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Investorama -Don't Worry

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Investorama -Don't Worry Powered By Docstoc
					                       Second edition 2013



      ORAMA
INVESTORAMA




                        Don’t worry, be happy?
  Since the beginning of the year, all worries seem
   to have been dispelled and the crises defanged.
 It appears as though most of the threat potential
     has dissipated. Does the financial world really
                      not have to worry anymore?

                             Economic outlook
     Economic data, which have been somewhat
    better than expected, are providing tentative
          signs that the economic downturn has
  bottomed out. Thus, the risk of a global double
         dip back into a recession has decreased

      Always look on the bright side of life?
   We recommend taking a “moderately bullish”
     tactical positioning that is clearly above the
        strategic neutral weightings for equities,
      while overweighting the Norwegian krone
                                 and the US dollar

                   Read the signs of the market
  The stock market has a far stronger momentum
 of its own than highly abstract, purely economic
     models are capable of capturing. The field of
Behavioral Finance provides scientific explanations
   for these processes, on the basis of which LGT
 has used its extensive experience to develop and
              refine practical investment concepts
Dear Readers
Although political policies have basically been geared towards an
opportunistic strategy of “muddling through,” they appear to have
succeeded in recapturing the trust of the financial markets. A year
ago, the latest developments in Cyprus would probably have
triggered panic on the financial markets. However, since then, pol-
iticians and central bankers have more than once explicitly declared
and implicitly demonstrated that they can be counted on in an
emergency. Given the unresolved structural problems, however,
one should not become complacent, as governments and central
banks have only limited potential to stimulate the real economy.

In these tough conditions, it is even more important to identify
opportunities and risks early on and to take the right investment
decisions. We are responsible each day for recognizing trends at
an early stage and seizing investment openings, whether in terms
of Asset Allocation, Security Selection or Manager Selection. This
work entails tracking the markets closely on an ongoing basis,
and taking a critical look at relevant social, political and macro-
economic developments.

“Investorama” is the ideal publication to keep you fully up to date
with developments on the financial markets and to present you our
investment views.

We also present you an in-depth look at our Behavioral Finance ap-
proach. Learn more about how we strive, on the basis of scientific
evidence, to systematically exploit market inefficiencies within the
framework of our tactical positioning.

The editorial team of Investorama hopes you will find it an enjoy-
able read.
                                               Content




Editorial                                        4
Don’t worry, be happy?



Economic conditions, outlook and positioning     6
Always look on the bright side of life?

Currencies                                       7
Japanese yen: Overcome the growth lethargy?
Yes, we yen!

Bonds and interest rates                         8
Government bonds
Inflation-linked bonds
Corporate bonds

Equities                                        10
USA
Europe
Emerging markets

Other asset classes                             12
Real estate
Commodities
Hedge funds
Listed private equity

Viewpoint                                       14
Anicca

Asset Management                                15
LGT’s core competencies in asset management

LGT Funds                                       16
Overview LGT Funds

Investment topic                                18
Read the signs of the market

Interview                                       20
Selling overdone fears and illusions

Money tales                                     21
The power of the masses

The number                                      22

Imprint/disclaimer                              23
    Editorial




        Don’t worry, be happy?
        Deflationary depression, debt and currency crises, a banking system collapse: in the last few years the
        financial markets and economists have had a lot to worry about and cope with. There’s hardly an extreme-
        case scenario that hasn’t been the focus of markets, made headlines and shaken up the price structures
        of the various asset classes. Since the beginning of the year, all these worries seem to have been dispelled
        and the crises dissipated. It appears as though most of the threat potential has dissipated. Does the
        financial world really not have to worry anymore?

                                                                                Do our crisis-related fears and anxious thinking about future
                                                                                economic scenarios amount to nothing more than suffering in
                                                                                advance for difficulties that are unlikely to ever materialize? Are the
                                                                                considerations made and actions taken in response to our anxiety
                                                                                meaningless because – contrary to the “can-do” fervor of some
                                                                                central bank governors – in reality all our efforts effect no change,
                                                                                not even in the slightest, since we have no control over what
                                                                                happens in the real world and are powerless to either encourage
                                                                                positive developments or ward off disaster? No. The fact that we
                                                                                cannot predict something with absolute certainty does not mean
                                                                                that we should cease and desist from all provisions for the future.
                                                                                An overly broad concern for the future can cast shadows that
                                                                                obstruct our view of opportunities, but this is not an argument
                                                                                against prudent planning.

                                                                                The financial markets are gaining more resistance to problems and
                                                                                issues, but this resistance has to be strictly distinguished from the
                                                                                immanent ignorance of self-complacent politicians. Financial markets
                                                                                are now able to develop almost rational powers of resistance –
                                                                                practically in defiance of the bad image they have of being overly
                                                                                determined by emotionalism – lending them a kind of immunity
                                                                                consistent with Nietzsche’s principle of “what doesn’t kill you
                                                                                makes you stronger.” Because even the most dreadful crisis sce-
                                                                                nario is eventually recognized for the danger it is and – although
                                                                                not yet overcome – it is sufficiently or even excessively priced in.
                                                                                Subsequently, the markets should no longer let themselves be
                                                                                influenced by that well-known risk. Politicians, however, are moti-
                                                                                vated by election strategy considerations. They tend to constantly
                                                                                play down unpleasant facts – especially self-made problems, such
                                                                                as the government debt crisis – or avoid dealing with them or find
                                                                                pragmatic ways of covering them up. Even the slightest calming in
                                                                                the markets or supposed mitigation of a problem is taken as an op-
                                                                                portunity to claim success with calculated optimism. This attitude
                                                                                results in market technicals showing a reduced urgency for action,
                                                                                delaying the necessary crisis resolution process at a fundamental
                                                                                level and ultimately making it more painful.




4
                                                                                                                                          Editorial




As so often has been the case in the series of ominous puzzles that       absolute certainty, we should plan ahead and take care – which
the interaction of politics, economics and the financial markets has      does not mean constantly shoring up to the extreme against every
presented us in recent years, the key lies in the practice of mone-       potential risk, but intelligently preparing for the future. Thus pre-
tary doping, which is gaining ever broader acceptance worldwide.          pared, one can in fact acquire a stronger immune system and
The return of a more relaxed attitude to the markets can be largely       achieve relative composure – instead of presuming to know all and
attributed to the promise made by the president of the European           betting on a single card. With this approach, investors may never
Central Bank to purchase any amount of peripheral government              earn the maximum that they might otherwise. But they are more
bonds necessary in case of emergency; the “Draghi put” is also the        likely to weather a volatile economic storm and all the market tur-
main reason for the end to the eurozone’s own test of its robust-         bulence that goes with it. You can never fully protect yourself. Even
ness in the face of disruptive pressures. Politicians are all too eager   the person who sticks his head in the sand in a thoughtless effort
to rely on their ultra-expansive monetary policy rather than commit       to achieve false security could literally end up losing his head or
themselves to a strict course of austerity involving unpopular struc-     incurring irresponsible losses.
tural reforms. Whether in Europe, the United States or Japan, the
behavioral patterns we are seeing today are in principle all the
same, no matter where in the world you look.




    “That an overly broad concern                                         Dr Alex Durrer
                                                                          Chief Economist
    for the future can cast shadows
    that obstruct our view of op-
    portunities is not an argument
    against prudent planning.”

The great unknown is how long it will go well. At some future
point, we will eventually shake free from the ghosts that the policy
intervention measures unleashed. Until then, however, we cannot
exclude potential inflation spikes, no more than we can exclude
currency crises or a resurgence of the deflationary fears we believe
to have overcome at present. Hence, thinking and diversifying
according to these well thought-through extreme scenarios is
essential. Precisely because we cannot foresee anything with




                                                                                                                                                      5
    Economic conditions, outlook and positioning



       Always look on the bright side of life?


