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Association of Provident Funds

Association of Provident Funds. Risks of offshore investing. JUNE 2013. Greg Liddell. Benefits of Overseas Investing. Access to different companies and sectors Diversification of economic/growth cycle Diversification of interest rate cycle Benefits of currency diversification

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Association of Provident Funds

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  1. Association of Provident Funds Risks of offshore investing JUNE 2013 Greg Liddell

  2. Benefits of Overseas Investing • Access to different companies and sectors • Diversification of economic/growth cycle • Diversification of interest rate cycle • Benefits of currency diversification • Reduction of home country bias

  3. Risks Of Offshore Investing • Market Risk • Equity market risk • Credit • Currency • Manager Risk • Operational Risks • Counter party • Settlement • Custodian

  4. Risks Management – Market Crises 1972 World Oil Crisis (1 Dec’72 – 30 Sep’74) 1987 Crash (14 Oct’87 – 19 Oct’87) 1990 Recession (17 Jul’90 – 15 Nov’92) 2000 Argentine Economic Crisis (3 Mar’00 – 26 Jun’02) 2001 Dot-Com Slowdown (10 Mar’01 – 9 Oct’02) 2002 Accounting Scandals & WorldCom (30 Apr’02 – 23 Jul’02) 2008 Global Financial Crisis (1 Oct’07 – 27 Feb’09)

  5. 1972 World Oil Crisis (1 Dec’72 – 30 Sep’74) • Overview of market conditions • Severe downturn in global equity markets • High inflation • Australian interest rates jump sharply => negative bond returns • Property market collapses

  6. 1972 World Oil Crisis (1 Dec’72 – 30 Sep’74)

  7. Subprime Mortgage Crisis (1 Oct’07 – 27 Feb’09) Complex and multi-faceted crisis Followed extended period of artificially low US interest rates => lower investment disciplines Credit failures led to equity falls Losses extended to other risk asset classes Sovereign bonds the best performing asset class

  8. Subprime Mortgage Crisis (1 Oct’07 – 27 Feb’09)

  9. 2001 Dot-com Slowdown (10 Mar’01 – 9 Oct’02) Fall in equity markets following speculative tech bubble burst in April 2000 General slump in investor sentiment Spread to other global risk assets e.g. listed property Australian shares underperformed during bubble build up and outperformed as it burst

  10. 2001 Dot-com Slowdown (10 Mar’01 – 9 Oct’02)

  11. 1987 Crash (14 Oct’87 – 19 Oct’87) Short period of equity market decline globally Prior years saw relaxed investment, governance and balance sheet disciplines Largest one-day percentage fall in the Dow Jones Industrial Average of 22.6% Economic fundamentals unaffected

  12. 1987 Crash (14 Oct’87 – 19 Oct’87)

  13. Currency Risk

  14. Strategies to Manage Volatility 1. Strategically de-risk 2. Diversify e.g. Tactical Trading 3. Change flavore.g. Defensive Equity, Low volatility 4. Change shapee.g. Options / non-delta 1 strategies 5. Vary exposure e.g. Volatility Responsive Asset Allocation (VRAA) p.14

  15. Operational Risks • Counter Party Risk • Fraud • Negligence/Error or Omission • Bankruptcy • Can Impact • Fund Managers • Brokers • Custodians • Accountants/Auditors/Valuers • Exchanges

  16. Operational Risk Mitigation Risk audit Operational due diligence Contract review – use of credit support annexes (CSA) Jurisdiction Mark-to-market Counter-party identification and use of credit limits Agent versus principal Agent liability Settlement protocols e.g. Continuously Linked Settlement of FX

  17. Association of Provident Funds Taxation of offshore investments June 2013 Raewyn Williams, Director, After-Tax Investment Strategies

  18. I will cover… • Taxation of Thai provident funds in Thailand • Adding offshore investments – exploring the Australian tax impact • Conclusion – What does this mean for the investment strategies of • Thai provident funds?

