Alternative investments a curmudgeon's guide by LeeGreenwood

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									Alternative investments: a curmudgeon's
guide.*

Brian Parker CFA
MLC Investment Management


*This presentation was part of a paper delivered by MLC's Investment Strategist Brian Parker at the Centre for
Investor Education (CIE) conference in Paris, October 2007




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General advice warning and disclaimer
Any opinions expressed in this presentation constitute our judgement at the time of issue and are subject to
change. We believe that the information contained in this presentation is correct and that any estimates,
opinions, conclusions or recommendations are reasonably held or made as at the time of compilation.
However, no warranty is made as to their accuracy or reliability (which may change without notice) or other
information contained in this presentation. To the maximum extent permitted by law, we disclaim all liability
and responsibility for any direct or indirect loss or damage which may be suffered by any recipient through
relying on anything contained in or omitted from this presentation.
This presentation contains general information and may constitute general advice. It does not take into
account any person‟s particular investment objectives, financial situation or individual needs. It should not be
relied upon as a substitute for financial or other specialist advice. It has been prepared solely as an
information service for financial advisers and should not be distributed to clients.
Before making any decisions on the basis of this presentation, you should consider the appropriateness of its
content having regard to your particular investment objectives, financial situation or individual needs.
Opinions expressed constitute our judgement at the time of issue and are subject to change. The presenter is
a representative of MLC Investments Limited. MLC Investments Limited ABN 30 002 641 661 105-153 Miller
Street, North Sydney NSW 2060 is a member of the National group of companies.
MLC Investments Limited is the issuer of the MLC MasterKey Unit Trust. Information about the MLC
MasterKey Unit Trust is contained in the current Product Disclosure Statement („PDS‟), copies of which are
available upon request by phoning MLC on 131 831 or on our website at mlc.com.au.




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Main messages

• Wealth creation made simple – provide capital to
  businesses
• The further we get from that premise, the uglier
  things potentially get
• Too many alternative investments may not be
  alternative enough
• Questions to ask product providers about
  alternative investment proposals




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Building wealth made easy

1. Supply capital (equity or debt) to businesses
2. Be patient
3. Understand (and be comfortable with) the risks
   you are taking
   In recent years, too many people have made
   building wealth too complicated too opaque and
                        too risky




                         4
What should an alternative investment look like?

• Sound economic basis for investing
• Low correlation to traditional assets, over a range
  of different environments
• Hedge funds/absolute return strategies, private
  equity, direct investments




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Absolute return strategies

• Designed to ensure positive absolute returns over
  some specified (short-term?) time period
• The alternative to benchmark relative investing?




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      Absolute return strategies

  •      The return of any investment portfolio has a beta
         component and an alpha component
  •      Is your return driven by alpha or beta? (neither is NOT an
         admissible response)
  •      If the answer is beta, then can you really charge 2 and 20?
  •      If the answer is alpha, then
         a) you are a relative return investor
         b) alpha can certainly be negative




“M. B. Waring and L.B. Siegel, 2006, “The Myth of the Absolute Return Investor,” Financial Analysts Journal,
Vol. 62, No. 2,
                                                            7
Where‟s all the volatility gone?

      Standard deviation of average daily % changes
3.5
                   1995-2004
3.0                2005- 6/2007
2.5                Since end June 2007

2.0
1.5
1.0
0.5
0.0
                               nk
    st bt




                                D
            ei




                                                       Ni
                          US Oil




                              irs




                                                       Au



                                                            Cu
                          FX D




                                                             Al
           00
     S& 50




                          US yr




                            NZ
                            AU
         kk
  ro D e




                            30




                            Pa
                            Ju
        P5
         x


       Ni
      ox
Eu M
    E




       Source: Datastream, MLC Investment Management
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 What to do when volatility disappears? Gear up!


3000    $US billion
                  All funds: total assets
2500
                  All funds: total exposure (assets x
2000              leverage)
1500

1000

 500

   0
       93       95        97    99          01   03     05
         Source: Bridgewater      9
So, you want to invest in a private equity
program NOW?

• Sound economic case for excess returns, and a sound
  use of capital
• Returns exhibit persistence – good private equity
  managers tend to stay that way!
BUT..
• Good private equity managers are swimming in cash
• 20% is the new 30%?
• Economic downturn would provide a great opportunity
  for skilled managers




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Evaluating alternative investments

•   Economic case for investing
•   Alpha or beta? (and what am I really paying for?)
•   Truly understanding the risks
•   Just how alternative is it?
•   Genuine skill or dumb luck?




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