       Dr Alex Durrer

       This is the new tune markets have been singing again since the             Global macroeconomic landscape*
       beginning of the year, thanks to the United States, which didn’t
       topple over the fiscal cliff after all, and the euro crisis, which at      Inflation          Stagflation                                     Classic boom
       least for the time being is not threatening the eurozone as it once                           Inflation-linked bonds, gold                    Cyclical stocks
       was. In terms of structural background, however, hardly any
       improvement can be detected; rather, there has been a masterful
       demonstration of avoidance and superficial concealment of the
       debt crisis on both sides of the Atlantic. Thus it must still be feared
       that the “Draghicly” orchestrated calm that has settled over the
       eurozone since the ominous announcement of unlimited purchas-              Price
       es of southern European government bonds will sooner or later              develop­
       turn out to be deceptive. The potential trigger of new turbulence          ment

       could be the upcoming elections in various European countries,
       which will thrust the crisis back into the media focus. In Italy, the
       topic is certainly not yet off the table, given the outcome of the
       February elections. At least temporarily, however, the negative in-
       fluence of the structural problems on the markets is no longer
       virulent but only subliminally latent.                                                        Government bonds                                Growth stocks
                                                                                                     Deflationary depression                         Globalization
                                                                                  Deflation
       The cyclical outlook for the global economy looks somewhat less
                                                                                                    Contraction                        Real growth        Expansion
       critical against this backdrop. Tentative signs that the economy has
       bottomed out are increasingly present; only in crisis-plagued Eu-                      Baseline scenario                 Risk scenario
       rope are growth prospects still clearly negative. A double dip back        * The macroeconomic landscape has a time horizon of 3-6 months.           Source: LGT

       into recession on a global scale is becoming less likely. Some of the
       most recently published macroeconomic figures are thus some-
       what better than expected. At least this is the conclusion that can
       be drawn from the relevant leading indicators, which are mostly
       once again above the critical thresholds separating recession from
       growth (except in the EU).
                                                                                  Overview investment policy as per April 8, 2013
       Inflation and, even more importantly, inflation expectations are                                                   --              -           +            ++
       trending sideways, as opposing extreme forces (deflationary pres-
       sure due to the necessity to reduce debt versus the inflationary           Equity USA
       potential of ultra-expansive monetary conditions) are in an unsta-
                                                                                  Equity Europe
       ble balance. This sideways trend will persist for as long as this is the
       case. All the major central banks are keeping the gas pedal floored,       Equity Japan
       and they are clearly signaling that they intend to stick to their
       unorthodox methods. Although doping in the world of monetary               Equity Asia/Pacific
       policy has gained widespread acceptance, unlike doping in the
                                                                                  Equity emerging markets
       sports world, the marginal effect of these monetary steroids for the
       real economy and the doped-up financial system is wearing off.             Sovereign bonds

       In our global baseline scenario, the world economy may be able to          Inflation-linked bonds
       recover somewhat, but it will remain too fragile to tolerate either a
                                                                                  Corporate bonds
       hard line of austerity or a monetary drug withdrawal. Deflationary
       pressure and inflationary forces will offset each other in a sideways      Emerging market bonds
       trend. Only in the risk scenario is there some potential for a back-
       slide into recession.                                                      Commodities

                                                                                  Gold
       In the latest quarterly strategy process, LGT Capital Management’s
       investment strategy team decided to take a “moderately bullish”            Liquidity
       tactical positioning that is clearly above the strategic neutral
       weightings for our Strategy products and portfolios. This positioning
       is based not only on economic fundamentals, but also on technical
       market factors.
6
                                                                                                                                                               Market



Currencies

Japanese yen: Overcome the growth lethargy? Yes, we yen!
Michael Kappeler

With the new government a new monetary era has dawn in the                 Yen vs US Dollar
Land of the Rising Sun. Following a series of failed attempts at
depreciation, Prime Minister Shinzo Abe has gone a step further            130
and effectively declared the yen a “valuta non grata.” Under the           120
motto “Yes, we yen,” a systematic reflation policy is to lead Japan
out of more than two lost decades of lethargic growth. Since this          110

change in the monetary policy regime became apparent in late               100
autumn of 2012, the yen has lost more than 20% against the US
                                                                            90
dollar, and the real effective exchange rate index has also tumbled.
                                                                            80
However, since the yen is now already regarded as slightly under-           70
valued again against most major currencies, the depreciation can
only become self-sustaining if there is a strong increase in inflation      04/08/     04/08/     04/08/     04/08/      04/08/     04/08/     04/08/        04/08/
expectations. The decades of ultra-expansive monetary policy have,           2006       2007       2008       2009        2010       2011       2012          2013

in fact, created a foundation for higher inflation rates. But the                USDJPY Index
conditions needed for triggering higher inflation will not come into             Moving average (40w)                                             Source: Datastream

place as long as capacity utilization is clearly below the historical
average and the unemployment rate persists at a level considered
high for Japan.

Though, with currency depreciation as one of the pillars of the new
Japanese economic policy, which is already being referred to as
“Abenomics”, and the independence of the Bank of Japan further
clipped by the latest change in leadership, we are not likely to see
the course altered in the foreseeable future.




Overview of currencies (as per April 8, 2013)

                  Exchange                           Mid­term
  Currencies                       Year­to­date                     Comment
                  rate                               trend

  EUR-USD               1.30          -1.3%                         In contrast to the ECB, the Fed is thinking about QE exit strategies.

  GBP-USD               1.53          -6.0%                         Weak growth is causing the pound to take a tumble.

  USD-JPY             98.89           14.4%                         Japan’s government is looking to stimulate growth with its “Yes, we yen” approach.

  USD-CHF               0.93           2.1%                         As long as the SNB's manipulation continues, the USDCHF will remain a residual.

  AUD-USD               1.04           0.1%                         Despite robust growth, rich valuation levels are limiting the upward potential.

  USD-CAD               1.02           2.4%                         Neither monetary policy nor the real economy give the “Loonie” new impulses.

  USD-SGD               1.24           1.6%                         With a watchful eye on growth, the MAS is hampering faster currency appreciation.

  USD-KRW           1140.13            6.5%                         Upside-down world: Korean exporters suffering from “cheap” Japanese competition.

  USD-CNY               6.20          -0.4%                         Controlled, slow renminbi appreciation.

  USD-MXN             12.17           -6.3%                         Promising reforms and US economic growth are powering the peso.

  USD-RUB             31.25            2.3%                         Russia is still an attractive destination from the perspective of carry traders.

  EUR-CHF               122            0.8%                         The SNB is sticking with the euro, even as the currency goes ever further astray.

  EUR-SEK               8.36          -2.5%                         In the north, the days are also getting longer again, but the upturn is still fragile.

  EUR-NOK               7.48           1.9%                         The NOK remains one of the last free currencies with a solid foundation.




                                                                                                                                                                        7
    Market



       Bonds and interest rates

       Government bonds
       Events of global significance
       Ewald Dür

       “Too big to fail” or “too small to fail” – it really doesn’t make a dif-          Yield on German government bonds
       ference anymore. The rescue of Cyprus and the Cypriot banks,
       which until recently hardly anyone paid much attention to, has                        5.0
       been blown up to an event of global significance by politics. For                     4.5
                                                                                             4.0
       ordinary citizens (living outside Cyprus) it is of no direct economic
                                                                                             3.5
       importance. The international financial markets and major curren-                     3.0
       cies have so far been little affected by the latest episode of hysteria.              2.5




                                                                                         %
       But the damage to trust has been immense nevertheless. The                            2.0
                                                                                             1.5
       deposit guarantee up to EUR 100,000 should never have been
                                                                                             1.0
       allowed to be put in question. It shows that the rescue mania is                      0.5
       increasingly ignoring the principles of the market economy and                        0.0
       the rule of law. A taboo has been broken, and with it a lot of trust
                                                                                         04/08/        04/08/            04/08/        04/08/          04/08/            04/08/
       has been gambled away.                                                             2008          2009              2010          2011            2012              2013

       Cyprus is also confirming the trend that is observable in almost all                  Yield of 10Y Bund                                                  Source: Datastream

       the crisis-ridden countries: governments willing to cut spending
       and restructure are punished by voters. In the latest elections in
       Italy, voters rejected further cost-cutting measures. The election
       outcome has made the country ungovernable and brought it to a
       standstill. The predicament of the ECB is consequently worsening.
       What will ECB president Mario Draghi do if a government unwill-
       ing to cut spending requests aid, thus leaving unfulfilled one of the
       key ECB conditions for purchasing government bonds? With a
       country like Italy, whose government debt is nearly two trillion(!)
       euros, the ECB will not be able to insist on formalities, and will
       have no choice but to sanction a rescue. The ECB has become
       dependent on politics.

