Nikko AM Pulse

September 2012
A monthly comment from the investment team of Nikko AMs World Series Fund Platform.

August was a month where the action was in the pool, the stadium and on the podium, but not in markets, as volumes dipped lower and volatility reached a five year low. Investor activity was muted, although some interesting noise from the Quantitative Easing (QE) and commodity camps kept things interesting. This month some of the team visited our offices and contacts in Sydney and Auckland, where we exchanged ideas regarding investment solutions and the pattern of demand in those regions. In the note below, we share some of our takeaways from that trip, as well current trends in searches and manager performance.

The pending introduction of MySuper, a proposed lowcost default option designed for the 80% of superannuation members who are disengaged and uninterested in directing their own funds, has led to some hand wringing within the investment management community. Its overarching emphasis on cost reduction and high transparency suggests some increase in passive options, but certainly ongoing pressure on active management fees. The World Series Fund Platform team at Tyndall Asset Management runs multi-manager portfolios in both global and domestic equities. Its global product stems from a longstanding need on the part of some Australia and New Zealand based investors to obtain global exposure and source best of breed managers via a onestop investment solution. Within New Zealand, our conversations focused on retail investors, as the smaller size of the institutional market made demand patterns more esoteric. The markets small size and relative isolation has, ironically, led to its suitability as a testing ground for new strategies. The appetite for such strategies seemed subdued though; multi-manager products were more prevalent than in Australia perhaps a reflection of the smaller size of average accounts and there was, interestingly, no interest in some of the headline NZ themed strategies such as timber, where we have seen sporadic interest from global investors. We saw some faint interest in the diversified growth/multi-asset strategies that have gained tremendous traction in Europe and the US, but otherwise, traditional solutions including balanced, seemed to fit the bill.

Antipodean Angst Notes from Australia and New Zealand

With over $1.3trn in pension fund assets (the fourth largest pool globally), a mature superannuation fund industry and a keen eye on energy, resources and Asia, Australian institutions rank as heavyweights on a global scale. Consultant coverage is comprehensive and sophisticated, despite the fact that intense competition has squeezed fees in this advisory layer even more than the norm across global markets. The sheer size of some of the larger superannuation funds - in a 2011 survey by Pensions and Investments, and Towers Watson, there were 15 Australian super funds with assets totaling $368bn in the top 300 global funds - has led to fee pressure at a manager level too, as steady growth of passive mandates and the addition of inhouse investment talent is occurring at the expense of active management mandates. Interestingly, we perceived there to be sparse interest in Asia-focused or resource/commodity themed investments, which are enduring themes across our Japanese, US and European contacts. This was attributed to the fact that the Australian economy is already very resource driven and dependent on exports to Asia; therefore these factors were indirectly embodied in a domestic equity allocation. Within domestic allocations, still-high bank deposit rates (around the 4% level) raised the bogey for any yield based strategy although, as we are witnessing in Japan, high dividend yield equities remain in demand. There was some interest merging market debt and active credit perceived as two areas needing specialist knowledge and on-the-ground research.

Late summer in the Year of the Pendulum

One of our Asian managers referred to the current year in China as the year of the pendulum, but it seems an apt description of the rest of the world too. Over the month the S&P reached a four year high, bringing its year to date return to a respectable 12.5%. Other markets were driven by strong performance in financials and although agricultural commodities retrenched a little following Julys gains, renewed QE and macro chatter caused gold and oil to soar.

This information is for professional investors only. Not for redistribution. For more information, visit http://en.nikkoam.com/worldseriesfundplatform
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Nikko AM Pulse
September 2012
Asia was again in mixed territory, as the Hang Seng rose whilst the Shanghai Comp and the Nikkei were down slightly. It was a busy period for Chinese data 1H12 GDP growth was 7.8%, which still represents a strong headline figure in comparative terms, albeit short of some expectations. Overall export growth from China slowed, but was still up 9.2% in 1H12 (with an increase of 17% in exports to ASEAN countries), whilst real retail sales, urban consumption and real rural income were all up double digits. The bugbear of inflation was muted, with CPI at 3.3% in 1H12, down from 5.4% for the full year of 2011. Despite these figures however, the Asian region continues to perform in a lacklustre way, although managers are expecting more positive performance to round out the year. August was overall a solid month for equity managers, as well as long/short equity and alternative credit strategies. Interestingly, the very strategies that prevailed during last years negative risk environment, such as macro and CTA strategies, have disappointed year to date, with indices down for the year. Much has been made of hedge fund managers failing to make headway versus traditional solutions this year, but this has not slowed the growth of the industry by size or manager number. Latest figures report the number of hedge funds to have increased by 4.6% to over 14,000, with assets in the industry now topping $2.3 trillion. This refutes the suggestion that increased barriers to entry have stemmed the pace of fund launches, or that the industry has had its day and the attendance and interest level at recent hedge fund events would substantiate this. Following a period of consolidation and huge cuts in sell side research coverage, it is estimated that currently 50% of the stocks in the US have no meaningful analyst coverage. However, whilst this might seem to suggest an increased information advantage, the huge increase in regulation and information sharing via internet sites has surely eroded some of the edge and certainly the longevity of any edge that fundamental research can sustain. *** As always we welcome your feedback, questions and comments. The Investment Team Nikko AM World Series Fund Platform September 2012

Further Information
Fund Managers
If you are a fund manager that can add value with specialist expertise in strategies which Nikko AM doesnt have in-house, please contact us we may be interested in appointing you as sub-advisor to a new product launch for our 300 intermediaries across Asia. E: worldseriesfundplatform-managers@nikkoam.com

Distributors
If you are a distributor and are looking for a specialist investment solution for your clients, please contact us about our worldwide third-party fund manager research.

E: worldseriesfundplatform-distributors@nikkoam.com

Important Information
This document is for information purposes only and is not intended to be an offer, or a solicitation of an offer, to buy or sell any investments. This document should not be regarded as investment advice. In making any investment decision, prospective investors must rely on their own examination of the merits and risks involved. This document has been prepared and issued by Nikko Asset Management Europe (Nikko AME), on the basis of publicly available information, internally developed data and other sources believed to be reliable. While reasonable care has been taken to ensure that the information is accurate and any assumptions made or simulations used are fair and reasonable, Nikko AME, nor any director, officer nor employee thereof, shall in any way make guarantee, representation or warranty of and be responsible for the accuracy or completeness of this document. Any opinions expressed in this document may be subject to change without notice. Nikko AME is authorised and regulated by the Financial Services Authority and is registered in England No. 1803699. Registered address: 1 London Wall, London, EC2Y 5AD. This information is for professional investors only. Not for redistribution. For more information, visit http://en.nikkoam.com/worldseriesfundplatform
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