Invest December

EFG Asset Management

monthly

December 2012 / January 2013

Ring in the New Year‌

Market Round Up

CIO’s investing resolutions for 2013

Global economic outlook: Getting the best out of a tough situation

2013: Stay Invested and Diversified!

Portfolio Management

01/02

contents

02 03

Portfolio Management 2013: Stay invested and diversified!

Market & Macro Round Up The global economy will continue to expand, though risks from the US, Europe and China could reduce expansion

05 06

Mutual Fund Selection 2012 fund reflections & outlook Investment Spotlight New Capital Dynamic Equity European Fund’s one year anniversary

07 09 10

Hot Topic Ring in the New Year…CIO’s investing resolutions for 2013

I

n this issue of Invest, EFGAM’s investment team provides portfolio planning ideas for 2013. We take a look at the past 12 months and the lessons learned and then go forward with resolutions for 2013 to look globally for the best equities, currencies, active funds and structured product investments.

Moz Afzal, Chief Investment Officer

Structured Products Feeling the cold…but the fires are still burning Latin American Artists EFG Bank and ArtNexus promote Latin American Artists

EFG Asset Management

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invest monthly / December 2012 / January 2013

Portfolio Management

2013:

Stay Invested and Diversified!

A

s 2013 approaches, there will be loads of prognosticators who will try to predict the year ahead. Investment experts will be no different. Despite all the knowledge and tools at their disposal, professional investors aren’t able to predict the future because there is too much uncertainty in the markets.

In 2012, the unpredictability of markets once again proved true. At the start of the year, many investors were defensively positioned, expecting some Armageddon scenarios such as a Eurozone breakout or a China hard landing. But none of this happened and risk assets successfully climbed past the wall of worries. Most equity markets – including Europe – performed well in 2012. But perhaps the biggest surprise of 2012 was the exceptional performance of credit and emerging markets in fixed income.

Inspired by the New Year’s resolutions of our Global CIO (see Invest December 2011), EFGAM portfolio managers have kept a long-term view and stayed long equities and credit throughout 2012, enabling our clients to enjoy very solid returns in 2012.

Now as we look forward to 2013, how should we position our clients’ portfolios?

The only certainty is that 2013 will present some of the difficult challenges that we faced in 2012. Risk-free investments are return-free and thus do not compensate for inflation. On the other hand, the world is still full of uncertainties, such as the US fiscal cliff and Iran-Israel tensions, keeping the risk premium elevated.

So what are the three most important portfolio-planning items to keep in mind for 2013? In the current market context – where yield and growth are scarce resources and irrational investor behaviours create numerous dislocations – we believe that investors will continue to search for: 1) yield; 2) growth and; 3) special situations.

In 2012, yield was abundant in the credit markets and it was possible to find growth stories in US mega large capitalisation stocks or in European exporters. Looking forward, we believe attractive yield and growth opportunities can be found in Asia through local currency bonds and Chinese equities. While developed markets seem to provide fewer opportunities, there are still some interesting niche stories such as individual stocks and short duration high yield bonds. Regarding special situations, our investments in volatility arbitrage proved to be successful in 2012 and EFGAM expects to exploit technical opportunities created by investors’ biases.

However, the most important investment principle to keep in mind is portfolio diversification. As always the case, some unexpected event will occur in 2013.

In addition, diversification achieved by investing in multiple asset classes makes the investment ride a lot less bumpy!

by Charles-Henry Monchau, Head of Investments, Europe Geneva office

So what are the three most important portfolio planning items to keep in mind for 2013?

1) search for yield 2) search for growth 3) search for special situations.

03/04

market & macro round-up

by Daniel Murray Global Head of Research London office

Economic Outlook: Getting the Best out of a Tough Situation

W

hen all is said and done 2012 looks like it will have turned out much better than the doomsayers had feared. The Eurozone remains complete, the US election went off relatively smoothly in spite of all the hype and China did not experience a hard landing.