       If all member states have unlimited access to the printing press,
       however, a real danger is present with the potential to have a glob-
       al impact. The crisis is persisting like a smoldering fire. We expect
       this to be the case for some time to come; we therefore recommend
       continuing to invest in bonds of good quality and liquidity.




       Overview target rates and yields on 10y government bonds (as per April 8, 2013)

         Economy            Target rate   Trend    Comment                                     10y­Yield         Trend      Comment
                                                   ZIRP is promised until unemployment
         USA                  0.25%                                                                1.71%                    No significant rise in sight
                                                   reaches 6.5%
         Eurozone (D)         0.75%                Further rate cut unlikely                       1.54%                    Debt crisis keeps pressure on “safe” Bunds

         Japan                0.10%                No rate hikes in foreseeable future             0.52%                    Lower rates due to central bank interventions

         UK                   0.50%                No rate hikes in foreseeable future             1.81%                    Stagflation is already priced in

         Switzerland          0.00%                No rate hikes in foreseeable future             0.54%                    No significant rise in sight
                                                   Rate hike due to rising inflation
         Brazil               7.25%                                                                9.61%                    Rising inflationary expectations
                                                   expected
         Malaysia             3.00%                Rate hike can not be excluded                   3.44%                    Slightly rising inflationary expectations




8
                                                                                                                                                        Market




Inflation­linked bonds
Still no side­effects despite high doses of monetary support
Dieter Gassner

Everybody has experienced it at some time or another: you take a          1.8% in February, and in Switzerland the inflation rate has been
strong dose of medicine, and you feel better rather quickly. This phe-    negative since December 2011. Consequently, the central banks
nomenon is especially evident with children. In no time at all they       feel justified in continuing on their current monetary path.
can be playing and running around again as if absolutely nothing
were wrong. Their parents have to see to it that they don’t overdo it,    We expect that inflation will be kept in check for a time by the lack
and that they get the rest they need to make a full recovery.             of a sustainable solution to the government debt crisis and the
                                                                          fragile economic outlook. The central banks have an obligation to
The situation is similar on the financial markets, which have been        pursue the recovery process they have set in motion, but also sooner
battling the “disease” called the government debt crisis for some         or later to reduce the liquidity dosages when the situation allows.
time now. The central banks and governments having been playing           The approach that has been adopted thus entails major risks and
the role of the emergency response team, repeatedly administering         repercussions in the long term. To mitigate the potential side-effect
ever higher doses of liquidity, which offer quick relief, at least tem-   of a loss of purchasing power, our broadly diversified bond port-
porarily. This “reassuring” feeling of knowing that financial market      folios are investing a quota of approximately 20% in inflation-
risks are effectively secured at the political level, or at least the     linked bonds.
expectation of additional rescue measures if needed, is making the
markets resistant.

Inflation expectations are also staying anchored in their multi-year
ranges, despite the highly expansive monetary and fiscal policies
we are seeing worldwide. This is partly because current inflation
rates are still moderate due to the weak economic momentum and
persistently high unemployment in developed countries. In the
United States, inflation is at 2%, in the eurozone it dropped to




Corporate bonds
Wake­up call for bond investors
Johannes Öhri

With their rescue package for Cyprus, Europe’s officials have taken       Credit default swap (CDS) premia on European financials
another step toward involving private creditors. Instead of combat-
ing debt with ever more debt and burdening taxpayers with the             700
costs of restructuring highly leveraged banks, the senior creditors       600
at the top of the capital structure are now to be held to account as      500
well. In order to contain the danger of contagion, senior creditors       400
have been spared up until now, for example in the case of the
                                                                          300
Spanish Bankia Group and the Dutch SNS Reaal.
                                                                          200

In contrast to the way the euro crisis has been dealt with so far, a      100
taboo was broken in the handling of Cyprus Popular Bank: now not            0
only are investors with unsecured (senior) bank bonds expected to         01/08/     04/08/     09/08/     01/08/      04/08/   09/08/   01/08/     04/08/
take a loss, but even the deposits of ordinary savers are no longer        2011       2011       2011       2012        2012     2012     2013       2013
sacrosanct! A precedence has thus been established which, in fu-
ture instances of bank insolvency, is likely to reduce the inhibitions          iTraxx Europe Sub Financials (5Y)                           Source: JP Morgan

                                                                                iTraxx Europe Senior Financials (5Y)
of political decision-makers to demand that senior creditors help
foot the bill. Bond investors should thus interpret Cyprus as a wake-
up call and anticipate higher default risk, especially with respect to
smaller, nonsystemic European banks, which in the medium term is
also likely to result in an increase in their credit risk premiums.




                                                                                                                                                                 9
 Market



     Equities

     USA
     “Don‘t fight the Fed!”
     Ralf Piersig

     Investors who invested in US stocks, despite the looming US              Equities USA
     sequestration and ongoing global macroeconomic uncertainties,
     have been rewarded with a further climb in stock prices since our        1600
     last edition, which was largely in line with our expectations.
                                                                              1400

     What did we notice in particular about the latest development?
                                                                              1200
     First of all, valuation multiples increased further due to the rise in
     stock prices coupled with simultaneous downward revisions of             1000
     earnings prospects. Valuations are now at their long-term averag-
     es. On their own, equities therefore no longer look cheap. The fact       800
     that earnings of companies in the main US index, the S&P 500,
     have climbed only 1.1% in the last seven quarters underscores the         600

     valuation argument. Furthermore, a change in leadership on the            04/08/    04/08/   04/08/    04/08/   04/08/   04/08/     04/08/     04/08/
     US markets is observable. In recent months, share price gains were         2006      2007     2008      2009     2010     2011       2012       2013

     driven by defensive sectors, which may seem unusual.                         S&P 500 (USD)                                            Source: Datastream

                                                                                  Moving average (40w)

     However, it supports the following conclusion: The latest price
     gains were not driven by real rises in corporate earnings, but can be    We expect the Fed to maintain its loose monetary policy in the
     attributed solely to the increase in valuation multiples. We consider    coming quarters, and in this way it will continue to support the
     the US Federal Reserve, whose ultra-loose monetary policy is urg-        equity markets. In the past, it has seldom paid off to position one-
     ing investors into ever riskier investments, as the main propagator      self in opposition to Fed policy. Coupled with the tentative signs of
     of this trend. This is also consistent with the picture presented by     economic recovery in the United States, we believe this suggests an
     the outperformance of defensive stocks, which are characterized          overall constructive environment for US stocks. Given the solid
     by a low sensitivity to the macroeconomic situation and high             performance year-to-date, however, investors should be prepared
     dividend yields, and are thus a relatively good alternative to bonds.    for greater volatility in the coming months.




     Overview of equity markets (as per April 8, 2013)

        Index                              Points    Year­to­date     since 04/08/2012    since 04/08/2008*     Trend     Comment

        S&P 500 (USD)                       1563             9.6%              11.8%                 2.7%                 Upward trend

        Euro STOXX 50 (EUR)                 2589             -1.8%              8.2%                -7.4%                 Upward trend

        NIKKEI 225 (JPY)                   13193            26.9%              36.2%                -0.1%                 Upward trend

        FTSE 100 (GBP)                      6277             6.4%               9.7%                 0.9%                 Upward trend

        DAX 30 (EUR)                        7663             0.7%              13.1%                 2.5%                 Upward trend

        SMI (CHF)                           7692            12.7%              24.8%                 0.3%                 Upward trend

        MSCI AC Asia / Pac ex Jap. (USD)     460             -1.3%              4.7%                -0.6%                 Upward trend

        MSCI EM (USD)                       1007             -4.6%              -2.9%               -2.7%                 Upward trend


     * annualized




10
                                                                                                                                                           Market




Europe
Litmus test
Manfred Hofer

The international equity markets continued their positive perfor-            Equities Europe
mance in the first quarter of the year, thanks to the surge in US and
Japanese stocks. In Europe, only the Swiss equity market could               5000
keep pace. Otherwise, stocks on the “old continent” performed                4500
below average.                                                               4000

                                                                             3500
There are plenty of reasons for this. Negative sentiment was gener-
                                                                             3000
ated by the accusations of corruption against members of the
Spanish government and the political stalemate in Italy following            2500
the parliamentary elections. The European Union’s aid program for            2000
Cyprus also caused a lot of bad feeling and loss of trust. And,              1500
finally, the council of economic experts substantially reduced their
growth forecasts for the German economy.                                     04/08/         04/08/   04/08/    04/08/   04/08/   04/08/     04/08/     04/08/
                                                                              2006           2007     2008      2009     2010     2011       2012       2013

Despite these negative developments, the basic strategic orienta-                  EURO STOXX 50 Index (EUR)                                  Source: Datastream

tion of investors should be monitored. The expansive global mon-                   Moving average (40w)

etary policy, generally climbing leading indicators and compelling
structural market data remain conducive to higher share prices –
also in Europe.