  19. Taxation of Thai provident funds - Thailand ‘EEE’ approach: Employers Employees

  20. Taxation of Thai provident funds – investing offshore Employers Employees Exempt Taxation of AU sourced income and gains, unless AU exemptions apply

  21. Types of tax on AU sourced income and gains • Generally, non-resident withholding tax (see Thailand-AU tax treaty) on:10% or 25% on interest on bonds (fixed interest securities) 15% or 20% on unfranked dividends (equities) 0% on franked dividends (equities) • BUT good news: AU exemption for tax-exempt foreign pension funds (Thai provident funds satisfy this definition)see s128B(3)(jb) Income Tax Assessment Act 1936 • Distributions of other AU sourced income from managed fundwithholding tax of 22.5% (Thailand is an ‘EOI’ country’) see s12-385 Taxation Administration Act 1953no equivalent foreign pension fund exemption • Capital gains tax exemption for asset sales where investment < 10% of total value of fund or asset; some exclusions e.g. AU direct property, REITs

  22. What does this mean for investment strategies of Thai provident funds? • Assess offshore investment opportunities on an after foreign tax basis other countries may not respect funds’ ‘EEE’ status need to make sense based on after-tax return and diversification (lower risk) recognise that foreign withholding taxes can’t be recouped by Thai provident funds (ok in AU) • Look for countries like AU where funds can qualify for tax exemptions (e.g. withholding tax exemption for foreign pension funds, non-resident capital gains tax exemption) • In AU, favour direct mandate over managed fund investment • Look for offshore investment managers who understand the tax profile of Thai provident funds and will manage to funds’ after-tax, not pre-tax, outcomes

  23. Taxation of offshore investments – an introduction Questions?

  24. Association of Provident Fund Global Market Outlook and Risks Looking Forward June 2013 Graham Harman – Investment Strategist, Asia-Pacific

  25. No catch-up growth for the US“Sweet spot” – Excess capacity positive for bonds AND equities

  26. Recovery fragile, but relatively “normal”

  27. Key messages • We are: • Cautious near-term on equities (longer-term there is upside) • Looking for a gradual rise in bond yields • Seeing moderate US growth, decreasingly worried about structural headwinds • Decreasingly worried about Europe, and see value longer term • Seeing a slowdown in China, but still like the story • Positive about Japan, although phase 2 will be more challenging • Seeing value, but no short term positive catalysts, for emerging market equities • Cautious about the “safe havens” of the past few years – gold, US treasuries, Australian dollar, emerging market debt

  28. Risks Valuation/duration Currency Economic growth Inflation Social fabric Geopolitical Agency

  29. World CVIs overvalued – Valuation of Equities

  30. Currency risk and exposure

  31. Currency risk and exposure EM = Emerging Markets; PPP = Purchasing Power Parity

  32. Is the end of European recession near?

  33. Italian and Spanish bond yields still at “safe” levels

  34. Portugal and Slovenia yields to rise?

  35. Unemployment rates at disturbingly high levels

  36. Geopolitical

  37. Association of Provident Funds Australian Funds Management Industry Overview JUNE 2013 James McSkimming

  38. Australian Managed Funds Landscape • $1,662bn Total Assets • Resident Investment Managers manage $1,365bn of this

  39. Australia’s Money Managers • Predominantly focussed on investing in Australia • Secondary interest in New Zealand, Asia Pac, Global • Few Global investment funds offered by resident money managers • Russell monitors and researches around 175 Aust Equity products, 110 Aust Cash and FI products • Boutique firms have dominated for the last ten years • Staff ownership • Life cycle challenge; Who will lead the firm tomorrow? • Institutional or global ownership - not a safer haven than boutiques • Competition and Consolidation • Internal management, overseas entrants, scale • Shifting emphasis in investment approaches • Eg Income, mortgage credit, managed volatility, beta variations, absolute return

  40. Russell Asia-Pac Multi-asset capabilities June 2013 Scott Fletcher Director, Client Investment Strategies

  41. What we do // Multi-asset solutions We will be recognised around the world as the leading provider of multi-asset solutions, by both institutional and retail investors Multi-asset investing: Building portfolios from a broad range of asset classes, styles and strategies, all with investors’ desired outcomes in mind How? By drawing on and integrating the 5 core competencies of our global business to meet client outcomes. Investment Value Proposition Investment Division is the core part of the global business that makes this happen ... Building outcome-focused, actively managed, multi-asset portfolios FINANCIAL PROFESSIONAL USE ONLY

