
have a common exposure to oil and gas prices; the
stocks of companies in this sector have been subject to
global forces, irrespective of where the company is
based. The European NonCyclical Cluster is geographically driven; its stocks have a common exposure to
Europe. Although these region/sector units encompass
a variety of industry sectors, many of the companies
represented focus primarily on Europe, which is why
they show a high degree of correlation.
FIGURE 6: Step 1—Partition the Universe into Region/Sector Units
Example of Two “Risk Units” within DBI World Portfolio
Consumer
Discretionary
Consumer
Staples
Energy
Financials
Health Care
Industrials
Information
Technology
Materials
Telecom
Services
Utilities
Materials
Telecom
Services
Utilities
Unit 1
Americas
Asia
Unit 2
EMU
Non-EMU
Source: QS Investors
For illustrative purposes only
FIGURE 7: Step 2—Group Highly Correlated Region/Sector Units into Clusters
Example of Two “Clusters” within DBI World Portfolio
■ Cluster 1
Consumer
Discretionary
■ Cluster 2
Consumer
Staples
Energy
Financials
Health Care
Industrials
Information
Technology
Americas
Asia
EMU
Non-EMU
Source: QS Investors
For illustrative purposes only
QS Investors
Diversification Based Investing (DBI) |
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Step 3 | Weight
l
This step forms the heart of our portfolio construction
process. The objective is to engineer a diversified
exposure to the key drivers of risk and return by
equally weighting all clusters and the risk units within
each cluster.
Below, FIGURE 8 shows a portfolio comprising six
clusters, each with a weighting of one-sixth (16.67%)
of the total portfolio. Next, we equal weight the
region/sector units within each cluster. This means
that the weight of an individual unit in the portfolio is
inversely proportional to the total number of risk units
in its cluster. In other words:
l
egion/sector risk units in clusters that contain many
R
units have relatively smaller weights in the portfolio:
see the Americas and European Cyclicals Cluster in
the table on the following page, which contains 15
region/sector risk units, each with a portfolio weighting of 1.11% (i.e., 16.67% ÷ 15). By construction, risk
units in more crowded clusters will be highly correlated with more of the other risk units; therefore,
they are not good portfolio diversifiers and should
have a lower weight.
Region/sector risk units in clusters that contain fewer
units have relatively larger weights in the portfolio:
see the Asian Cyclicals region/sector, which contains
four risk units, each with a weight of 4.17% (i.e.,
16.67% ÷ 4). Region/sector risk units in less crowded
clusters are highly correlated to fewer other units.
Even though clusters are determined by our analysis of
correlations, there is generally a clear theme within each.
For example, the clusters as of December 2012 are:
l
Global Commodities
l
Asian Cyclicals
l
European Non-Cyclicals: Europe
l
Americas and Non-EMU Non-Cyclicals
l
Americas and European Cyclicals
l
Americas and Asia High Dividend
To further illustrate how good and bad diversifiers are
weighted in the portfolio, FIGURE 8 shows how DBI
equal weights across themes. For example, due to the
large weight to North America in the cap weighted
index, Americas and European Cyclicals comprise
almost half of the index. In contrast, DBI gives the
macro theme one-sixth of the portfolio, or 16.67%.
FIGURE 8: DBI World is More Diversified Across Macro Themes
Market Cap weighting stocks leads to concentrated risks
DBI World Strategy
MSCI World Index
100%
75%
50%
Americas & European Cyclicals
Global Commodities
Non-Cyclicals: Americas & North EMU
25%
Asian Cyclicals
Americas & Asia High Dividend
0%
Non-Cyclicals: Europe
As of June 2012
Source: QS Investors, MSCI
For illustrative purposes only
QS Investors
Diversification Based Investing (DBI) |
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FIGURE 9
Example of All “Clusters” within DBI World Portfolio (as of June 2012)
Portfolio
Weight
Portfolio
Weight
Americas and European Cyclicals: 16.67%
Global Commodities: 16.67%
3.33%
Americas Energy
1.11%
Americas Industrials
3.33%
Americas Materials
1.11%
Americas Consumer Discretionary
3.33%
EMU Energy
1.11%
Americas Media
3.33%
Asian and non-EMU Energy
1.11%
Americas Food and Staples Retailing
3.33%
European and Asian Materials
1.11%
Americas Financials
1.11%
Americas Diversified Financials
1.11%
Americas Information Technology
1.11%
Americas Information Technology Services
1.11%
EMU Industrials
1.11%
EMU Consumer Discretionary
Asian Cyclicals: 16.67%
4.17%
Asia Industrials
4.17%
Asia Consumer Discretionary
4.17%
Asia Financials
4.17%
Asia Information Technology
1.11%
EMU Financials
European Non-Cyclicals: Europe: 16.67%
1.11%
Non-EMU Industrials
3.33%
EMU Consumer Staples
1.11%
Non-EMU Consumer Discretionary
3.33%
EMU Health Care
1.11%
Non-EMU Financials
3.33%
EMU Telecommunications
1.11%
European Information Technology
3.33%
Non-EMU Telecommunications
3.33%
European Utilities
Americas and Asia High Dividend: 16.67%
5.56%
Americas Telecommunications
Americas and Non-EMU Non-Cyclicals: 16.67%
5.56%
Americas Utilities
3.33%
Americas Consumer Staples excludes Retailing
5.56%
3.33%
Americas Health Care
Asia Consumer Staples, Telecom Services,
Healthcare, Utilities
3.33%
Americas Pharmaceuticals
3.33%
Non-EMU Consumer Staples
3.33%
Non-EMU Health Care
Source: QS Investors as of June 2012
For illustrative purposes only
QS Investors
Diversification Based Investing (DBI) |
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Step 4 | Implement Efficiently
l The ability to control for liquidity and market
In this step, we convert the model portfolio weights
into the live portfolio via an optimization process. The
primary purpose is to produce a favorable trade-off
between implementation costs and a faithful
representation of the model portfolio.
l
Lower turnover (reduced trading costs)
l
F ewer holdings/trades (operational efficiency, lower
custody fees)
l
Efficient integration of client-specific restrictions (e.g.
SRI or ESG)
The end result is a portfolio whose exposures, risk
characteristics and realized performance closely match
the model, but with slightly lower turnover and fewer
holdings. For example, the DBI World Model portfolio
may hold around 1600 names, whereas the live
portfolio tends to hold roughly 900. Our efficient
implementation process provides a number of
benefits including:
impact
Step 5 | Rebalance
The objective of this step is to capture structural
changes between geography and sectors, while
minimizing turnover to keep transaction and market
impact costs low.
We perform the clustering process annually in June and
rebalance back to equally weighted clusters quarterly
(FIGURE 10).
FIGURE 10
Cluster
Cluster
June
Rebalance
Rebalance
Rebalance
September
December
March
June
FIGURE 11: DBI Dynamically Reacts to Correlation Changes
Energy Sector Weight in DBI World and MSCI World
DBI World
MSCI World
20%
Decreasing
correlations to
Utilities lead to
increasing
overweight
18%
Weights
16%
14%
12%
10%
Increasing correlations to Materials
sector leads to underweight
8%
12/31/2008
9/30/2008
6/30/2008
3/31/2008
12/31/2007
9/28/2007
6/29/2007
3/30/2007
12/29/2006
6%
Data based on portfolio holdings as of December 31, 2008
Source: QS Investors, MSCI
The statistics discussed in this presentation are based on the unreconciled holdings of a representative portfolio which is included in the
composite; your account may differ due to specific client guidelines and restrictions.