Emerging markets
In the grip of economic policy
Daniel Kunz

The equity markets in the emerging economies are still not up to             Divergence between growth and equity markets
speed. The relative weakness compared with the equity markets in
industrialized countries, which has persisted for more than two years,       140                                                                           9%
continued in the first quarter. Cyclically, this trend is unfounded, since   120
                                                                                                                                                           8%
the emerging markets have recently been able to extend further their                                                                                       7%
                                                                             100
stronger growth rates compared to the industrialized nations.                                                                                              6%
                                                                              80                                                                           5%
In the meantime, however, investors have probably become con-                 60                                                                           4%
cerned with developments on the economic policy front. Reports                                                                                             3%
                                                                              40
claiming that the state is violating shareholder rights “for the great-                                                                                    2%
er good of the people” are increasingly being heard. For example,             20                                                                           1%
Chinese companies, the majority of which are owned by the state,               0                                                                           0%
                                                                                   03/31/        03/31/       03/31/    03/31/     03/31/       03/31/
are putting other objectives ahead of profit maximization (such as
                                                                                    2008          2009         2010      2011       2012         2013
keeping employment rates high). In Brazil, the oil company Petro-
bras has been forced to set the gasoline price artificially low in order           Relative performance MSCI EM vs MSCI World (in USD)        Source: Datastream

to keep inflation in check. Measures such as these may be condu-                   Growth differential between EM and DM (rhs)

cive to stability, but only in the short term. Longer term, the emerg-
ing markets would be well advised to refrain from such measures so
as not to jeopardize their favor with foreign investors. Foreign inves-
tors are essential to enabling the emerging markets to realize the
investments they still need to make going forward in order for them
to stay on their upward path.



                                                                                                                                                                   11
 Market



     Real estate and commodities

     Real estate
     Crisis? What crisis?
     Boris Pavlu

     After almost exactly five years, US REITs have superseded their old           US REITs capital issuance and performance
     highs of 2007 and seemingly put that chapter of the financial crisis
     behind them. While the issuing activity of the companies in 2009-                                              80                                                                          1400




                                                                               US REITs Capital Issuance (USD bn)
     10 largely served to recapitalize their hard-hit balance sheets, the                                           70                                                                          1200




                                                                                                                                                                                                       Total Return Index (USD)
     record volume of financing acquired on the capital market last year                                            60                                                                          1000
     was destined for other purposes: US REITs are increasingly adopting                                            50
                                                                                                                                                                                                800
     an expansionary course, and are no longer shying away from making                                              40
                                                                                                                                                                                                600
     acquisitions abroad, as exemplified by Simon Property Group’s                                                  30
     investment in the French company Klepierre.                                                                                                                                                400
                                                                                                                    20
                                                                                                                    10                                                                          200
     As many of the valuation gaps have closed in the meantime, how-                                                 0                                                                          0
     ever, it will be more difficult for both companies and internation-                                              2007       2008        2009      2010       2011       2012       2013
     ally oriented investors to find intrinsic value to invest in. Larger US
     REITs are already trading with premiums to their NAV again this                                                Equity (lhs)                                      Source: SNL Financials, Datastream

     year. The focus will again be on hiking rents and reducing vacancy                                             Debt (lhs)
                                                                                                                    FTSE EPRA/NAREIT US REITs, until mid February (rhs)
     rates, which in view of the still sluggish economic growth is certain
     to be a challenge.




     Commodities
     Corn: anxiety about critically low supplies
     Sander Bressers

     Corn has been the best-performing major commodity over the past               Corn crop
     12 months, rising 25%. Main cause was the devastating drought
     that hit the US corn belt last summer. Additionally, this lower sup-          1.4
     ply was accompanied by strong demand: almost half the US corn                 1.2
     crop is now used to produce government-sponsored ethanol.                                              1

                                                                                   0.8
     These developments have led to corn inventories that are now
                                                                                   0.6
     dangerously low. The market desperately needs good harvests to
     replenish global supplies: all eyes are therefore on the US, where            0.4
     corn planting is about to start.                                              0.2

                                                                                                            0
     This anxiety about short-term supply has caused the corn forward                                                2004     2005    2006     2007    2008    2009      2010   2011     2012       2013
     curve to become massively inverted: current inventories (represent-
     ed by the nearby July 2013 futures contract) are trading at a record                                           Old/New Crop Ratios (March)                                          Source: Bloomberg

     26% markup over the December 2013 contract. This reflects the
     premium that the market attaches to the “certainty” of current
     inventories, over more uncertain future supplies.

     Good growing weather over the next few months should alleviate
     the anxiety about corn inventories and normalize the forward
     curve. Consequently, renewed weather problems might cause an
     even bigger scramble for the remaining corn stocks.



12
                                                                                                                                                                          Market



Hedge funds and listed private equity

Hedge funds
Fiscal Cliff averted, Equities provide lift
John Orthwein

Hedge Fund performance across strategies was positive at the            Hedge funds performance 2013 YTD*
beginning of the period thanks in part to a compromise which
averted the U.S. Fiscal Cliff and buoyed the markets. Only two          4.0%
strategies showed slight negative returns mid-quarter as the global     3.5%
equity rally faded.
                                                                        3.0%

Global Macro managers saw gains extended as central banks               2.5%

continued expansive policies, lending support for risky assets, the     2.0%
effects of which were pronounced in the US and Japan equity mar-        1.5%
kets. Managed Futures started the year with strong performance
                                                                        1.0%
thanks to increased equity exposure and short JPY trades. These
gains diminished, however, as market momentum waned, ending             0.5%

the period slightly negative.                                           0.0%
                                                                                   Event              Global      Managed       Long/Short Convertible Fixed Income
Long/Short Equity gained significantly with the strong equity mar-                 Driven             Macro        Futures        Equity    Arbitrage    Arbitrage

ket performance, then softened as the Sequester in the U.S. and         * as per end of February                                        Source: Dow Jones Credit Suisse Indices

elections in Italy came into the spotlight. Event Driven strategies
also gained alongside global equities and the more conducive M&A
conditions.

Fixed Income- and Convertible Arbitrage strategies showed re-
spectable returns over the period even as nascent macro doubt
increased volatility.




Listed private equity
Market sentiment and listed private equity discounts
Benjamin Isler

In the past, the average listed private equity (LPE) discounts were a   Discount to NAV in the context of the market sentiment
good yardstick of market sentiment. At present, they are indicating
that investor sentiment has improved substantially, although it’s         10%
                                                                                                   thrill             euphoria
still far from euphoric. The mood on the financial markets over the         0%
last 10 years has varied across all extremes, from optimism to          -10%                       excitement
                                                                                                                             anxiety                             optimism
euphoria to fear and panic.                                             -20%           optimism                                                                   relief
                                                                        -30%                                       denial
                                                                                                                      fear
These mood swings were reflected with a remarkable degree of            -40%
                                                                                                                                                                hope
accuracy by LPE discounts, which are the mathematical difference        -50%                                    desperation
                                                                        -60%                                                                          depression
between the net asset values (NAVs) of exchange-listed private                                                         panic
                                                                        -70%                                                                 despondency
equity funds and their market prices. When sentiment peaked in
                                                                        -80%                                                  capitulation
2007, investors were generally prepared to pay premiums on the
                                                                        -90%
portfolios they purchased. Two years later, the same portfolios
                                                                        -100%
were changing hands at discounts of over 60% on their intrinsic
                                                                              01/01/ 01/01/ 01/01/ 01/01/ 01/01/ 01/01/ 01/01/ 01/01/ 01/01/ 01/01/
value. Four years after the peak in sentiment, the financial markets
                                                                               2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
had recovered significantly, along with the LPE segment. The cur-
rent discount level of 15-20% is signaling, however, that optimism            Listed private equity discount                                       Source: LGT CP, Datastream

is still not overly abundant.                                                 Wave of the market sentiment




                                                                                                                                                                                  13
 Viewpoint




     By Hubert Günter


     Anicca
     The ancient Indian term “anicca” stands for one of the essential doctrines of Buddhism: the notion that all of existence is in a
     constant state of flux. At the same time as Buddha, Heraclitus was also developing his philosophy of strife and change as the
     natural conditions of the universe (which later became popularly known as “panta rhei”). Why am I reminded of this?