In terms of the economic environment this too was not as bad as it might have been. We highlighted at the beginning of the year the potential for weak but positive US growth, poor European economic conditions and a more normal cyclical pattern of activity in many of the world’s emerging markets.1 In the middle of the year we revisited our outlook, drawing attention to the possibility of a global slowdown over the summer followed by improving conditions going into the year-end.2 Overall it is fair to say that the pattern of global activity has turned out broadly as we anticipated.

However, this is not to say that we got everything right. Of the predictions we made which didn’t work out, I would note that the ECB kept rates on hold in the second half of the year – when EFGAM forecast at least one more cut – and we were disappointed by the lack of more pronounced Chinese policy easing.

Despite the lacklustre economic backdrop, asset markets held up well. At the time of writing, the S&P500 index of US equities is up by over 10.0% for the year-to-date while credit has continued to rally even as government bond yields declined to unprecedented levels in many parts of the world. We ascribe strong cross-asset performance to the abundance of liquidity provided by the world’s major central banks.

So what is the outlook for 2013? In the immediate future the major point of concern for America and the world at large is the impending US fiscal cliff. This is scheduled to take effect as soon as the New Year begins.

It is estimated that it will reduce US GDP by around 4.0%, if left unchecked. The US is already experiencing low rates of growth and this would push the economy back into

invest monthly / December 2012 / January 2013

The outlook for 2013: US expected to be the best of the world’s developed markets, Europe continuing to suffer though some relative improvement of the periphery relative to the core and China experiencing a gentle improvement in growth.

contraction. However, it seems increasingly likely that the Republicans and the Democrats will forge an agreement – possibly on a temporary basis – to reverse or limit some of the fiscal drag. Nonetheless, any compromise is likely to impart a degree of tightening on the US economy. Our best guess at present is that this tightening will amount to about 1.5% to 2.0% of GDP. Thankfully other aspects of the US economy remain reasonably healthy to offset the tightening. The US housing market continues to make slow, steady progress from a low base while Purchasing Managers Indexes – both national and regional – are consistent with gentle but positive economic expansion. The labour market is showing some modest improvement and companies are awash with cash, which means lower levels of corporate stress. But the high cash level is also frustrating because it dampens economic growth. One of the reasons why the US economy has been so lacklustre is because of weak hiring and investment plans. Corporate cash must be put to work, in order for the economy to experience a resounding rebound.

The prospects for Europe are very different.

The mainstay of the European economy this year has been the core, specifically Germany and its exports. There is evidence now that Germany’s export growth is slowing and with it the industrial sector, diminishing an important pillar of support for the European economy. The announcement by the ECB of its Outright Monetary Transactions (OMT) programme has helped to draw a line in the sand with regard to the debt crisis. However, the market will test the ECB’s resolve at some point. It seems likely that during the course of next year Greece will undergo another restructuring or “default.” On the positive side there is some evidence that structural changes are taking place with a narrowing of relative labour costs between the core and the periphery countries. Greece and Spain recently reported that their current accounts returned to surplus. In contrast with this year we could then witness a deterioration of the core European countries alongside a stabilisation of the periphery.

This brings us to China where a number of transitions are taking place. First we have the recent once-in-a-decade leadership change. Given the nature of Chinese politics

we do not expect there to be any meaningful changes in policy in the short term, with the 2012 five year plan serving as a good template in terms of what to expect from China over the next few years.

Our view is that this year saw the combination of a slowdown in China’s trend growth rate alongside a cyclical dip in activity, which is why at times it felt uncomfortable. The gentle policy easing of earlier this year is starting to take effect and we anticipate this continuing into next year.

In summary, our economic outlook has not changed significantly from the middle of 2012, with the US expected to be the best of the world’s developed markets, Europe continuing to suffer though some relative improvement of the periphery relative to the core and China experiencing a gentle pick up in growth.

1 See “2012 certainly won’t be boring…. Keep a lookout for economic, market and political uncertainties” in the January 2012 edition of Invest.

2 See “Plus ça change, plus c’est la même chose” in the July 2012 edition of Invest.

05/06

Mutual Fund Selection

by Andrew Harradine Head of Long Only Research London office

2012 Fund Reflections and Outlook W

ith 2012 quickly drawing to a close, now seems like a good time to reflect on key activities for the past 12 months and how some of our ideas played out.