QS Investors
Diversification Based Investing (DBI) |
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Dynamic portfolio construction
Changes in cluster composition are based on changes
in correlation between risk units. When correlations
between risk units change, weightings will increase or
decrease a sector or region. One example that illustrates this process is our changing exposure to the
Energy sector, as illustrated in FIGURE 11. In 2007 we
were slightly overweight Energy stocks versus the
benchmark as Energy stocks had a relatively low
correlation to other sectors. Prior to this time period,
Utilities stocks had been highly correlated to Energy
stocks and thus they were combined in one cluster. But
the correlation declined over time; indeed, Energy
stocks began to show low correlation with all other risk
units as oil prices and the earnings of Energy companies increased. So at the June 2007 clustering, they
formed a cluster comprised exclusively of Energy
stocks. Since there were a smaller number of units
within the cluster, each risk unit had a larger weight.
As a result, we were overweight Energy stocks versus
the benchmark in 2007.
By the June 2008 clustering, Materials stocks were
showing higher correlation with Energy stocks, as
investors began to think that the prices of all commodities were rising together. Therefore Materials
and Energy were combined into a cluster. The addition
of Materials reduced the weight of Energy stocks in the
portfolio, and we moved to an underweight position in
Energy versus the benchmark.
This enabled DBI to capture the relative outperformance
of Energy stocks driven by the boom in oil prices, and
avoid the Energy sector’s relative underperformance
when oil prices declined. FIGURE 11 shows the weight
of Energy stocks in DBI and its benchmark. Returns from
Energy stocks peaked in June 2008 and then declined,
just as DBI moved to an underweight Energy position.
QS Investors
The increasing correlation between Energy and Materials
stocks leading up to the June 2008 clustering reflected a
broader trend of rising correlations between sectors.
Cluster theme
On the following page, FIGURE 12 shows how clusters
changed from 2011 to 2012.
Many of the dominant themes from 2011 were
similarly represented in the June 2012 clustering,
such as cyclicals and non-cyclicals.
Financials and Industrials continue to exhibit high
correlations to other units and therefore continue to
have one of the largest underweights. Telecommunications, Utilities and Health Care have the largest
overweights as they continue to be less correlated to
other region/sector units.
Last year, we saw a predominantly Global Health Care
clustered-theme. In 2012 Health Care combined with
Consumer Staples to form an Americas and Non-EMU
Non-Cyclicals cluster.
The weight to the Energy sector in 2012 moved from
an overweight to a small underweight. This is due to
the pure Energy cluster combining with Materials,
forming the current Global Commodities Cluster. The
current commodities cluster indicates a stronger
relationship between Energy and Materials, which is a
recurring theme. In June 2007, we saw a pure Energy
cluster. The following year in 2008, prior to the energy
bubble crash (July 2008), Energy and Materials combined together, indicating Energy was not as good a
diversifier. We saw a shift in themes as the active
weight to Asia Cyclicals increased. For the last two
years, we saw Asia Cyclicals and Materials cluster
together. This year, Materials combines with Energy
instead of Asia leading to a pure Asia Cyclical cluster.
Diversification Based Investing (DBI) |
11
FIGURE 12
DBI Portfolio in June 2011 and June 2012
Portfolio
Weight
June 2011
5.56%
5.56%
5.56%
Global Energy: 16.67%
Americas Energy
EMU Energy
Asian and Non-EMU Energy
2.78%
2.78%
2.78%
2.78%
2.78%
2.78%
Asian Cyclicals and Materials: 16.67%
Americas Materials
Asia Industrials
Asia Consumer Discretionary
Asia Financials
Asia Information Technology
European and Asian Materials
2.78%
2.78%
2.78%
2.78%
2.78%
2.78%
European Non-Cyclicals: 16.67%%
Americas Consumer Staples excludes Retailing
EMU Consumer Staples
EMU Health Care
EMU Telecommunications
Non-EMU Consumer Staples
European Utilities
Portfolio
Weight
June 2012
3.33%
3.33%
3.33%
3.33%
3.33%
Global Commodities: 16.67%
Americas Energy
Americas Materials
EMU Energy
Asian and non-EMU Energy
European and Asian Materials
4.17%
4.17%
4.17%
4.17%
Asian Cyclicals: 16.67%
Asia Industrials
Asia Consumer Discretionary
Asia Financials
Asia Information Technology
3.33%
3.33%
3.33%
3.33%
3.33%
European Non-Cyclicals: 16.67%
EMU Consumer Staples
EMU Health Care
EMU Telecommunications
Non-EMU Telecommunications
European Utilities
Global Health Care and Non-Cyclicals: 16.67%
Americas Health Care
Americas Pharmaceuticals
Non-EMU Health Care
Asia Consumer Staples, Telcom Services,
Health Care, Utilities
3.33%
3.33%
3.33%
3.33%
3.33%
Americas and Non-EMU Non-Cyclicals: 16.67%
Americas Consumer Staples excludes Retailing
Americas Health Care
Americas Pharmaceuticals
Non-EMU Consumer Staples
Non-EMU Health Care
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
Americas and European Cyclicals: 16.67%
Americas Industrials
Americas Consumer Discretionary
Americas Media
Americas Food and Staples Retailing
Americas Financials
Americas Diversified Financials
Americas Information Technology
Americas Information Technology Services
EMU Industrials
EMU Consumer Discretionary
EMU Financials
Non-EMU Industrials
Non-EMU Consumer Discretionary
Non-EMU Financials
European Information Technology
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
1.11%
Americas and European Cyclicals: 16.67%
Americas Industrials
Americas Consumer Discretionary
Americas Media
Americas Food and Staples Retailing
Americas Financials
Americas Diversified Financials
Americas Information Technology
Americas Information Technology Services
EMU Industrials
EMU Consumer Discretionary
EMU Financials
Non-EMU Industrials
Non-EMU Consumer Discretionary
Non-EMU Financials
European Information Technology
5.56%
5.56%
5.56%
Americas IT and Telecom: 16.67%
Americas Information Technology
Americas Information Technology Services
Americas Telecommunications
5.56%
5.56%
5.56%
4.17%
4.17%
4.17%
4.17%
Americas and Asia High Dividend: 16.67%
Americas Telecommunications
Americas Utilities
Asia Consumer Staples, Telecom Services,
Healthcare, Utilities
For illustrative purposes only. The weightings are based on a representative portfolio, which is included in the composite. A client’s account may
differ due to specific guidelines and restrictions.
QS Investors
Diversification Based Investing (DBI) |
12
3 | Performance analysis
In this section, we detail DBI’s backtested and live
perfromance (through December 31, 2012). The
analysis presented is for the DBI World strategy—other
DBI strategies are introduced in the final part of this
paper. The strategy has delivered higher absolute and
risk-adjusted returns than its benchmark in both
analysis periods.
outperforming the MSCI World Index by 157 basis
points (gross of fees) on an annualized basis, with an
annualized volatility of 15.95% (FIGURE 13) and an
information ratio of 0.62.
In the backtesting period from March 1985 to July
2001, DBI delivered an annualized excess return of 175
basis points for an active risk level (tracking error) of
4.1% (FIGURE 14).
During the live period, from inception in August 2001
to December 2012, DBI World returned 5.52%,
FIGURE 13
DBI World Live Performance — August 1, 2001 (inception) to December 31, 2012
Annualized
Return
Annualized
Volatility
Beta
Active Risk
Excess Return
Information
Ratio
DBI World Composite (Gross)
5.52%
15.95%
93%
2.55%
1.57%
0.62
DBI World Composite (Net)
5.36%
—
—
—
1.40%
—
MSCI World Index (Net)
3.96%
16.64%
—
—
—
—
Past performance is not an indication of future results. The historical returns achieved by the account are not a prediction of future performance
and there can be no assurance that these or comparable returns will be achieved or that the account’s performance objective will be achieved.