     After spending 27 years in the service of LGT Group, I am bidding        The diagram below illustrates a typical case where a broad base of
     my readers farewell. My next stop will be in Thailand at mid-year,       investors hold on to beliefs established over many years, even after
     where I will continue to examine the question of what the future         the real foundation of such beliefs ceases to exist. The rapid accel-
     might look like and how one can best prepare for it – as an investor     eration of globalization in recent decades provided most of the
     and in general. Both e-mails and visitors are very welcome. (E-mail      emerging markets with an enormous burst of growth. But the
     address may be requested from LGT.)                                      momentum of world trade has been interrupted. The behaviors
                                                                              and structures of the boom period show their ugly side when
                                                                              the economic environment is more difficult. A “circulus virtuosus”
                                                                              becomes a “circulus vitiosus.” The outcome is obviously always the

        “The nature of really significant                                     same. A lot of money is still flowing into emerging markets funds,
                                                                              however. Is the market really looking into the future, as theory
        changes is unrecognized.”                                             maintains, or is it simply extrapolating based on what it knows
                                                                              from the recent past? I tend to believe the latter. In short: Most
                                                                              emerging markets (Mexico is an exception) have become unat-
                                                                              tractive, and if world trade remains slack, we should not be sur-
     This brings me to my main topic today: contemporary experts who          prised to see further weakness in their stock markets.
     seem to be unaware of these age-old principles – and who “exam-
     ine only a series moments in time in order to formulate causal laws
     or finalistic sequences,“ an approach to which Heraclitus was al-
     ready opposed over two thousand years ago. Does this not, in fact,
     describe the methods used by economists and investment manag-
     ers today? The nature of really significant changes is unrecognized.     Relative equity market performance vs MSCI USA

                                                                              300
     The internet and new communication media are revolutionizing
     society and the world order, in a way similar to Gutenberg’s inven-
                                                                              250
     tion of the printing press. I agree with Parag Khanna (“How To Run
     The World,” 2011) when he postulates that we are in a transition
                                                                              200
     to a “new medieval” world order where the centers of power are
     spread out and there is a chaotic mix of influential groups and peo-
                                                                              150
     ple, both good and bad – a highly conflict-prone yet self-regulating
     environment in which the economy is certainly capable of thriving.
                                                                              100
     The phenomena associated with this emerging world order cannot
     be properly understood in the context of decaying structures.
                                                                               50

     Consequently, those who attempt to compare the processes in the
                                                                                0
     eurozone with those of established nation-states will be blind to
                                                                              04/08/ 04/08/ 04/08/ 04/08/ 04/08/ 04/08/ 04/08/ 04/08/ 04/08/ 04/08/ 04/08/
     that which is newly evolving, an entity in which conflicts of national
                                                                               1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
     interest, harmony and discord form a tension-filled yet inseparable
     unity entirely consistent with Heraclitus, whose thinking strongly             MSCI EM Latin America (USD)                             Source: Datastream
     influenced both Hegel and Nietzsche. The eurozone is not obso-                 MSCI Europe (USD)
     lete; on the contrary, it is actually ahead of its time.                       MSCI EM Asia (USD)




14
                                                                                                                                 Asset Management




LGT’s core competencies in
asset management
LGT Group’s investment center is a specialist for traditional as well    consideration. We also check qualitative criteria during extensive
as alternative investments. Alongside alternative investment topics      discussions conducted on site. This allows us to put all the pieces of
such as hedge funds and private equity our core competencies             the jigsaw together and form a harmonious overall picture.
include:
                                                                         Security Selection
Asset Allocation                                                         Security Selection is carried out using a combination of Behavioral
Carefully planned asset allocation is the foundation for successful      Finance, fundamental and qualitative analysis. We take pride in
asset management and performance. LGT’s longstanding experience          occupying a leading position in terms of Behavioral Finance within
and disciplined investment approach enable us to offer our clients       the European financial services sector. To maintain this excellent
traditional and alternative investments as an integrated, compre-        ranking and to use the findings of Behavioral Finance in the inter-
hensive package and to go to our clients as an authority in this         ests of our clients, we take advice from top academic researchers.
regard. Our transparent investment process covers portfolio con-         One of the key findings of Behavioral Finance is that investors in-
struction and implementation in line with our clients’ needs as well     fluence one another through the exchange of information, leading
as continual monitoring of specific risks. The aim of our asset allo-    to market inefficiencies in the form of trends and price distortions.
cation investment solutions is to optimize the long-term risk-return     Combining the quantitative analysis of market data with Behav-
profile. It is important to ensure that our investment solutions         ioral Finance enables us to identify market trends at an early stage,
participate in market upturns, while offering stability and capital      to correctly interpret them and to profitably exploit them in active
preservation in difficult market periods. The cornerstones of our        strategies.
asset allocation expertise are:
                                                                         The following chart shows how our clients can benefit from these
n   A comprehensive global universe of listed and non-listed             competencies as part of our actively managed investment solutions.
    investments
n   Broad diversification in and between asset classes, segments,
    styles, specialists and currencies
n   A systematic, disciplined process and a balanced blend of
    qualitative and quantitative elements

Manager Selection
Since no one can be an expert in all markets and segments, we
also rely on the knowledge of external specialists. LGT’s ownership
structure gives us complete independence in selecting best-in-class      Active management
asset managers worldwide. The selection process is based on the
core-satellite approach, i.e. breaking the portfolio into core and
                                                                                  Developed markets                    Emerging markets
satellite investments. Core investments add stability to a portfolio
thanks to their broad diversification, which means they are particu-
larly important from a strategic perspective. Satellite investments                                 Asset allocation
offer the prospect of attractive additional returns. They mainly cover
specific and especially attractive regions and themes. Investments
                                                                                                   Manager selection
in the individual asset classes are generally made via mandates. This
allows investment guidelines and costs to be agreed individually
and access to investments to be guaranteed at all times. With an                                   Security selection

excellent network, years of expertise in manager selection and an
impressive volume of assets under management, we have access to
asset managers frequently not available to private investors. When
                                                                                             Bond, equity and mixed funds
selecting an asset manager, performance is not the only major




                                                                                                                                                  15
 LGT Funds



     Overview LGT Funds

                                                                                  Price as per   Performance   Performance     Performance
     LGT Funds                                       ISIN           Launch date
                                                                                  03/31/2013     ytd           ­3 years p.a.   ­5 years p.a.

     Princely Strategy

     LGT GIM Balanced (CHF) B                        LI0108469029   01/31/2010    CHF 11102.69      3.06%          2.42%                -

     LGT GIM Balanced (EUR) B                        LI0108469169   01/31/2010    EUR 11842.58      2.85%          4.34%                -

     LGT GIM Balanced (USD) B                        LI0108468880   01/31/2010    USD 11637.89      2.16%          4.09%                -

     LGT GIM Growth (CHF) B                          LI0108469268   01/31/2010    CHF 11413.36      4.70%          2.82%                -

     LGT GIM Growth (EUR) B                          LI0108469318   01/31/2010    EUR 12299.08      4.41%          5.04%                -

     LGT GIM Growth (USD) B                          LI0108469250   01/31/2010    USD 12032.36      3.56%          4.68%                -



     Strategy Funds

     LGT Strategy 2 Years (CHF) B                    LI0008231966   11/10/1999    CHF 1277.10       1.20%          1.58%           2.49%

     LGT Strategy 2 Years (EUR) B                    LI0008232030   11/10/1999    EUR 1694.08       0.82%          4.32%           5.33%

     LGT Strategy 2 Years (USD) B                    LI0121882315   02/28/2011    USD 1089.28       0.66%               -               -

     LGT Strategy 3 Years (CHF) B                    LI0008232139   11/10/1999    CHF 1249.05       1.76%          1.71%           2.63%