Within Invest Monthly we have commented on a variety of topics covering fixed income and equities. For instance in February we referenced the emergence of the short duration US high yield asset class. Subsequent research saw the team add Aberdeen local currency Asia Bond, Sky Harbor and Axa US High yield short duration funds to the list. EFG client cash flows into some of these funds is encouraging and highlights that this research is meaningful to our client base.

Following the exceptionally strong performance of full duration products in 2012, given spread tightening and low yields versus history we now view short duration as more attractive from a risk/ return perspective for 2013.

In April, we reviewed the merits of active versus passive approaches in emerging markets and flagged Nevsky Fund as our preferred play in Eastern Europe, Findlay Park Fund in Latin America, Tiburon and Coupland Cardiff funds in Asia. With respect to active versus passive, active funds have done especially well in Latin America with median fund ahead by 3.10% year to date (to October 31st).

This is linked to the underperformance of the largest index names Petrobas & Vale which funds tend to underweight.

Source: Morningstar

YTD

01/12/2007 30/11/2012

01/12/2011 30/11/2012

Return (Cumulative)

Return (Annualised)

Return (Annualised)

Findlay Park Latin American USD

24.66

6.39

27.63

MSCI EM Latin America NR USD

2.05

-1.09

0.43

Nevsky Eastern European USD

14.24

-4.04

3.35

MSCI EM Eastern Europe NR USD

10.89

-10.00

-0.05

Group/Investment

Latin America

Eastern Europe

Median Europe manager is flat vs. index to end November.

Findlay Park Latin has done especially well outperforming by 24.66% year to date (to November 30th) vs. MSCI EM Latin America index. Asia peer groups have also outperformed indices. The Eastern European peer group has modestly lagged indices this year although our preferred fund, Nevsky, has outperformed the MSCI EM Eastern Europe Index by 3.35% year-to-date (to November 30th).

We have recently reviewed the relative performance of funds added to the Mutual Fund list during 2011. As you would expect we have had a mixture of successes and failures but positively the team’s batting average (% of total new additions outperforming) is 60% so far. The standout winners have been UK equities with Schroders, Heronbridge, European small caps with Threadneedle and Metzler and Europe large caps with IVI and Henderson.

New ideas in Asia have been mixed with Tiburon and Coupland Cardiff lagging although First State Asia has done well since being added to our list in June 2012.

Looking ahead to next year we expect the relative performance of active funds in the US to improve on the heels of a weak 2011.

In 2012, Apple has been a significant headwind to active funds given its size in the index and outperformance. We have also observed that the value style has been stronger in the US in recent months which coincides with better returns from financials. We advocate a more balanced approach to US exposure including some value exposure e.g. via the Russell 1000 Value ETF. We expect to add a value fund over the coming months.

Given the dramatic underperformance of China relative to Asia in recent years, low valuations, and the tendency for Asia managers (e.g. First State & Aberdeen) to aggressively underweight China, we believe that adding a dedicated China manager will help balance portfolios.

invest monthly / December 2012 / January 2013

Investment Spotlight

by Robin Milway, Head of Equity Research London office

New Capital Dynamic Equity European Fund’s One Year Anniversary European stocks positioned to perform

T

he New Capital Dynamic Equity European Fund is one year old. The inaugural year produced good performance of 16.46% compared with the STOXX 600 of 15.82% as of 15th November 2012. The Fund enjoyed a particularly consistent performance during the past 12 months because the region benefited from the green shoots of improving investor sentiment.

The key strength of the Fund is its composition; it is well diversified across the region with core positions in NorthWestern Europe and the UK. The companies are typified by good balance sheets, growing businesses and, importantly, attractive valuations. The trailing price to earnings multiple of the Fund is 13x, compared to the index level of 18x. The Fund also outpaces the index on dividend yield with 4.40% compared to 3.90%. When viewed from a valuation perspective, we believe the opportunity is tilted in Europe’s favour for the long term.