Please see the accompanying composite description for additional composite information. Fees are described in detail in QS Investors Form
ADV 2A.
FIGURE 14
Hypothetical DBI World Performance — March 1985 to July 2001
Annualized
Return
Annualized
Volatility
Beta
Active Risk
Excess Return
Information
Ratio
Hypothetical DBI World
14.85%
14.82%
96%
4.09%
1.75%
0.43
MSCI World Index (Gross)
13.10%
14.89%
100%
—
—
—
Source: QS Investors, MSCI
The DBI hypothetical backtest employs the same investment process as the live DBI strategy. The investment process is a purely quantitative
portfolio construction process which slices the MSCI World equity universe into regional and sector units. These units are grouped into new
clusters which have low correlations to each other and equally weighted. The clusters are reconstituted annually and the portfolio is rebalanced
back to the model on a quarterly basis. Transaction costs are assumed to be 20bp each way. Old industry definitions are used until May 2000 and
the new GICs classifications are used thereafter. One of the limitations of hypothetical performance results is that they are generally prepared
with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely
account for the impact of financial risk in actual trading. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of
which can adversely affect actual trading results. Please see hypothetical disclosures for additional information on hypothetical information.
QS Investors
Diversification Based Investing (DBI) |
13
Understanding performance patterns
Outperformance in up and down markets
DBI World has shown consistent patterns of performance. These are explored below.
On average DBI has outperformed whether the market
moved up or down. FIGURE 16 shows that DBI World
captured more positive stock movements than its
benchmark, and avoided some of the benchmark’s
negative movements. DBI has outperformed by more
in down markets than up markets, and so offers
potential for downside protection.
Low correlation with many other active strategies
FIGURE 15
DBI World Correlation of Excess Return to Ten
Largest Global Equity Managers
1.0
Correlation
DBI World Composite Supplemental Live
Performance*
99%
Up Market
Capture
0.5
0.0
-0.5
-1.0
FIGURE 16
Market Participation
Because DBI uses a differentiated portfolio construction process, the strategy has shown low correlation of
excess returns to most active managers that focus on
stock selection. FIGURE 15 illustrates the correlation of
DBI’s excess returns to those of strategies run by the
10 largest global managers in a leading investment
consultancy’s database. The correlation is disbursed
between 0.51 and -0.04, supporting our view that DBI
World can be a strong portfolio diversifier for investors.
A
B
C
D
E
F
G
Managers
H
I
Time period: Ten years as of December 2012
Source: Consultant Manager Universe, Zephyr StyleAdvisor
QS Investors
J
90%
Down Market
Capture
As of December 31, 2012
Since inception: August 2001
Source: Zephyr StyleAdvisor
Based on quarterly returns.
*Please see the DBI World Composite for full disclosures.
Time period used by QS Investors to report performance of
GIPS-compliant composites.
Past performance is not indicative of future results. This
information is supplemental to the composite description.
Please see the accompanying composite description for
additional composite information.
Diversification Based Investing (DBI) |
14
Consistency
DBI World has exhibited consistency of excess returns.
As illustrated by the two charts below, FIGURE 17
shows five-year Rolling Excess Return since inception,
while FIGURE 18 displays cumulative returns of the
DBI World backtest and of the benchmark.
FIGURE 17
DBI World Composite Five-Year Rolling Excess Return — August 2001 to December 2012
4
3
Percent
2
1
0
Dec 12
Jun 12
Dec 11
Jun 11
Dec 10
Jun 10
Dec 09
Jun 09
Dec 08
Jun 08
Dec 07
Jun 07
Dec 06
Jun 06
-1
Past performance is not indicative of future results. Performance is shown gross of fees and does not reflect investment advisory fees. Had such
fees been deducted, returns would have been lower. This information is supplemental to the composite description. Please see the accompanying
composite description for additional composite information.
FIGURE 18
Hypothetical DBI Cumulative Returns versus Its Benchmark from March 1985 to July 2001
MSCI World Benchmark (Net Index USD)
Hypothetical DBI
14
12
10
8
6
4
2
3/31/2001
3/31/2000
3/31/1999
3/31/1998
3/31/1997
3/31/1996
3/31/1995
3/31/1994
3/31/1993
3/31/1992
3/31/1991
3/31/1990
3/31/1989
3/31/1988
3/31/1987
3/31/1986
3/31/1985
0
Source: QS Investors, MSCI
The DBI hypothetical backtest employs the same investment process as the live DBI strategy. The investment process is a purely quantitative
portfolio construction process which slices the MSCI World equity universe into regional and sector units. These units are grouped into new
clusters which have low correlations to each other and equally weighted. The clusters are reconstituted annually and the portfolio is rebalanced
back to the model on a quarterly basis. One of the limitations of hypothetical performance results is that they are generally prepared with the
benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account
for the impact of financial risk in actual trading. There are numerous other factors related to the markets in general or to the implementation
of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can
adversely affect actual trading results. Please see hypothetical disclosures for additional information on hypothetical information.
QS Investors
Diversification Based Investing (DBI) |
15
Avoiding concentrations
DBI’s ability to avoid some of the concentrations found
in market capitalization-weighted indices was highlighted during the TMT bubble. DBI’s weight in these
sectors increased as they started to have a lower
correlation to the broad market while outperforming
many parts of the market. However, our equal weight-
ing of clusters limited the exposure that we had in
these sectors which provided diversification. Thus our
weight increased less dramatically during the bubble,
and fell only modestly when the bubble burst. This
illustrates the diversification and the benefit of the DBI
strategy when compared to the MSCI World Index
(FIGURE 19).
FIGURE 19: Concentration Risk Can Build and Collapse
Capitalization Weight of Technology, Media, and Telecommunication (TMT) Stocks
December 31, 1991—November 30, 2001
Capitalization Weight
Hypothetical DBI Weight
Weights
30%
February 2000
20%
10%
0%
Dec
1991
Dec
1992
Dec
1993
Dec
1994
Dec
1995
Dec
1996
Dec
1997
Dec
1998
Dec
1999
Dec
2000
Nov
2001
Source: QS Investors, MSCI
The DBI hypothetical backtest employs the same investment process as the live DBI strategy. The investment process is a purely quantitative
portfolio construction process which slices the MSCI World equity universe into regional and sector units. These units are grouped into new
clusters which have low correlations to each other and equally weighted. The clusters are reconstituted annually and the portfolio is rebalanced
back to the model on a quarterly basis. Please see hypothetical disclosures for additional information on hypothetical information.
4 | Risk and exposures
This section outlines the strategy’s risk exposures. DBI
has no persistent active style or size biases relative to
its benchmark.
As we showed earlier (FIGURE 13), DBI’s total volatility
was approximately 69 basis points lower than that of
the MSCI World Index from inception to 12/31/2012,
and similar to that of the benchmark in the backtesting
period (FIGURE 14). FIGURE 20 gives a decomposition of
DBI’s active risk, based on an Axioma analysis of
holdings as of June 2012. The largest contributors to
risk are country, industry, and currency—an expected
outcome given the focus of our investment process.
FIGURE 20: Active Risk is Driven by
Industry, Country and Currency
Decomposition of Active Risk — June 2012
120%
100%
80%
60%
MACRO
RISK
40%
20%
0%
2006
Industry
2007 2008
Country
2009
2010
Currency
2011 2012
Risk Indices
Source: Axioma
The weightings are based on a representative portfolio, which
is included in the composite. A client’s account may differ due
to specific guidelines and restrictions.