     LGT Strategy 3 Years (EUR) B                    LI0008232162   11/10/1999    EUR 1518.83       1.35%          3.42%           4.17%

     LGT Strategy 3 Years (USD) B                    LI0112273912   04/30/2010    USD 1087.24       0.78%               -               -

     LGT Strategy 4 Years (CHF) B                    LI0008232204   11/10/1999    CHF 1159.20       2.38%          0.95%           1.47%

     LGT Strategy 4 Years (EUR) B                    LI0008232220   11/10/1999    EUR 1439.05       1.82%          2.46%           3.37%

     LGT Strategy 4 Years (USD) B                    LI0112273938   04/30/2010    USD 1059.60       1.28%               -               -

     LGT Strategy 5 Years (CHF) B                    LI0019352918   10/01/2004    CHF 1280.05       2.87%          0.54%           1.07%

     LGT Strategy 5 Years (EUR) B                    LI0019352926   10/01/2004    EUR 1440.73       2.12%          1.78%           2.72%

     LGT Strategy 5 Years (USD) B                    LI0112273961   04/30/2010    USD 1029.10       1.59%               -               -

     LGT Alpha Indexing Fund (CHF) B                 LI0101102999   04/30/2009    CHF 1312.45       3.61%          4.53%                -



     Money Market

     LGT Money Market Fund (CHF) B                   LI0015327682   01/19/1998    CHF 1122.30       0.01%          0.39%           0.41%

     LGT Money Market Fund (EUR) B                   LI0015327740   01/19/1998    GBP   704.56      0.08%          0.84%           1.39%

     LGT Money Market Fund (GBP)                     LI0023744159   03/01/2005    GBP 1197.27       0.10%          0.73%           1.36%

     LGT Money Market Fund (USD) B                   LI0015327757   01/19/1998    USD 1449.96       0.10%          0.61%           0.91%



     Bonds

     LGT Bond Fund Global (EUR) B                    LI0015327765   10/22/1996    EUR 1562.46      -0.91%          8.89%           9.30%

     LGT Bond Fund Global Hedged (CHF) B             LI0148577955   22.10.1996    CHF 1031.00      -0.29%          2.39%           3.86%

     LGT Bond Fund Global Hedged (EUR) B             LI0148577948   22.10.1996    EUR 1036.85      -0.23%          3.85%           4.92%

     LGT Bond Fund Global Hedged (USD) B             LI0015327872   10/22/1996    USD 2527.87      -0.16%          6.21%           5.18%

     LGT Bond Fund EMMA LC (CHF) B                   LI0133634688   09/30/2011    CHF 1275.56       4.11%               -               -

     LGT Bond Fund EMMA LC (EUR) B                   LI0133634662   09/30/2011    EUR 1278.25       3.29%               -               -

     LGT Bond Fund EMMA LC (USD) B                   LI0133634670   09/30/2011    USD 1219.59       0.33%               -               -

     LGT Bond Fund Global Inflation Linked (CHF) B   LI0100058481   03/31/2009    CHF 1027.37       0.81%          4.43%                -

     LGT Bond Fund Global Inflation Linked (EUR) B   LI0017755534   05/10/2004    EUR 1232.69       0.85%          5.41%           4.46%

     LGT Bond Fund Global Inflation Linked (USD) B   LI0114576395   09/30/2010    USD 1030.84       0.88%               -               -




16
                                                                                                                                           LGT Funds




                                                                                     Price as per   Performance   Performance     Performance
LGT Funds                                               ISIN           Launch date
                                                                                     03/31/2013     ytd           ­3 years p.a.   ­5 years p.a.

Manager selection

LGT Select Bond Emerging Markets (USD) B                LI0026536628   12/31/2000    USD 3606.00      -1.18%          7.71%           6.94%

LGT Select Bond High Yield (USD) B                      LI0026564604   08/31/2000    USD 1984.91       2.72%          8.71%           8.91%

LGT Select Commodity Diversified (CHF) B                LI0134210504   24.02.2012    CHF   863.09     -1.00%               -               -

LGT Select Commodity Diversified (EUR) B                LI0134210470   27.01.2012    EUR   891.00     -0.87%               -               -

LGT Select Commodity Diversified (USD) B                LI0123117868   18.02.2008    USD   773.88     -0.74%         -0.98%          -6.45%

LGT Select Commodity Producers (USD) B                  LI0132437729   11/30/2009    USD   918.46      1.36%         -5.52%                -

LGT Select Convertibles (CHF) B                         LI0132437745   08/31/2011    CHF 1124.63       4.59%               -               -

LGT Select Convertibles (EUR) B                         LI0132437737   08/31/2011    EUR 1135.74       4.64%               -               -

LGT Select Convertibles (USD) B                         LI0102278962   07/31/2006    USD 1293.34       4.74%          5.51%           4.93%

LGT Select Equity Asia/Pacific ex Japan (USD) B         LI0026536305   10/31/1999    USD 2325.83       1.59%        10.47%            4.45%

LGT Select Equity Emerging Markets (USD) B              LI0026536354   12/31/2000    USD 3742.24       2.49%          5.59%           1.37%

LGT Select Equity Europe (EUR) B                        LI0026536404   10/31/1999    EUR 1465.60       9.28%          8.90%           2.36%

LGT Select Equity Japan (JPY) B                         LI0026536511   10/31/1999    JPY   927.00     21.81%          2.97%          -1.70%

LGT Select Equity North America (USD) B                 LI0026536560   10/31/1999    USD 1494.97       8.79%          9.86%           4.55%



Sustainable Investments

LGT Sustainable Bond Fund Global (EUR) B                LI0106892909   30.11.2009    EUR 1321.01       1.15%          7.97%                -

LGT Sustainable Equity Fund Global (CHF) B              LI0148540441   17.12.2012    CHF 1105.44      10.72%               -               -

LGT Sustainable Equity Fund Global (EUR) B              LI0106892966   31.12.2009    EUR 1297.43       9.86%          6.40%                -

LGT Sustainable Equity Fund Global (USD) B              LI0148540466   17.12.2012    USD 1068.91       6.71%               -               -

LGT Sustainable Equity Fund Europe (EUR) B              LI0015327906   30.09.2000    EUR   820.53      5.77%          6.53%           1.21%

LGT Sustainable Impact Multi-Asset Class Fund (CHF) B   LI0149898327   30.11.2009    CHF 1117.83       4.50%          1.32%                -

LGT Sustainable Impact Multi-Asset Class Fund (EUR) B   LI0106893162   30.11.2009    EUR 1176.50       4.35%          3.73%                -



Dynamic Shield

LGT Fixed Income Dynamic Shield (CHF) B                 LI0121391937   01/31/2011    CHF 1089.89       2.31%               -               -

LGT Fixed Income Dynamic Shield (EUR) B                 LI0008231933   11/10/1999    EUR 1585.18       2.39%          3.28%           4.09%

LGT Fixed Income Dynamic Shield (USD) B                 LI0121391945   01/31/2011    USD 1095.82       2.38%               -               -

LGT Multi Asset Dynamic Shield (CHF) B                  LI0121391994   02/03/2011    CHF 1032.76       0.75%               -               -

LGT Multi Asset Dynamic Shield (EUR) B                  LI0121391986   01/31/2011    EUR 1048.39       0.78%               -               -

LGT Multi Asset Dynamic Shield (USD) B                  LI0121392000   01/31/2011    USD 1047.82       0.77%               -               -



Commodities

LGT Commodity Active Fund (CHF) B                       LI0134229264   11/30/2011    CHF   924.52     -1.69%               -               -

LGT Commodity Active Fund (EUR) B                       LI0134229249   11/30/2011    EUR   929.81     -1.66%               -               -

LGT Commodity Active Fund (USD) B                       LI0134229223   11/30/2009    USD   938.80     -1.52%          2.36%                -




                                                                                                                                                   17
 Investment topic




     Behavioral Finance


     Read the signs of the market
     The stock market has a far stronger momentum of its own than highly abstract, purely economic models
     are capable of capturing. Consequently, many investment decisions, and thus price trends, can only be
     interpreted as sociological processes. The field of Behavioral Finance provides scientific explanations for
     these processes, on the basis of which LGT has developed practical investment concepts and used its
     extensive experience to refine them.