EFGAM believes that investing in Europe is now a much more attractive proposition than in 2007. Issues across Europe are very well documented and therefore the markets have digested and discounted these into stock prices. EFGAM considers the Source: Factset

European Government Bond to Equities Dividend Yield Spread

European equities index to have de-risked.

Banks have retreated from an unsustainable 15.0% of the benchmark to 10.0%. Utilities, another bubble, have also shrunk to 5.0% compared to 9.0% before the economic crisis. The largest industry in the index is now Food and Beverages, which alongside Pharmaceuticals is trading at their long-term average stock price multiples, which we consider to be fair value. The index has a much smaller composition from the industries under stress, combined with a large exposure to stable sectors such as Consumer Staples and Healthcare that are not expensive and growing.

The Fund should benefit from economic and financial market resurgence in Europe because of its exposure across all industries. The portfolio construction demands the Fund to invest broadly, which means it targets value across the entire European universe rather than chasing momentum and doubling up in

“hot” sectors. In 2012 the Fund prospered from holding great companies such as Novo Nordisk, Gemalto and Rolls Royce.

Now, however, the fog obscuring visibility on companies correctly described as “national victims” is starting to clear and their value is becoming tangible. The Fund holds companies such as Hannover Re, WPP and Deutsche Börse whose valuations could start to be reappraised when sentiment improves – which it will.

Before we blow out the first-year candle on the cake, it is important to highlight the fact that the spread between a basket of European government bonds and the dividend yield on the index is currently -1.10%. This is the lowest it has been outside of the 2009 crisis. We believe this signals an opportunity for European stocks and during the next few years investing in Europe could be very worthwhile. The New Capital Dynamic Equity European Fund is well positioned to benefit from this.

07/08

Hot Topic Ring in the New Year…

Investing Resolutions for 2013

T

he New Year is both a time of reflection and a time to look forward.

Therefore, before I launch into my New Year’s resolutions for 2013, I will first review what I said for 2012. Why should you believe what I have to say for the next 12 months, until we check if my advice worked out for the past 12 months?

Overall, it was a "surprisingly" good year for prediction; I got it right when I told investors to buy US equities, stay away from treasury bonds and prepare for a European equity turnaround transition in the second half of the year. US actively managed funds underperformed Exchange Traded Funds (ETF), which was my only bungled resolution. See my “Chief Investment Officer Scorecard” for a full review of 2012’s resolutions.

The primary lesson we learned from 2012 was to stay the course and be a long-term investor. Anyone who sold in the midst of massive market uncertainty in the past 12 months would have missed out on unexpected gains. That’s why being a long-term investor is again at the top of my New Year’s resolutions.

Here’s the top ten list of my 2013 New Year’s resolutions.

1. S tay the course, be a long-term investor: Being a long-term investor should be at the top of every investor’s resolution list.

The average holding period for stocks has been shockingly low; surveys suggest as low as seven months. However to improve the odds, investors should extend the holding period to three to five years.

2. D on’t miss the equity re-bound: Equities are set to have a reasonably good year in 2013. Although there are shortterm concerns about a fiscal cliff in the US and worries in Europe and China, we think that as the year goes on the mist will clear and people will focus on a much better economic climate in the second half of 2013 and 2014. Markets will move upward before the large pick-up in economic growth predicted in 2014.

3. F ixed income will disappoint: The Federal Reserve is not likely to raise rates in 2013. However we expect that through the course of the year long-term rates will rise. Most fixed income investments will disappoint relative to the last few years.

4. Look for currency investing opportunities: Compared to fixed income, I see more investing opportunities in currencies.

We think Asian currencies could see good appreciation in 2013. Also the British pound could become stronger because there is more tangible structural improvement in the UK economy through cutting of government expenditure and resumption in private sector activity.

The rise of property prices, especially in London, will also boost the allure of the pound.

5. Buy UK equities: UK equities have underperformed compared to global equities, in the last couple of years and next year could be a period of outperformance.