Periods ending June
Risk Indices include: Global Market, Value, Leverage, Growth,
Size, ST Momentum, MT Momentum, Volatility, Liquidity and
FX Sensitivity.
QS Investors
Diversification Based Investing (DBI) |
16
Region and sector exposures
As of December 2012, DBI’s largest regional position
was an underweight of North America relative to the
benchmark (FIGURE 21). The US is a large integrated
market, comprising over 50% of the MSCI World
Index, and is subject to powerful common risk factors.
Because of this, US risk units tend to fall into common
clusters—recall that clusters with more risk units
result in smaller portfolio weights for each unit within
that cluster, and vice versa. Moreover, US companies
make up a large portion of globally integrated industries, such as Industrials and Financials, which also
tend to fall into large clusters.
By sector, the largest underweight was to Financials
(FIGURE 22). Financials is the largest global sector—
almost 20% of the index—and its stocks correlate
strongly both with one another and with other cyclical
sectors. For this reason, Financial stocks tend to be
grouped in clusters with a large number of risk units.
FIGURE 21
FIGURE 22
Region Weights for December 2012
Sector Weights for December 2012
MSCI World Index
DBI World
DBI World
MSCI World Index
Health
Care
North
America
Telecommunication
Services
Consumer
Staples
Utilities
AsiaPac
Energy
Financials
EMU
Consumer
Discretionary
Information
Technology
Industrials
Non-EMU
Materials
0%
10%
20%
30%
40%
50%
60%
0%
5%
10%
15%
20%
25%
The statistics discussed are based on the unreconciled holdings of a representative portfolio which is included in the composite;
your account may differ due to specific client guidelines and restrictions.
QS Investors
Diversification Based Investing (DBI) |
17
Style and size exposures
Our analysis confirms that DBI has had no persistent
size or style bias since inception. DBI’s average Priceto-Book (P/B) ratio was slightly lower than the index
in the first four years after inception and in 2008
but slightly above benchmark from 2004 to 2007
(FIGURE 23).10
FIGURE 24 presents the corresponding analysis for size.
DBI World had a slight bias toward small-cap stocks
from 2002 to 2004, and in 2006 and 2008, but a slight
large-cap bias in the other three years.
FIGURE 23
Price/Book Since Inception
Price/Book DBI World
Price/Book MSCI World Index (Net)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2.61
1.93
2.32
2.43
2.74
2.71
2.98
1.46
1.78
1.91
1.60
1.66
2.82
2.18
2.50
2.47
2.68
2.64
2.75
1.49
1.85
1.83
1.61
1.77
Data based on portfolio holdings as of December 31, 2012
Source: QS Investors, MSCI
For illustrative purposes only. The weightings are based on a representative portfolio, which is included in the composite. A client’s account
may differ due to specific guidelines and restrictions.
FIGURE 24
Market Capitalization Since Inception
Market Cap DBI World
90
80
70
60
50
40
30
20
10
0
Market Cap MSCI World Index (Net)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
67.27
55.17
64.64
68.77
69.78
74.35
84.47
51.43
65.63
69.62
60.47
57.70
57.57
61.70
70.84
71.88
68.38
76.96
81.12
58.58
65.43
66.30
65.48
72.00
Data based on portfolio holdings as of December 31, 2012
Source: QS Investors, MSCI
For illustrative purposes only. The weightings are based on a representative portfolio, which is included in the composite. A client’s account
may differ due to specific guidelines and restrictions.
10
The average P/B ratio for a portfolio is computed as a “harmonic mean.” This is the total price of the portfolio divided by the total
book value, i.e., it is simply the P/B ratio of the portfolio. For the average capitalization of stocks in a portfolio, we use a portfolioweighted average rather than the usual arithmetic average. This measure of average capitalization has the important property
that it is insensitive to the presence of many small positions, as long as their total portfolio weight is small.
QS Investors
Diversification Based Investing (DBI) |
18
5| T
he next steps
in diversification
Using country rather than region leads to:
DBI EAFE
Our extensive research into the DBI concept resulted
in the development of DBI EAFE(European, Australasia
and Far East). DBI EAFE has the same objective and
philosophy as DBI World, but uses more granular risk
units based on country and sector (rather than region
and sector). A typical country/sector unit for DBI EAFE
might be France Information Technology. The cluster
and weighting procedures are identical to those used
in DBI World.
l
More clusters
l
Higher volatility between clusters
l
Lower correlation between clusters
l
A higher expected absolute and risk-adjusted return
Since January 2006, DBI EAFE has followed this
portfolio construction methodology. Since inception in
February 2002, DBI EAFE has generated an annualized
return of 8.25% versus 6.33% for the MSCI EAFE Index,
with an annualized volatility of 18.12%.
FIGURE 25
DBI EAFE Performance — February 2001 to December 2012
DBI EAFE performance
February 1, 2002 (inception) to September 30, 2011
Annualized
Return
Excess Return
Annualized
Volatility
Active Risk
Information
Ratio
DBI EAFE Composite (Gross)
8.25%
1.92%
18.12%
2.95%
0.65
DBI EAFE Composite (Net)
7.88%
1.55%
—
—
—
MSCI EAFE Index USD
6.33%
—
18.43%
—
—
Source: QS Investors, MSCI
*Past performance is not an indication of future results. The historical returns achieved by the account are not a prediction of future performance
and there can be no assurance that these or comparable returns will be achieved or that the account’s performance objective will be achieved.
Please see the accompanying composite description for additional composite information. Fees are described in detail in QS Investors Form
ADV 2A.
QS Investors
Diversification Based Investing (DBI) |
19
DBI ACWI
FIGURE 26
QS Investors continues to expand the platform. In
January of 2011, QS Investors launched DBI ACWI, a
region/sector strategy benchmarked to the MSCI All
Country World Index. The DBI methodology has proven
effective within the broader ACWI Universe resulting
in 0.55% excess return since inception.
DBI ACWI Performance
Performance
Since Inception
DBI ACWI Composite (gross of fees)
4.28%
MSCI ACWI Index Net USD
3.73%
Value added
0.55%
As of December 31, 2012
Inception date: January 2011; time period used by QS Investors, LLC to report performance of GIPS-compliant composites.
Past performance is not necessarily indicative of future results. Performance is shown gross of fees and does not reflect
investment advisory fees.
Had such fees been deducted, returns would have been lower.
Please see the appendix for additional composite information.
FIGURE 27
DBI ACWI Hypothetical Performance — June 2000 to December 2010
Annualized
Return
Annualized
Volatility
Beta
Active Risk
Excess Return
Information
Ratio
Hypothetical DBI ACWI
6.01%
17.38%
99%
2.84%
3.40%
1.20
MSCI All Country World Index
2.62%
17.40%
N/A
N/A
N/A
N/A
Performance
Assumption – 50 bps of transaction costs per year
The DBI ACWI back-test employs the same investment process as the live DBI strategy. The investment process is a purely quantitative portfolio
construction process which slices the MSCI All Country World Index universe into region and sector units. These units are grouped into new
clusters which have low correlations to each other and equally weighted. The clusters are reconstituted annually and the portfolio is rebalanced
back to the model on a quarterly basis. Hypothetical performance is not an indicator of future actual results and do not represent returns that
any investor actually attained. No representation is being made that any portfolio will, or is likely to replicate the information shown. A client’s
account may differ due to specific guidelines and restrictions. Past performance is no guarantee of future results. Both back-test and benchmark
returns are considered gross of withholding tax. Please see the Appendix for important information on hypothetical performance.