     Market prices are the result of countless interactions between                stricken exits from riskier asset classes usually prove to be excessive,
     millions of people. Any attempt to establish a causal classification          and can thus often provide attractive buying opportunities. In con-
     for the motives behind these actions is hopeless – which is why the           trast, the signal provided by short-term sentiment in a positive
     result is complex. Realistically speaking, only by observing market           environment has proven to be far less reliable. If a large number of
     events can we obtain a better understanding of the forces behind              investors anticipate short-term gains, the probability of a consoli-
     them. Just as Galileo Galilei deduced the nature of the universe by           dation increases, but such phases of unanimous collective confi-
     observing the movement of the stars with his telescope, it makes              dence can also last for a longer period of time. As soon as market
     sense for us to use the movements of the relative prices of various           bubbles begin to emerge, however, a further contrarian indicator
     asset classes to determine what makes the financial markets tick.             comes into play in the form of valuation levels. Although, even in
     The focus is not on deriving precise laws in order to set price               the case of significant distortions, undervaluations and overvalu-
     targets or forecast a certain level. A good analysis aims to capture          ations can persist over a period of years, history has shown, that
     the current developments in a nutshell.                                       the price will sooner or later return to its fundamentally justified
                                                                                   level, whether the air comes out of the bubble carefully over time,
     When performing a review, we aim to identify patterns using a                 or the bubble actually bursts.
     broad spectrum of reference points. Such reviews are built on the
     determination of short-, medium- and long-term price trends, the              At LGT Capital Management, Behavioral Finance analysis has
     continuation of which is confirmed or scrutinized on the basis of a           played a key role since the company’s foundation. The findings
     null hypothesis. By putting together these jigsaw pieces, we can              from the refined trend analysis are not just incorporated in our
     derive the probability of a change of direction in the markets.               quarterly strategy process but also directly into the allocation of
                                                                                   various individual investment funds.
     For an upward trend on the equity markets to continue, it takes
     market breadth (a large number of individual stocks following the
     trend) and optimistic investor sentiment over the long term. Dis-
     crepancies in the price trends of individual equities or sectors, how-
     ever, often point to an impending shift in the trend. When almost
     all investors are lining up with similar positions, this is a call for cau-
     tion, in particular in negative scenarios. Following price setbacks,
     investors often become embroiled in a competition as to who can
     paint the gloomiest picture as they extrapolate further slumps in
     prices. When the fundamentals are looked at objectively, panic-




18
                                                                                                                                     Investment topic




LGT Alpha Indexing Fund (CHF) B
Fund description                                                     Opportunities
LGT Alpha Indexing Fund is an actively managed portfolio broadly     n Investment process combines fundamental expectancy analyses
diversified into money market instruments, bonds and equities          with findings from the field of Behavioral Finance.
across a range of currencies, alternative investments and real       n The weighting of the investment classes is flexible and can be

estate. The aim is to outperform the benchmark by actively posi-       adapted to current market expectations.
tioning the asset allocation. The bond and equity portions vary      n Major room for manoeuvre for the portfolio manager to

between 30-60% and 10-50%, respectively. The implementation            actively exploit attractive market opportunities thanks to a
is mainly through indexed investment instruments. The portion in       broad weight range.
the reference currency CHF amounts to at least 70%.                  n Cost efficient implementation of the main markets via indexed

                                                                       investment instruments, satellites via actively managed funds.
Why invest in the LGT Bond Fund Global Inflation Linked?
n Thanks to the global approach the fund avoids a concentration      Risks
  on single debtors.                                                 As the fund invests in equities, investors are exposed to fluctua-
n Currency risk is completely hedged back into reference currency.   tions on the equity market and the performance of the companies
n Compared to an index fund, the interest rate risk is lower due     contained in the portfolio. As the portfolio contains money market
  to the shorter duration.                                           instruments and bonds, performance is also impacted by interest
n The fund focuses on high quality debtors.                          rate changes and issuer credit risk. Investors must also be aware of
n The portfolio management distinguishes itself through a stable     additional risks entailed in alternative investments. This fund is suit-
  team with a long and proven investment experience in this          able for investors with a long-term investment horizon and higher
  relatively young asset class.                                      risk tolerance who are able to accept stronger price fluctuations
                                                                     and a decline in the price of units over a longer period. As a result
                                                                     of the active management style, the performance may differ sig-
                                                                     nificantly from the benchmark. Return fluctuations as a result of
                                                                     unfavorable exchange rate movements cannot be ruled out.

                                                                     Performance (net of LGT management fees; 04/30/2009 – 03/31/2013)
Fund data
                                                                     135
Inception                           30.04.2009
                                                                     130
Fund domicile                       Principality of Liechtenstein    125
ISIN                                LI0101102999                     120
Distribution                        None, retains profits            115
Reference currency                  CHF                              110
Subscription fee                    Maximum 3.00%                    105
Management fee p.a.                 0.9%                             100
Operations fee p.a.                 0.30%                             95

Total fund assets                   CHF 23.71 mn                      90

                                    (as at March 31, 2013)           04/28/    10/31/   04/30/   10/31/   04/30/   10/31/   04/30/   10/31/ 03/28/
                                                                      2009      2009     2010     2010     2011     2011     2012     2012   2013
Registration                        AT, CH, DE, FL
Portfolio manager                   Alex Borer                             LGT Alpha Indexing Fund (CHF) B                                Source: LGT




                                                                                                                                                        19
 Interview
 Xxxxxxx




     Behavioral Finance as the basis for an active tactical positioning


     Selling overdone fears and illusions
     Putting the findings from Behavioral Finance research into practice requires a great deal of experience, along with
     well thought-out and well-structured investment processes. The Behavioral Finance specialist and senior portfolio
     manager Alex Borer explains in an interview how he selectively exploits irrational exaggerations in the LGT Alpha
     Indexing Fund and generates additional returns by "selling" illusions.



     Investorama: How do you use the findings from Behavioral Finance           formed for the trend. Cost-efficient implementation using passive
     in your investment fund?                                                   index instruments allows me to make pronounced active “bets.”
     Alex Borer: While the strategic asset allocation is based on the sce-
     nario analysis approach, as is the case for all of our multi-asset class   Which specific indicators do you rely on?
     funds, Behavioral Finance, in addition to fundamental analysis, plays      The basis is provided by absolute and relative price trends of vari-
     an important role in determining the fund's tactical positioning. Put      ous asset classes over different time horizons. In contrast to simple
     simply, we follow market trends for as long as they remain disputed,       trend-following approaches, we query these trend signals using
     and position ourselves against them as soon as a consensus is              valuation figures as well as positioning, capital flow, and sentiment
                                                                                indicators. For example, despite the uptrend remaining intact, we
                                                                                are underweight in government bonds due to the significant over-
                                                                                valuation.

                                                                                What conclusions can be drawn from the sentiment indicators?
                                                                                Sentiment indicators have proved their worth as buy signals in
                                                                                particular. The findings from Behavioral Finance studies show that
                                                                                investors have a tendency towards herd behavior and overreac-
                                                                                tions. If fear drives investors to flee to safe havens on the spur of
                                                                                the moment, this is usually a good time to build up risk positions.
                                                                                Conversely, extremely positive sentiment can be a warning sign for
                                                                                an impending correction. Sell signals are less reliable, however, as
                                                                                sentiment on the financial markets can remain very optimistic over
                                                                                a longer period.

                                                                                Are definite trends or clear exaggerations required, or has it also
                                                                                been possible to use the findings from Behavioral Finance in the
                                                                                volatile sideways-trending markets of recent years?
                                                                                Recent years have featured a wide range of positions and thus
                                                                                considerable uncertainty. While some investors prepared for the
                                                                                “end of the world,” others proclaimed that the European debt
                                                                                crisis was over after marginal improvements in the government
                                                                                budgets of peripheral states. I was able to “sell” these exaggerated
                                                                                fears and illusions by buying covered put and call options against
                                                                                an attractive premium, without entering into significant risks or
                                                                                restricting the liquidity of the fund.

     Alex Borer, Head Asset Allocation Strategies at LGT Capital                Although the approach has proved successful and the fund has
     Management, has 22 years of investment experience and has                  won a renowned prize, the volume of assets under management
     worked for LGT since December 1992. As a long-standing                     remains relatively small. Why is this?
     member of the Strategy team, he is jointly responsible for                 Staying true to our style, we have made a conscious decision not
     determining the tactical positioning of all asset allocation prod-         to market the fund very actively, as we first want to prove that our
     ucts. He has been responsible for the LGT Alpha Indexing Fund              investment idea pays off in practice. Many investors also demand a
     since its launch and made a significant contribution to the                successful track record over a period of three years, something we
     development of the investment concept.                                     are now able to boast. In addition to the fund, we are also managing
                                                                                institutional mandates on the basis of the same concept.




