Global Asset Allocation and Stock Selection Assignment 1

Global Asset Allocation and Stock Selection Assignment #1 Comparison of Investment Styles along Tactical Trading Strategies Gold Asset Management Artima Suraphongchai Genzo Kimura Andrew (Jing) Liu Joseph Sun Stefan Prawitz

AGENDA Methodology Overview Forecasting Model Strategy Evaluation Key Take-Aways

Methodology Overview: 3 Investment Styles Country-based Investing US UK JP Sector-based Investing DE Financial Health Utilities Material Mixed Investing US Financial Health DE

Each Investment Style Evaluated Across 6 Tactical Trading Strategies Description Strategy 0: Buy-and-hold • Buy & Hold sub-strategies assume equal weights for all 4 asset classes. Strategy 1 A: Long-or-Cash (No Filter Rule) • Compares highest forecasted return to the 1 -month Eurodollar deposit return • If forecasted returns exceed the deposit return, go “Long” in the asset class with highest forecasted return. Strategy 1 B: Long-or-Cash (Filter Rule) • Same as strategy 1 A, but highest forecasted return must exceed 1 -month Eurodollar deposit return by at least 0. 01% on a monthly basis • Only then will we go “Long” on the asset class. Strategy 2 A: 2 -Long-Positions (Equal Weights) • Compares two highest forecasted returns to 1 -month Eurodollar deposit return • If both forecast returns exceed deposit return, then go “Long” • If only one asset exceeds deposit return, go only “Long” in one asset and deposit the rest • Equal weights for both positions (50%-50%) Strategy 2 B: 2 -Long-Positions (Weights 2: 1) • Same as Strategy 2 B, but asset with highest forecast twice that of the second highest forecast Strategy 3: Long-and-Short • Go “Long” in asset with highest positive forecast and “Short” in the lowest negative return forecast • Positive forecast must also exceed deposit return. If there are no positive forecasts, then deposit. If there are no negative forecast, no short position is taken

Country-based Forecasting Model Variables US Germany Japan UK Oil Price Change (3) Spread Change (4) Dividend Yield (5) Price-Book Price-Earnings (1) Relative Change to Term Structure Note: • • • P/E ratio of US equities P/E ratio of UK equities Change in spread of 10 -year German Bunds over 10 -year US Treasuries Dividend Yield of Japanese equities Price-Book Ratio of Japanese equities UK term structure (1) (2) (6)

Sector-based Forecasting Model Finance Oil Price Change Yield Change in 10 Y USTreasuries US Price-Earnings Change of Relative US Term Structure Health Utilities Material

Historical Efficiency Frontier (Strategic View)

Predicted Efficiency Frontier (Tactical View)

Investment Style Comparison (Return) 0. 0071 MSCI World Return

Investment Style Comparison (Standard Deviation) 0. 0424 MSCI World Std Dev

Investment Style Comparison (Sharpe Ratio) 0. 1672 MSCI World Sharpe Ratio

Two way comparison: Ranking System for Combination Evaluation (I) Standard Deviation Sharpe Ratio Rank of Standard Deviation Rank of Sharpe Ratio % of non-negative Rank of % of non-negative Maximum Return Rank of Maximum Return Minimum Return Rank of Minimum Return

Two way comparison : Ranking System for Combination Evaluation (II)

Key Take-Aways Investment Style Comparison Overall score shows Mixed Strategy is the best Plot of efficiency frontier favors country-only strategy Poor sector returns probably due to high inter-correlation Tactical trading Strategy Comparison Overall score shows 1 b: Long-or-Cash (Filter Rule) is the best Little difference between 2 -Long and Long-Short trading strategies Buy & Hold strategy has the lowest performance (But still beat MSCI World) Best combinations is to have Combined asset classes and implement Long. Cash (with Filter) trading strategy

Global Asset Allocation and Stock Selection Assignment #1 Any Questions? Gold Asset Management Artima Suraphongchai Genzo Kimura Andrew (Jing) Liu Joseph Sun Stefan Prawitz

Regression Summary: Solid Adj-R 2 and High Predicting Power Country-based Sector-based Adjusted R square Correct Direction Count Total Observations Percentage Buy & Hold US 10. 28 % 134 192 70% 63% Germany 5. 78 % 126 192 60% 58% Japan 4. 32 % 104 180 58% 46% UK 5. 13 % 118 192 61% 57% Finance 9. 18 % 168 262 64% 66% Health 7. 63 % 175 262 67% 65% Utility 4. 72 % 127 192 66% 60% Material 16. 57 % 77 108 71% 59%

GARCH model (Expected variance)

Investment Style Comparison Table

Strategy Comparison (Maximum Return)

Strategy Comparison (Minimum Return)

Global Industry Classification (GICS) Sector Description Financials Sector Banking, consumer finance, investment banking and brokerage, asset management, insurance and investment, and real estate, including REITs. Health Care Sector Two main industry groups. The first includes companies who manufacture health care equipment and supplies or provide health care related services, including distributors of health care products, providers of basic health-care services, and owners and operators of health care facilities and organizations. The second regroups companies primarily involved in the research, development, production and marketing of pharmaceuticals and biotechnology products Utilities Sector Electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power. This sector includes both nuclear and non-nuclear facilities. Materials Sector Encompasses a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including producers of steel. Note: • 10 Sectors (Other 6 sectors are Energy, Industrial, Consumer Staples, Consumer Discretionary, IT and Telecom) • 24 Industry Groups • 62 Industries • 132 Sub-industries Source: MSCI website