  42. Russell Global AUM breakdown By Segment By Region Global AUM US$ 175 billion Source: Russell Investments, AUM as at 30 April 2013. Segment split data as at 31 December 2012. FINANCIAL PROFESSIONAL USE ONLY

  43. Multi-asset Australian Institutional Funds (PSTs & Unit trusts) Australian Retail Funds Bespoke Retail Funds (B2B Retail) Asian Institutional accounts Australian MAGS Multi-strategy Australian Shares Australian Fixed Interest & Cash Pacific Basin Shares Direct Investments (CPM, Select Exposure) ETFs Capabilities Portfolio Management Investment Strategy Research – Manager & Capital Markets Client investment support (external & internal clients) Governance (operational due diligence & risk management) Investment Management : Sydney office FINANCIAL PROFESSIONAL USE ONLY

  44. Investment Division : Global Structure Pete Gunning Global Chief Investment Officer Erik Ristuben Chief Investment Strategist Adam Goff MD, Investments Vic Leverett MD, Alternatives James Barber CIO, Equities Jeff Hussey CIO, Fixed Income Christophe Caspar CIO, Multi-Strategies US Investment Process & Risk US/Canada US Client Strategies US / Canada / Public Real Estate INVESTMENTS Lance Babbit Sr. PM Sam Baughn Director Ops DD Brian Burke Sr. Inv Risk Analyst Julia Cormier Director, Alt Investments Keith Espirito Sr Oversight Analyst Andrew Howeiler Sr Oversight Analyst Ed Garcia PM Jennifer Keeney Ops DD Maniranjan Kumar PA Patrick Nikodem PA Ed Robertiello MD, Hedge Funds Derek Williams Director, Private RE PORTFOLIO MGMT Keith Brakebill PM Gerard Fitzpatrick PM Kelly Mainelli Director (STI) Greg Nott CIO/PM, CAN Brian Pringle PM (STI) Kevin Lo Associate PM John Greves PM Lee Kayser APM VenkatKopanathi PA Brian Meath MD Investments Mike Ruff PCS Director / PM Brian Yadao PA Rob Balkema Sr. Analyst, Portfolio Management Practice John Forrest Head Manager Research Practice Jordan McCall Sr. Analyst, Investment Practice Mark Eibel Director CIS Iheshan Faasee Client PM Scott Fletcher Director CIS Steve Wood Chief Mkt Strategist, North America US PORTFOLIO MGMT Damien Amato APM Jon Eggins PM Josh Goodell PA Rob Kuharic PM Dave Hintz PM Richard Yasenchak PM RESEARCH Steve Skatrud H of R Dave Brunette Sr. RA Eric Papesh Sr. RA Megan Roach Sr. RASteve Swartley Sr. RA Tom Warburton Sr. RA Kathleen Wylie Sr. RA Kathleen Baldwin RA John Lidington RA Sherrie Trecker RA Curtis Yasutake RA Quantitative Analytics Europe RESEARCH Open, H of R Ryan Dembinsky Sr. RA David Jurca Assoc RA Bilal Naqvi Sr. RA Yoshie Phillips Sr. RA Yoel Prasetyo Sr. RA CANADA PORTFOLIO Kevin Eng APM Thierry Vallee, Head of Canadian Equities, PM Craig Austin Mgr Inv Bus Intelligence Steve Bui Busines Intelligence Analyst Ashish Katyal Inv Bus Intelligence Analyst Justin Knowles Technical Bus Analyst Anthony Lawver Inv Bus Intelligence Analyst Paul OldenkampSr Inv Bus Intel Analyst David Pedack Quantitative Analyst John Sacks Director, Quantitative Analytics Mark Terjeson Sr Inv Bus Intel Analyst Eric Thaut Quantitative Analyst Sanjeeth Vijayan Sr Inv Bus Intel Analyst Bin Wang Sr Quantitative Analyst Alexandre Attal PA Neil Jenkins MD Investments Ran Karni, Associate, Open World Mayank Markanday PA Rory McPherson APM William Pearce PM David Rae Head of Investment Solutions, EMEA Faisal Rahman PM Soeren Soerensen PA Wee-Tsen Lee