6. Buy active funds: Despite getting it wrong last year, I believe active funds should outperform ETFs in 2013. I’m still a believer in active management. For the past 12 months, breadth of the market has been very narrow and it has been very difficult to outperform ETFs. But the market is broadening and stock picking will become very important, giving active managers a better chance to outperform.

invest monthly / December 2012 / January 2013

by Moz Afzal Chief Investment Officer London office

Chief Investment Officer Scorecard 7. Be wary of US equities: US equities will potentially underperform global equities in 2013 because stock valuations are significantly cheaper outside the US. Some mean reversion is warranted.

8. Invest in Chinese stocks: Chinese equities are at rock-bottom prices and we think 2013 will be a transition year for the Chinese equity market to rebound.

9. Look to the periphery in Europe: In valuation terms the European periphery markets – Spain, Italy and Portugal – are more attractive than the core markets.

Stocks from the periphery markets could catch up to Germany and France in the next 12 months.

10. Keep this Chief Investment Officer: Although no Chief Investment Officer can get it right all of the time, last year's resolutions were good enough to keep me another year.

Here’s a closer look at the performance of my 2012 resolutions. Although not every forecast went exactly to plan, most of my resolutions came true and clients greatly benefitted from EFGAM’s investment advice.

Be a long term investor: Correct In the midst of major market volatility, investors who stuck with their equity holdings, had an amazingly good year.

The global equity indices returned 14.2% for the year at the time of this printing.

Keep conviction: Correct Investors, who were spooked and sold at the bottom, missed 2012’s unexpected returns.

Stay one step ahead of the unknown: Correct In 2012 there were flash crashes, systems failures and other trading events, which highlight the importance of being prepared for random events.

Don’t rely on government bonds and stay away from US treasuries: Correct The worse performing assets in 2012 were US treasuries, which returned around 2.7% for the year, as of the end of November.

Sell ETFs and buy active management: Half correct This is my only resolution that didn’t completely ring true for US equities.

US active managers failed miserably in 2012. However, in Europe and emerging markets, active managers generally outperformed (e.g. In Latin America, the median active manager outperformed the index by 3.1%*).

Buy US equities: Correct The S&P 500 rose nearly 15.0% for the year as of the end of November.

Buy Asian equities: Correct Asian equities performed well, giving returns of around 19.0% in 2012.

European equities could be at a crossroads: Correct European equities performed badly in the first half of 2012 and then picked up in the summer. The turning point was in late Spring when ECB Chief Mario Draghi changed policy and took a more accommodative stance.

Keep an eye on US elections: Correct During the year it appeared to be a close election, but in the end the markets reacted favourably by President Obama’s victory.

Don’t shoot the chief investment office: Certainly not!

The predictions mostly spot-on and I still have my job. *Source: Morningstar

09/10

Structured Products feeling the cold‌but the fires are still burning

T

here’s no hiding the fact that pricing conditions for structured products have reached a low point in 2012. Interest rates have consistently hit record lows throughout the year and financial credit spreads have tightened substantially. These conditions combined with implied volatility levels not seen since June 2007, have caused investment terms to suffer on both capital protected and at risk products.

However, due to their versatility, structured products will always have their place, particularly when uncertainty is rife because they can offer investment strategies that are simply not available by other means.

Pricing inefficiencies can also generate opportunities, some of which we have taken advantage of during the last year: Chinese Renminbi (CNY): Towards the end of 2011, there was a notable increase (depreciation) in the expected future price of CNY, a trend that continued through 2012. This meant that investors could gain cheap exposure to CNY, which EFGAM continues to view positively, in the form of a principal repayment note that offered 2 times leverage to the future appreciation over a three-year period.

Source: Bloomberg, EFGAM

by Martin Randall Structured Products Manager, London office

Frosty Conditions

European Dividends: As noted in June this year, European dividend futures (expectations) are currently trading at significant discounts to analyst expectations (discounts of circa 25.0%+ and 40.0%+ for the 2014 and 2015 contracts respectively) and below recorded dividend payments for every year since 2004. Whilst analysts sadly are not infallible, this arguably presents an investment with a much better risk return profile than direct European equity investments when held to maturity.