DBI Emerging Markets
The DBI approach has also been applied to Emerging
Markets through a country/sector approach. The
backtest (FIGURE 28) exhibits results consistent with
the historical return patterns observed in our other DBI
strategies. The hypothetical DBI Emerging Markets
strategy outperformed the benchmark by 3.47% over
the backtesting period.
FIGURE 28
DBI Emerging Markets Hypothetical Performance — June 2000 to December 2012
Annualized
Return
Annualized
Volatility
Beta
Active Risk
Excess Return
Information
Ratio
Hypothetical DBI Emerging Markets
13.71%
22.64%
91%
4.91%
3.47%
0.71
MSCI Emerging Markets
10.24%
24.33%
N/A
N/A
N/A
N/A
Performance
Assumption – 50 bps of transaction costs per year
The DBI EM back-test employs the same investment process as the live DBI strategy. The investment process is a purely quantitative portfolio
construction process which slices the MSCI Emerging Markets Free universe into country and sector units. These units are grouped into new
clusters which have low correlations to each other and equally weighted. Each country weight is constrained within +/- 5% of the index weight.
The clusters are reconstituted annually and the portfolio is rebalanced back to the model on a quarterly basis. Hypothetical performance is not
an indicator of future actual results and do not represent returns that any investor actually attained. No representation is being made that any
portfolio will, or is likely to replicate the information shown. A client’s account may differ due to specific guidelines and restrictions. Past performance is no guarantee of future results. Both back-test and benchmark returns are considered gross of withholding tax. Please see the Appendix
for important information on hypothetical performance.
QS Investors
Diversification Based Investing (DBI) |
20
Summary
Diversification Based Investing (DBI) is an equity
strategy that provides broad exposure and seeks
higher risk-adjusted returns than its benchmark with
less downside risk.
The DBI investment process is designed to capture the
benefits of a higher level of diversification by taking
into account the primary drivers of equity returns:
geography and sector. Diversification is maintained by
rebalancing the portfolio.
The primary drivers of DBI’s active risk exposures are
from country and sector differences. The strategy has
exhibited no persistent size or style bias relative to the
MSCI World Index since inception (up to December
2012), and only modest bias at any given time.
Key benefits of the DBI strategies include:11
l
H
igher risk-adjusted returns: DBI targets a higher
level of diversification than its benchmark, which
has produced higher risk-adjusted returns12
l
O
utperformance in both up and down markets with
less downside risk: DBI has offered downside
protection relative to its benchmark when equity
markets have declined11
l
L ow correlation of excess returns to other enhanced/
active managers: DBI’s differentiated methodology
results in a low correlation of excess returns to many
traditional enhanced and active strategies12
The strategy could underperform if a very narrow segment of the market has a very dramatic increase.
No assurance can be given that this will continue in the future.
11
12
QS Investors
Diversification Based Investing (DBI) |
21
Bibliography
Arnott, Robert D., Jason C. Hsu, and Philip Moore.
“Fundamental Indexation.” Financial Analysts Journal
61(2), pp. 83-99. March/April 2005.
Bernstein, William J., and David Wilkinson. “Diversification, rebalancing, and the geometric mean frontier.”
November 1997. Available at http://www.effisols.com/
basics/rebal.pdf.
Bird, Ron, Xue-Zhong He, Satish Thosar and Paul
Woolley. “The case for market inefficiency: Investment
style and market pricing.” Journal of Asset Management
5(6). April 2005.
Harvey, Campbell R. and Claude B. Erb. “The Tactical
and Strategic Value of Commodity Futures.” Manuscript.
February 2005. Available from the NBER website at
http://www.nber.org/papers/w11222.pdf.
Rubinstein, Mark. Continuously rebalanced investment
strategies. Journal of Portfolio Management. Fall 1991.
Treynor, Jack. Why Market-Valuation-Indifferent
Indexing Works. Financial Analysts Journal 61(5) pp.
65-69.September/October 2005.
Winston, Kenneth. The “efficient index” and prediction
of portfolio variance. Journal of Portfolio Management.
Spring 1993.
Booth, David, and Eugene Fama. “Diversification return
and asset contributions.” Financial Analysts Journal
48(3) pp. 26-32. May/June 1992.
Author biographies
James Norman, President
l
Responsible for assisting the CEO with all business, strategic and investment decisions. He is also panel member
of the Investment Oversight Committee.
l
Formerly head of Deutsche Asset Management’s Quantitative Strategies Qualitative Alpha research. At Deutsche
Asset Management, he also served as Global Head of Product Management, Senior Portfolio Specialist for Active
US Equity and Asset Allocation, and as a senior management consultant from 1995 to 2010. Prior to joining
Deutsche Asset Management, he spent five years as a senior casualty underwriter for CIGNA International
l
Education: AB from Vassar College; MBA from New York University
Keri McLaughlin, Relationship Management
l
Responsibilities include client service and reporting
l
Formerly at Deutsche Asset Management from 2002 – 2010. She served as product specialist for the quantitative
strategies group from 2005 – 2010. Prior to joining the QS group, she worked as a Client Service Associate. Prior to
joining Deutsche Asset Management, she had eight years of experience at Citigroup Asset Management, most
recently as manager of the RFP team, and at State Street Bank, as senior fund accountant
l
Education: BS from Bryant College
QS Investors
Diversification Based Investing (DBI) |
22
Hypothetical Disclosures
The DBI World, DBI World Plus and DBI ACWI backtests employ the same investment process as the live DBI strategy. The
investment process is a purely quantitative portfolio construction process.
The DBI World backtest slices the MSCI World equity universe into regional and sector units. These units are grouped into new
clusters which have low correlations to each other and equally weighted. The DBI World Plus backtest slices the MSCI World
equity universe into country and sector units. These units are grouped into new clusters which have low correlations to each
other and equally weighted. The clusters are reconstituted annually and the portfolio is rebalanced back to the model on a
quarterly basis. Transaction costs are assumed to be 20bp each way. Old industry definitions are used until May 2000 and the
new GICs classifications are used thereafter.
The DBI ACWI backtest slices the MSCI All Country World Index universe into region and sector units. These units are grouped
into new clusters which have low correlations to each other and are equally weighted. The clusters are reconstituted annually
and the portfolio is rebalanced back to the model on a quarterly basis. Returns are net of 50 bps transaction costs.
The DBI EM (constrained) back-test employs the same investment process as the live DBI strategy. The investment process is a
purely quantitative portfolio construction process which slices the MSCI Emerging Markets Free universe into country and sector units. These units are grouped into new clusters which have low correlations to each other. Active country underweights/
overweights are constrained to be no more than 5%. The clusters are reconstituted annually and the portfolio is rebalanced
back to the model on a quarterly basis
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being
made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.
One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In
addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the
impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program
in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other
factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.
Total returns for the ‘Model Portfolio’ presented herein do not reflect actual investor returns. The returns are calculated daily
and are time weighted. They do not reflect the deduction of investment management fees or other expenses. If such fees and
expenses were deducted, the results would be lower.
Transaction costs are assumed to vary depending on country and traded assets, but do not necessarily reflect the cost an
actual account might experience. Past performance is not indicative of future results. The value of investments can go down
as well as up. Exchange rate fluctuations may alter the value of your investment. The tax treatment of investments may
change and you may get back less than you have contributed.
This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision.