PA Stanislava Vrabcheva PA Alain Zeitouni PM DIRECT INVESTING Brian Mock MD, Direct Investments Marc Hewitt PM Rich Johnson Sr PM Mahesh Pritamani Sr RA Kevin Reinkensmeyer Sr PA Sean Smith RA Rafael Zayas PM Nick Zylkowski APM RE PORTFOLIO MGMT Bruce Eidelson Dir. RE Adam Babson PM Adrianna Giesey APM Patrick Nikodem PA RESEARCH Joe Belladonna Product Specialist Ariel Castle RA Brett Deits Sr. RA Cedric Fan Sr. RA Jack Fadule RA Cameron McVie Sr. RA Wade Millen RA Paul Kreiselmaier Sr. RA Tamara Larsen Sr. RA Mark Rapela Sr. RA European/Global PORTFOLIO MGMT Al Jalso PM Mark Klein PM (STI) James Mitchell PM Andreas Koester PA Capital Markets Research Emerging Markets / Global Japan Europe RESEARCH Marcus Graf RA Franklin Schram RA Peter Ballantyne Snr Forecasting Analyst Evgenia Gvozdeva Forecasting PS Aran Murphy Product Strategist Mahesh Pritamani Sr RA Leola Ross Sr RA Patrick Rowland Sr. PS Sean Smith RA Vivek Sondhi Sr RA Ian Toner Director, Research & Communication PORTFOLIO MGMT Matt Beardsley PM Scott Crawshaw PM Gustavo Galindo PM Phil Hoffman PM Jim Jornlin PM Iwona Kochanska PA Olen Storaasli PA Yiannis Vairamis PA RESEARCH Mark Thurston Head EM Manager Research James Carpenter Head Global Manager Research Patrick Egan Sr. RA Tereasa Gandhi Sr. RA Joe Hemmant Sr. RA Simo Sorsa RA Vikrant Verma RA Artemiza Woodgate Sr. RA Gashirai Zengeni RA Hiroyuki Nakagawa Director / PM Michinori Kanokogi APM INVESTMENTS Efua Mercer Sr Oversight Analyst John Mancuso Director, Real Estate, EMEA Australasia Australasia RESEARCH Majid Kahn Sr. RA, Hedge Fund Tom Richardson RA PORTFOLIO MGMT Austin Loke PA Clive Smith PM Andrew Sneddon MD Investments Thomas McDonald PA Australasia RESEARCH Robert Moore RA Investment Tools Strategists European/UK RESEARCH Stephen Hunt Sr Oversight Analyst Samantha Steele Sr. RA Justin Johnson Sr Analytic Product Manager Carrie Luetzow Sr Product Manager Andrew Pease Global Head of Inv Strategy Graham Harman Inv Strategist Asia-Pac Yuliya Brayshaw Invest Strat Analyst WouterSturkenboom Head, Capital Markets Research-Europe Mike Dueker Chief Economist Doug Gordon Sr. Investment Strategist Abraham Robinson Inv. Strategy Analyst PORTFOLIO MGMT James Barber PM Ronnie Sabel PM Robert Mears APM Anthony Cherrington PA RESEARCH Graeme Allan H of R Veronique Botton Sr. RA Ana Harris RA Gabriel Sauma RA Asia Pacific Asset Allocation / Model Strategies PORTFOLIO MGMT Symon Parish CIO/PM Masaki Kai Sr. PA Leslie Kapin APM Andrew Zenonos PA Satoshi Tawada PM RESEARCH Scott Anderson H of R Japan Makiko Hakozaki Sr. RA Kathrine Husvaeg Sr. RA Sarah Lien Sr. RA Ayumu Matsuura ARA James McSkimming H of R AUS Bradley Street. RA Steve Meyer Managing Director, Investment Operations Yuan-An Fan Sr. RASteve Murray Director, Asset Allocation Strategies Sam Pittman Sr. RA DIRECT INVESTING Scott Bennett PM Investments MD = Managing Director PM = Portfolio Manager APM = Associate Portfolio Manager Sr. PA = Senior Portfolio Analyst PA = Portfolio Analyst APA = Associate Portfolio Analyst STI = Short Term Investments Research H of R = Head of Research Sr. RA = Senior Research Analyst RA = Research Analyst ARA = Associate Research Analyst PS = Portfolio Strategist IS = Investment Strategist Mikel Ross Chief Operating Officer, Investment Division FINANCIAL PROFESSIONAL USE ONLY