20
                                                                                                                                   Money tales




Psychological principles of Behavioral Finance


The power of the masses
For a long time, it was assumed that financial market participants behave rationally. Their
actions, however, exhibit surprising similarities with the behavior of crowds during periods
of panic, demonstrations, and uprisings. The psychology of mass movements is thus also an
area of interest for economic theorists.



For the founder of classical economics, Adam Smith (1723–1790),         needs, interests, and beliefs are jointly brought together and ex-
it was a matter of course to also incorporate psychological findings    pressed. Crowd phenomena can be observed in particular in crisis
in his economic theory. However, this approach did not last, and his    situations such as panic, demonstrations, and uprisings. In eco-
immediate successors disregarded psychological aspects. The pro-        nomics, for example, speculative bubbles caused by the typical
ponents of neoclassicism developed the model of the “Homo               herd mentality of investors can be explained with the help of crowd
oeconomicus”, a rationally thinking economic actor who attempts         psychology.
to maximize his own benefits. Their thinking shaped economic
theory well into the second half of the 20th century. It was only in    The field of crowd psychology primarily focuses on three areas:
the 1970s that the developers of the Behavioral Finance theory,         drawing conclusions on crowd behavior, looking into how individu-
Daniel Kahneman and Amos Tversky, recognized the impact of              als change within crowds, and making predictions on the control-
psychology on economic decisions and stock market events.               lability of crowds on the basis of the findings made.

Events on the financial market can be explained using the theory of     Researchers are looking more carefully not only at crowd phenom-
crowd psychology. This was established by the French sociologist        ena, which play a surprisingly large role in the stock market, to
Gustave Le Bon (1841–1931), and was expanded on significantly by        explain financial developments. Economists have also been re-
Sigmund Freud. In his essay “Group Psychology and the Analysis of       searching the neurological basis for investment decisions. “We can
the Ego,” published in 1921, Freud presented the psychological          only understand investment behavior better if we view psychology,
mechanisms that he believed were at work within mass movements.         economics, and neuroscience in context,” writes the German
                                                                        psychologist Arnold Kitzmann. “The expectation of a positive or
Crowd phenomenon                                                        negative event can evoke a more intense response than the event
Crowd psychology refers to the spontaneous interaction of indi-         itself. We need to better understand feelings such as hope, greed,
viduals within crowds or groups of people. In crowd psychology,         fear, panic, and joy in order to comprehend investment decisions.”




                                                                            Pioneer of crowd psychology
                                                                            After completing his medical training, Gustave Le Bon (1841–
                                                                            1931) became a military doctor and headed a military hospital
                                                                            during the Franco-Prussian War of 1870–71. He subsequently
                                                                            dedicated himself to anthropology studies, including on vari-
                                                                            ous trips to North Africa and India. Gustave Le Bon lived
                                                                            through the February revolution of 1848 and the Paris Com-
                                                                            mune of 1871, experiences which greatly influenced his work.
                                                                            “The sentiments and ideas of all the persons in the gathering
                                                                            take one and the same direction, and their conscious person-
                                                                            ality vanishes. A collective mind is formed, doubtless transi-
                                                                            tory, but presenting very clearly defined characteristics,” he
                                                                            wrote in 1865 in his main work “The Crowd: A Study of the
                                                                            Popular Mind.” Gustave Le Bon, whose work greatly influ-
                                                                            enced Sigmund Freud, is viewed as the founder of crowd psy-
                                                                            chology.




                                                                                                                                              21
              90
 The number




              Overconfidence in one’s own ability is a well-
              known phenomenon that affects all areas of
              life. According to an investigation, 90 percent
              of car drivers believe that their standard of
              driving is above average, while 82 percent are
              convinced that they are among the top third.
              Lawyers – 70 percent of whom are sure they
              will win their respective case – are no better
              in terms of self-assessment than doctors, who
              in most cases overestimate their ability to
              diagnose illnesses. Insufficient diversification
              within equity portfolios is a common example
              of how investors can fall into this psychologi-
              cal trap. Investors have a tendency to overes-
              timate their selection skills, placing their trust
              only in a handful of securities instead of ade-
              quately diversifying their equity risk.
                                                                   © Minerva Studio/fotolia.com




22
Imprint
No. 2/2013 | Editor: LGT Capital Management Ltd., Schützenstrasse 6, CH-8808 Pfäffikon | Editorial team: Dr. Alex
Durrer, Hubert Günter, Michael Kappeler, Johannes Öhri | Layout: LGT Group, Marketing & Communications |
Print: Gutenberg AG, Schaan/FL | Dispatch: LGT Group, Marketing & Communications, lgt.investorama@lgt.com |
© Schemmi/pixelio.de

Investorama is published five times a year
Copy deadline: April 1, 2013
Prices per: April 8, 2013
Source for charts and tables: Datastream and Bloomberg



Risk note/Disclaimer
A gain in value in the past provides no guarantee of positive performance in the future. The risk of price and
foreign currency losses and of fluctuations in return as a result of unfavorable exchange rate movements cannot be
ruled out. There is a possibility that investors will not recover the full amount they initially invested. Commissions
and charges levied on the issuance and redemption of units are debited separately to each investor. They are
therefore not taken into account in the performance shown here.

This publication is an advertising message. It is for information purposes only and is not intended as an offer or
recommendation to buy or sell any investment or other specific product. The content of this publication has been
prepared by our staff and is based on sources of information which we consider to be reliable. However, we
cannot provide any undertaking or guarantee as to it being correct, complete and up to date. The circumstances
and principles to which the information contained in this publication relates may change at any time. Once
published, information shall not therefore be understood as implying that no such change has taken place
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upon an approval. Any person coming into possession of this publication shall therefore be obliged to find out
about any restrictions that may apply and to comply with them. The current full prospectus, the Key Investor
Information Document (KIID) and the current annual and semi-annual reports can be obtained free of charge
from the fund administrator as well as under following addresses: Liechtenstein: LGT Bank Ltd., Herrengasse 12,
FL-9490 Vaduz and as an electronic version at www.lafv.li; Representative, main distributor and paying agent for
Switzerland: LGT Bank (Switzerland) Ltd., Lange Gasse 15, CH-4002 Basel; Paying and information agent for
Germany: Landesbank Baden-Württemberg, Am Hauptbahnhof 2, D-70173 Stuttgart; Paying agent in Austria:
Erste Bank der österreichischen Sparkassen AG, Graben 21, A-1010 Wien.
     Principality of Liechtenstein
     LGT Bank Ltd., Herrengasse 12, FL-9490 Vaduz
     Phone +423 235 11 22, info@lgt.com
     Vaduz, Chur, Davos, Bahrain, Hong Kong, Singapore

     Switzerland
     LGT Bank (Switzerland) Ltd., Lange Gasse 15, CH-4002 Basel
     Phone +41 61 277 56 00, lgt.ch@lgt.com
     Basel, Berne, Geneva, Lausanne, Lucerne, Lugano, Zurich, Madrid, Montevideo

     Austria
     LGT Bank AG, Branch Austria, Bankgasse 9, A-1010 Vienna
     Phone +43 1 227 59 0, lgt.austria@lgt.com
     Vienna, Salzburg




     LGT Capital Management Ltd.                   LGT Capital Management Ltd.                 LGT Capital Management Ltd. (Niederlassung Deutschland)
     Schützenstrasse 6                             Herrengasse 12                              Mainzer Landstrasse 33
     CH-8808 Pfäffikon                             FL-9490 Vaduz                               D-60329 Frankfurt am Main
     Phone +41 55 415 92 11                        Phone +423 235 25 25                        Phone +49 69 1301 46 900
     lgt.cm@lgt.com                                lgt.cm@lgt.com                              lgt.cm@lgt.com
                                                                                                                                                         50040en 0413 6.5H GUT




     www.lgt.com

     LGT Group is represented in more than 20 locations in Europe, Asia and the Middle East.
     A complete address list can be seen at www.lgt.com


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