It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for QS Investors, LLC and its affiliates to enter into or arrange any type of transaction
as a consequence of any information contained herein. Neither QS Investors, LLC nor any of its affiliates, gives any warranty as to the
accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute
cannot be excluded, no member of the QS Investors, LLC , the Issuer or any officer, employee or associate of them accepts any liability
(whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or
damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.
The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. This
document is only for professional investors. This document was prepared without regard to the specific objectives, financial
situation or needs of any particular person who may receive it. The value of shares/units and their derived income may fall as
well as rise. Past performance or any prediction or forecast is not indicative of future results. No further distribution is allowed
without prior written consent of the Issuer.
The forecasts provided are based upon our opinion of the market as at this date and are subject to change, dependent on
future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the
economic trends of the markets is not necessarily indicative of the future or likely performance.
QS Investors
Diversification Based Investing (DBI) |
23
Important Information
This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who
may receive it. It is intended for informational purposes only and it is not intended that it be relied on to make any investment
decision. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any
contract to purchase or sell any security or other instrument, or for QS Investors, LLC and its affiliates to enter into or arrange
any type of transaction as a consequence of any information contained herein. Neither QS Investors, LLC nor any of its
affiliates, gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document.
Except insofar as liability under any statute cannot be excluded, no member of the QS Investors, LLC, the Issuer or any officer,
employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any
error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise
suffered by the recipient of this document or any other person.
The views expressed in this document constitute QS Investors, LLC’s or its affiliates’ judgment at the time of issue and are
subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. No further distribution is
allowed without prior written consent of the Issuer.
Any forecasts provided herein are based upon our opinion of the market as at this date and are subject to change, dependent
on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. Investments are subject to risks,
including possible loss of principal amount invested.
For Investors in Australia:
This information is only available to persons who are professional, sophisticated, or wholesale investors under the Corporations
Act. An investment with QS Investors, LLC is not a deposit with or any other type of liability of QS Investors, LLC or its affiliates.
The capital value and performance of an investment with QS Investors, LLC is not guaranteed by QS Investors, LLC or its affiliates.
Investments are subject to investment risk, including possible delays in repayment and loss of income and principal invested.
QS Investors, LLC does not hold an Australian financial services license. QS Investors, LLC is exempt from the requirement to hold
an Australian Financial Services License for the financial services it provides to you. QS Investors , LLC is regulated by the Securities and Exchange Commission under the laws of the United States of America and those laws differ from Australian laws.
For investors in New Zealand:
No prospectus (as defined in the Securities Act 1978 of New Zealand) or other disclosure document in relation to the Fund
or the Interests has been or will be lodged with the Registrar of Companies of New Zealand or the Securities Commission of
New Zealand. The Interests have not been offered or sold (and will not be offered or sold), directly or indirectly, and no offering
materials or advertisement in relation to any offer of the Interests has been distributed (nor will be distributed), directly or
indirectly, in New Zealand other than:
(i) to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money;
(ii) to persons who in all the circumstances can properly be regarded as having been selected otherwise than as members of
the public; or
(iii) to persons who are each required to pay a minimum subscription price of at least N.Z.$500,000 for Interests before the
allotment of those Interests (disregarding any amounts payable, or paid out of money lent by the Fund, the General Partner or
the Manager or any associated person of the Fund, the General Partner or the Manager); or
(iv) in other circumstances where there is no contravention of the Securities Act 1978 of New Zealand (or any statutory modification or re-enactment of, or statutory substitution for, the Securities Act 1978 of New Zealand).
For investors in the United Kingdom:
This document is a “non-retail communication” within the meaning of the FSA’s Rules and is directed only at persons satisfying
the FSA’s client categorization criteria for an eligible counterparty or a professional client. This document is not intended for
and should not be relied upon by a retail client.
When making an investment decision, potential investors should rely solely on the final documentation relating to the investment or service and not the information contained herein. The investments or services mentioned herein may not be appropriate for all investors and before entering into any transaction you should take steps to ensure that you fully understand
the transaction and have made an independent assessment of the appropriateness of the transaction in the light of your
own objectives and circumstances, including the possible risks and benefits of entering into such transaction. You should also
consider seeking advice from your own advisers in making this assessment. If you decide to enter into a transaction with us
you do so in reliance on your own judgment.
QSCR-00661 (03/13)
QS Investors
Diversification Based Investing (DBI) |
24
Diversification Based Investing (DBI) World Composite: Composite Description
Schedule of Investment Performance for the Period: December 31, 2012
Benchmark: MSCI The World Total Return Net Index
Period Ending
(a)
Composite Gross
of Fees Returns
(%)
Composite Net
of Fees Returns
(%)
Benchmark (b)
15.83
Number of
Accounts
4
Composite
Assets
(US$m)
895
Firm Assets
(US$m)
Composite
Dispersion (c)
10,516
N/A
2012
12.98
12.71
2011
-1.42
-1.65
-5.54
4
777
14,797
N/A
2010
8.94
8.72
11.76
4
758
17,282
N/A
2009
30.53
30.31
29.99
5
727
—
N/A
2008
-37.82
-37.90
-40.71
2
418
—
N/A
2007
13.30
13.16
9.04
2
664
—
N/A
2006
20.17
20.02
20.07
3
625
—
N/A
2005
10.25
10.11
9.49
3
499
—
N/A
2004
16.36
16.21
14.72
2
334
—
N/A
2003
33.77
33.59
33.11
1
204
—
N/A
2002
-15.86
-15.97
-20.09
1
157
—
N/A
Standard Deviation (d)
3-Year 2012
15.68
15.68
16.74
3-Year 2011
19.04
19.04
20.15
Notes:
a) Inception and/or termination period of performance may not comprise a full year; see reporting period dates above.
b) Period August 1, 2001 to May 31, 2002 the MSCI Provisional World Net Dividends was used MSCI World Total Return Net
Index was used after May 31, 2002. Due to differences in sources for benchmark performance, there may be slight variances
between benchmark returns noted above and those from other published sources.
c) Asset-weighted standard deviation; calculated for gross returns for composites with five or more portfolios active over the
full year.
d) 3-year annualized ex-post standard deviation.
See Accompanying Notes below
1. Basis of Presentation
QS Investors, LLC (“QS Investors”) is a registered investment adviser with the SEC, providing investment and advisory services
to a diverse array of institutional clients. QS Investors, based in New York City, is a 100% employee owned firm launched in
August, 2010. The firm was created on August 1, 2010 via a management buy-out of the Quantitative Strategies Group within
Deutsche Asset Management and therefore Firm assets prior to 2010 are not applicable.
QS Investors claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented
this report in compliance with the GIPS standards. QS Investors has not been independently verified. This presentation of investment performance sets forth the time-weighted gross and net rates of return for the Diversification Based Investing (DBI)
World Composite (the “Composite”) for the period shown. Past performance is no guarantee of future results and may differ
in future time periods. Additional information regarding the Firm’s policies and procedures for valuing portfolios, preparing
compliant presentations, and calculating and reporting performance results is available upon request.
2. Composite Description and Valuation Procedures
The Composite includes all fee-paying portfolios invested in developed global equity securities which use region and sector as
the building blocks to portfolio construction. The Composite strategy is designed to create an optimal portfolio that maximizes
long-term wealth and produces better risk-adjusted returns than the index.
Eligible new portfolios are added to the Composite at the start of the first performance measurement period following the
date that the portfolio is fully invested as defined by the Composite strategy. Securities listed on any national exchange are
valued at their last trade price. Securities that are not listed are valued at the most recent publicly quoted bid price. Securities
transactions are recorded on a trade date basis. If applicable, dividend income is recorded as of the ex-dividend date. Returns
reflect investment of dividends and other earnings. Policy for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. The Composite was created August 1, 2010.