  45. Investment Team : Australasia Pete Gunning Global Chief Investment Officer James Barber Chief Investment Officer, Equities Troy Rucker Managing Director,Implementation Services Jeff Hussey Chief Investment Officer, Fixed Income Christophe Caspar Chief Investment Officer, Multi-Strategies Erik Ristuben Chief Investment Strategist Adam GoffManaging Director, Investments Vic LeverettManaging Director, Investments - Alternatives ASSET ALLOCATION Peter Ballantyne CMA IMPLEMENTATION Adam Van Ness PM Daniel Birch PM Jerome Hogan PM Diana Wijaya PA*** RESEARCH Samantha Steele Snr RA CLIENT STRATEGIES Scott Fletcher Dir PORTFOLIO MGMT Andrew Sneddon MD/PM Thomas McDonald PA PORTFOLIO MGMT Clive Smith PM Austin Loke PA PORTFOIO MGMT Symon Parish CIO/PM Scott Bennett PM Leslie Kapin APM Andrew Zenonos PA DUE DILIGENCE Samuel Baughn Dir STRATEGIST Graham Harman Inv.Strategist Yuliya Brayshaw PA RESEARCH Robert Moore RA DUE DILIGENCE Stephen Hunt Snr OA RESEARCH James McSkimming H of R Kathrine Husvaeg H of R^ Sarah Lien Sr RA Brad Street RA Jane Bouris - Admin Steve Bui – Systems Analyst Daniel Choo - Intern ^Maternity Leave ***Maternity Leave cover – Alistair Martyres London Seattle Australasia New York

  46. Multi-asset investment framework Multi-asset Solutions Primary thrust to market Active AA Global Bonds Real Assets Alternatives Exist for use in Russell multi-asset solutions Manager Research Multi-asset Toolkit Global Shares External Market (Client Multi-asset) Australian Bonds Implementation Services Australian Shares Only if used in Russell multi-asset solutions Smart Beta

  47. Matrix Asia-Pac Institutional Master Trust Clients Intermediary Groups INSTO MULTI - ASSET RETAIL MULTI - ASSET CO - MANUFACTURE FULL OUTCOME FUNDS FUNDS OUTCOME - ORIENTED ORIENTED BALANCED PARTNERSHIP BALANCED MAGS & OPPORTUNITIES FUNDS FUND ABSOLUTE RETURN Multi-asset in AustraliaCurrent spectrum of Russell’s Australian multi-asset solutions Multi-asset SOLUTIONS Multi-asset TOOLS TM & Overlay Sector Funds Smart Beta Active AA

  48. Portfolio Construction // From theory to reality FINANCIAL PROFESSIONAL USE ONLY

  49. Example // Balanced Opportunities Fund • Listed Equities 57.0% • Australian Shares 29.0% • Australian Shares Tracker 18.0% • Australian Shares Opportunities11.0% • International Shares 28.0% • Global Opportunities 24.6% • Emerging Markets Index 1.5% • Global Defensive Equity 1.9% • Real Assets & Alternatives 17.5% • Global REITs 2.5% • Australian Unlisted (Dexus) 2.0% • Global Listed Infrastructure 2.0% • Unlisted Infrastructure (IFM, Hastings) 2.0% • Commodities Fund 0.5% • Global Strategic Yield Fund 5.0% • Absolute Return (DA & AREF) 2.5% • Local Currency EMD 1.0% • Fixed Income & Cash 25.5% • International Bonds 8.5% • Australian Bonds 10.0% • Absolute Return Bonds 1.0% • Cash Enhanced 6.0% Fixed Income & Cash Real Assets & Alternatives Listed Equities Strategic Asset Allocation as at 30 April 2013 FINANCIAL PROFESSIONAL USE ONLY

  50. Portfolio Construction // From theory to reality FINANCIAL PROFESSIONAL USE ONLY

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