As a more general point, I have always believed that investors are overcompensated for taking downside risk on an asset within barrier products, particularly following a fall. As such, EFGAM has, during the year, looked to and will continue to take advantage of short-term declines in stock markets and other assets.

Looking forward to 2013, should the current economic uncertainty persist, I would continue to recommend standard and defensive autocallable structures. Not simply to reduce risk, but also to increase the probability of returns, especially when structured over a longer term (see May’s edition of Invest). Whilst yields are not as attractive as they once were, I still feel that the risk/return profile of autocallable products make them invaluable in the current climate.

One final caveat however (before we all dive into the Christmas turkey and mountains of chocolate that generally follow) ... care should be taken not to chase higher yields unnecessarily. I have no issues using more volatile underlyings and additional indices or stocks (worst-of products), but only when there is some level of conviction on all underlyings, not simply as a ploy to improve the yield.

invest monthly / December 2012 / January 2013

EFG Bank & ArtNexus

Celia Sredni de Birbragher Founding Editor and Publisher ArtNexus

promote Latin American Artists

T

he term “Latin American art” designates the work of artists from a diverse region, where each country presents its own particular, intrinsic situation. The level of international recognition achieved by Latin American art in recent times is in large part due to the efforts of curators, scholars, art fairs, auction houses, and publications such as ArtNexus, devoted for the past 36 years to introducing the world to the best art from this hemisphere.

As part of its commitment to covering and supporting Latin American art, two years ago ArtNexus launched, in partnership with EFG Bank, the EFG Bank–ArtNexus Acquisition Prize, intended to support and promote emergent artists presenting works in four South American art fairs: ArtBo (Bogotá, Colombia), SP Arte (São Paulo, Brazil), ArteBa (Buenos Aires, Argentina) and ChACO (Santiago, Chile).

In each fair, one curator and ArtNexus’ publisher Celia Birbragher nominate one artist for the prize. The nominees are represented in the magazine’s back cover and at the end of the year one winner is

chosen to receive a US$10,000 prize.

The work selected is included in EFG Bank’s collection. Colombian artist Miler Lagos was the winner of the first edition of the EFG–ArtNexus prize and the winner of the second edition will be announced at the end of the present year.

ArtNexus currently relies on a network of over 100 writers, among them many renowned intellectuals, curators, art critics and researchers. Aware of the growth of electronic communications in the contemporary world, the magazine launched in 2001 www.artnexusguide. com. The website is a way for users to locate galleries, museums, fairs, biennials and valuations in auctions held by Sotheby’s, Christie’s and Phillips de Pury in New York, among others.

Artists always operate in local markets that are closely linked to a country’s economy and impacted by the support provided by the state and its cultural organisations. By “local market”, I am referring to the acquisitions of works by local artists in any given country.

International interest in Latin American art grew after a number of large-scale exhibitions were organized in 1992.

Starting that year, the interest and the market it has generated have expanded consistently. Today, important Latin American artists are fully immersed in the international mainstream.

Collectors have also been influential in these developments. Moving beyond the simple acquisition of individual works of art, many collectors now sit on the boards of museums like the Museum of Fine Arts Houston (MFAH), Tate Modern, and MoMA. Some have even established their own museum, like Eduardo Constantini, in Buenos Aires, and the Daros Collection, in Zürich, who will be opening a cultural center in Rio de Janeiro.

Two years ago ArtNexus launched, in partnership with EFG Bank, the EFG Bank–ArtNexus Acquisition Prize, intended to support and promote emergent artists presenting works in four South American art fairs.

Art Basel Miami Beach serves as the backdrop for the announcement of the winning artist of the EFG Bank Art Nexus Latin America Art Award.

Feria Internacional de Arte de Bogotá – Bogotá, Colombia

arteBA – Buenos Aires, Argentina

LATIN AMERICA

ART AWARD

Feria de Arte Contemporaneo – Santiago, Chile

Artist: Eduard Moreno

São Paulo International Art Fair – São Paulo, Brazil

Artist: Eugenia Calvo

Artist: Manuel Calderón

Artist: José Carlos Martinat

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