Derivatives are used to equitize cash where permitted.
QS Investors
Diversification Based Investing (DBI) |
25
DBI World Composite Description (continued)
3. Calculation of Rates of Return
Composite returns are expressed in US dollars. For each portfolio within the Composite, the total rate of return for the time
period is equal to the change in the market value of the portfolio, including capital appreciation, depreciation and income, as a
percentage of the beginning market value of the portfolio, adjusted for the net of all contributions and withdrawals (the “cash
flows”). Each cash flow is weighted from the actual date of contribution or withdrawal in the month it occurred. The results are
for the Composite for all periods shown net of withholding taxes, where applicable, on dividends, interest, and capital gains.
Rates of return are calculated on a “time-weighted” basis for all portfolios which comprise the Composite. Time-weighted
rates of return minimize the effect of cash flows on the investment performance of the portfolio. Monthly Composite rates
of return are computed by taking an asset weight of each portfolio’s monthly rate of return within the Composite, utilizing
their respective beginning market values for the period. Annual Composite rates of return are derived by geometrically linking
monthly Composite rates of return. Gross rate of returns are presented net of transaction and commission costs and gross
of investment management fees. Net returns are net of actual management fees. Net of fee performance is based on actual
fees of the underlying accounts, which are asset weighted to derive a composite level net return. Effective August 1, 2010 the
standard management fee schedule is as follows: 0.40% on the first $100m USD, 0.30% on the next $400m USD and 0.20% on
the balance.
The standard deviation of comparable performance over time is a measure of dispersion. This calculation measures the fluctuation of the rates of return of portfolios with the Composite in relation to the average return. Dispersion is not shown for
composites with less than 5 portfolios for a full year as it is not meaningful.
4. Cash Flow Policy
Portfolios with daily cash flows in excess of 20% of their market value will be removed from the Composite for the relevant
reporting month.
5. Composite Benchmark
Composite returns are benchmarked to the MSCI World Total Return Net Index. The MSCI World Total Return Net Index is a free
float-adjusted market capitalization index designed to measure global developed market equity performance. The MSCI World
Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore,
Spain, Sweden, Switzerland, the United Kingdom, and the United States. The benchmark is used for comparative purposes only
and generally reflects the risk or investment style of the investments reported on the schedule of investment performance.
Investments made by the Firm for the portfolios it manages according to the Composite strategy may differ from those of the
MSCI World Total Return Net Index. Accordingly, investment results will differ from those of the benchmark.
For the period from August 2001 to May 2002, the Composite was benchmarked against the MSCI Provisional World Net
Dividends Index. The benchmark changed when the MSCI Provisional World Net Dividends Index was discontinued.
6. List of the Firm’s Composites
In addition to the Composite, the Firm provides investment management services utilizing different strategies. A complete list
and descriptions of the Firm’s composites are available upon request.
7. Significant Events
On 08/01/2010, the Quantitative Strategies group of Deutsche Investment Management Americas, Inc. (“DIMA”) separated from
DIMA and formed QS Investors, LLC, a registered investment advisor under the Investment Advisers Act of 1940, as amended.
QS Investors
Diversification Based Investing (DBI) |
26
Diversification Based Investing (DBI) EAFE Composite: Composite Description
Schedule of Investment Performance for the Period: December 31, 2012
Benchmark: MSCI EAFE Total Return Net Index
Period Ending
(a)
Composite Gross
of Fees Returns
(%)
Composite Net
of Fees Returns
(%)
Benchmark (b)
Number of
Accounts
1
Composite
Assets
(US$m)
63
Firm Assets
(US$m)
Composite
Dispersion (c)
10,516
N/A
2012
17.04
16.49
17.32
2011
-10.60
-10.96
-12.14
2
82
14,797
N/A
2010
11.72
11.27
7.75
1
29
17,282
N/A
2009
35.50
35.04
31.78
3
83
—
N/A
2008
-39.57
39.73
-43.38
4
110
—
N/A
2007
15.42
15.08
11.17
1
30
—
N/A
2006
29.84
29.45
26.34
1
30
—
N/A
2005
11.08
10.75
13.54
1
107
—
N/A
2004
19.47
19.11
20.25
1
90
—
N/A
2003
43.10
42.67
38.59
1
61
—
N/A
Standard Deviation (d)
3-Year 2012
17.71
17.70
19.37
3-Year 2011
20.92
20.91
22.43
Notes:
a) Inception and/or termination period of performance may not comprise a full year; see reporting period dates above.
b) MSCI EAFE Net Index. Due to differences in sources for benchmark performance, there may be slight variances between
benchmark returns noted above and those from other published sources.
c) Asset-weighted standard deviation; calculated for gross returns for composites with five or more portfolios active over the
full year.
d) 3-year annualized ex-post standard deviation.
See Accompanying Notes below
1. Basis of Presentation
QS Investors, LLC (“QS Investors”) is a registered investment adviser with the SEC, providing investment and advisory services
to a diverse array of institutional clients. QS Investors, based in New York City, is a 100% employee owned firm launched in
August, 2010. The firm was created on August 1, 2010 via a management buy-out of the Quantitative Strategies Group within
Deutsche Asset Management and therefore Firm assets prior to 2010 are not applicable.
QS Investors claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented
this report in compliance with the GIPS standards. QS Investors has not been independently verified. Verification does not
ensure the accuracy of any specific composite presentation. This presentation of investment performance sets forth the timeweighted gross and net rates of return for the Diversification Based Investing (DBI) EAFE Composite (the “Composite”) for the
period shown. Past performance is no guarantee of future results and may differ in future time periods. Additional information
regarding the Firm’s policies and procedures for valuing portfolios, preparing compliant presentations, and calculating and
reporting performance results is available upon request.
2. Composite Description and Valuation Procedures
The Composite includes all fee-paying portfolios invested in developed global equity securities except the U.S. which use
country and sector as the building blocks to portfolio construction. The Composite strategy is designed to create an optimal
portfolio that maximizes long-term wealth and produce better risk-adjusted returns than the index. Prior to January 2006, the
strategy used region and sector as the building blocks to portfolio construction.
Eligible new portfolios are added to the Composite at the start of the first performance measurement period following the
date that the portfolio is fully invested as defined by the Composite strategy. Securities listed on any national exchange are
valued at their last trade price. Securities that are not listed are valued at the most recent publicly quoted bid price. Securities
transactions are recorded on a trade date basis. If applicable, dividend income is recorded as of the ex-dividend date. Returns
reflect investment of dividends and other earnings. Policy for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. The Composite was created August 1, 2010.
Derivatives are used to equitize cash where permitted.
QS Investors
Diversification Based Investing (DBI) |
27
DBI EAFE Composite Description (continued)
3. Calculation of Rates of Return
Composite returns are expressed in US dollars. For each portfolio within the Composite, the total rate of return for the time
period is equal to the change in the market value of the portfolio, including capital appreciation, depreciation and income, as a
percentage of the beginning market value of the portfolio, adjusted for the net of all contributions and withdrawals (the “cash
flows”). Each cash flow is weighted from the actual date of contribution or withdrawal in the month it occurred. The results for
the Composite for all periods shown net of withholding taxes, where applicable, on dividends, interest, and capital gains.
Rates of return are calculated on a “time-weighted” basis for all portfolios which comprise the Composite. Time-weighted
rates of return minimize the effect of cash flows on the investment performance of the portfolio. Monthly Composite rates
of return are computed by taking an asset weight of each portfolio’s monthly rate of return within the Composite, utilizing
their respective beginning market values for the period. Annual Composite rates of return are derived by geometrically linking
monthly Composite rates of return. Gross rate of returns are presented net of transaction and commission costs and gross
of investment management fees. Net returns are net of actual management fees. Net of fee performance is based on actual
fees of the underlying accounts, which are asset weighted to derive a composite level net return. Effective August 1, 2010 the
standard management fee schedule is as follows: 0.50% on the first $100m USD, 0.40% on the next $400m USD and 0.30% on
the balance.
The standard deviation of comparable performance over time is a measure of dispersion. This calculation measures the fluctuation of the rates of return of portfolios with the Composite in relation to the average return. Dispersion is not shown for
composites with less than 5 portfolios for a full year as it is not meaningful.
4. Cash Flow Policy
Portfolios with daily cash flows in excess of 20% of their market value will be removed from the Composite for the relevant
reporting month.
5. Composite Benchmark
Composite returns are benchmarked to the MSCI EAFE Net Index. The MSCI EAFE Index (Europe, Australasia, Far East) is a free
float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the
U.S. and Canada. As of June 2007, the MSCI EAFE Net Index consisted of 21 developed market country indices. This benchmark
is being retroactively applied from inception to the present. The reason for this change is the MSCI EAFE is a more relevant
benchmark given the underlying investments. The benchmark is used for comparative purposes only and generally reflects
the risk or investment style of the investments reported on the schedule of investment performance. Investments made by
the Firm for the portfolios it manages according to the Composite strategy may differ from those of the MSCI EAFE Net Index.
Accordingly, investment results will differ from those of the benchmark.
Composite returns were previously benchmarked to the MSCI World ex US Total Return Net Index. The MSCI World ex US Total
Return Net Index is a free float-adjusted market capitalization index designed to measure global developed market equity performance. As of February 2002, the MSCI World ex US Total Return Net Index consisted of 23 developed market country indices.
Previously, for periods from February 2002 to May 2002, the composite was benchmarked against the MSCI Provisional World
ex US Index. The benchmark changed when the MSCI Provisional World ex US Index was discontinued.
6. List of the Firm’s Composites
In addition to the Composite, the Firm provides investment management services utilizing different strategies. A complete list
and descriptions of the Firm’s composites are available upon request.
QS Investors
Diversification Based Investing (DBI) |
28
Diversification Based Investing (DBI) ACWI Composite: Composite Description
Schedule of Investment Performance for the Period: December 31, 2012
Benchmark: MSCI ACWI ND Index
Period Ending
(a)
Composite Gross
of Fees Returns
(%)
Composite Net
of Fees Returns
(%)
Benchmark (b)
Number of
Accounts
Composite
Assets
(US$m)
Firm Assets
(US$m)
Composite
Dispersion (c)
2012
13.52
13.13
16.13
1
494
10,516
N/A
2011
-4.21
-4.54
-7.35
1
436
14,797
N/A
Standard Deviation (d)
3-Year 2012
N/A
N/A
N/A
3-Year 2011
N/A
N/A
N/A
Notes:
a) Inception and/or termination period of performance may not comprise a full year; see reporting period dates above.
b) Due to differences in sources for benchmark performance, there may be slight variances between benchmark returns noted
above and those from other published sources.
c) Asset-weighted standard deviation; calculated for gross returns for composites with five or more portfolios active over the
full year.
d) 3-year annualized ex-post standard deviation is not applicable because it does not have a 3-year history..
See Accompanying Notes below
1. Basis of Presentation
QS Investors, LLC (“QS Investors”) is a registered investment adviser with the SEC, providing investment and advisory services
to a diverse array of institutional clients. QS Investors, based in New York City, is a 100% employee owned firm launched in
August, 2010. The firm was created via a management buy-out of the Quantitative Strategies Group within Deutsche Asset
Management and therefore Firm assets prior to 2010 are not applicable.
QS Investors claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented
this report in compliance with the GIPS standards. QS Investors has not been independently verified. This presentation of investment performance sets forth the time-weighted gross and net rates of return for the Diversification Based Investing (DBI)
ACWI Composite (the “Composite”) for the period shown. Past performance is no guarantee of future results and may differ
in future time periods. Additional information regarding the Firm’s policies and procedures for valuing portfolios, preparing
compliant presentations, and calculating and reporting performance results is available upon request.
2. Composite Description and Valuation Procedures
The Composite includes all fee-paying portfolios invested in global equity securities which use region and sector as the building blocks to portfolio construction. The Composite strategy is designed to create an optimal portfolio that maximizes longterm wealth and produces better risk-adjusted returns than the index.
Eligible new portfolios are added to the Composite at the start of the first performance measurement period following the
date that the portfolio is fully invested as defined by the Composite strategy. Securities listed on any national exchange are
valued at their last trade price. Securities that are not listed are valued at the most recent publicly quoted bid price. Securities
transactions are recorded on a trade date basis. If applicable, dividend income is recorded as of the ex-dividend date. Returns
reflect investment of dividends and other earnings. Policy for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. The Composite was created August 1, 2010.
Derivatives are used to equitize cash where permitted.
3. Calculation of Rates of Return
Composite returns are expressed in US dollars. For each portfolio within the Composite, the total rate of return for the time
period is equal to the change in the market value of the portfolio, including capital appreciation, depreciation and income, as a
percentage of the beginning market value of the portfolio, adjusted for the net of all contributions and withdrawals (the “cash
flows”). Each cash flow is weighted from the actual date of contribution or withdrawal in the month it occurred. The results are
for the Composite for all periods shown net of withholding taxes, where applicable, on dividends, interest, and capital gains.
QS Investors
Diversification Based Investing (DBI) |
29
DBI ACWI Composite Description (continued)
Rates of return are calculated on a “time-weighted” basis for all portfolios which comprise the Composite. Time-weighted rates
of return minimize the effect of cash flows on the investment performance of the portfolio. Monthly Composite rates of return
are computed by taking an asset weighted average of each portfolio’s monthly rate of return within the Composite, utilizing
their respective beginning market values for the period. Annual Composite rates of return are derived by geometrically linking
monthly Composite rates of return. Gross rate of returns are presented net of transaction and commission costs and gross
of investment management fees. Net returns are net of actual management fees. Net of fee performance is based on actual
fees of the underlying accounts, which are asset weighted to derive a composite level net return. Effective August 1, 2010 the
standard management fee schedule is as follows: 0.60% on the first $100m USD, 0.50% on the next $400m USD and 0.40% on
the balance.
The standard deviation of comparable performance over time is a measure of dispersion. This calculation measures the fluctuation of the rates of return of portfolios with the Composite in relation to the average return. Dispersion is not shown for
composites with less than 5 portfolios for a full year as it is not meaningful.
4. Cash Flow Policy
Portfolios with daily cash flows in excess of 20% of their market value will be removed from the Composite for the relevant
reporting month.
5. Composite Benchmark
Composite returns are benchmarked to the MSCI ACWI Net Index. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The
MSCI ACWI consists of 45 country indices comprising 24 developed and 21 emerging market country indices. The benchmark is
used for comparative purposes only and generally reflects the risk or investment style of the investments reported on the schedule of investment performance. Investments made by the Firm for the portfolios it manages according to the Composite strategy may differ from those of the MSCI ACWI Net Index. Accordingly, investment results will differ from those of the benchmark.
6. List of the Firm’s Composites
In addition to the Composite, the Firm provides investment management services utilizing different strategies. A complete list
and descriptions of the Firm’s composites are available upon request.
QS Investors
Diversification Based Investing (DBI) |
30