risk matters magazine - edition 4 · magazine, and we would like to thank you our readers for...
TRANSCRIPT
RiskEdition 4
Volatility: Plotting a course
08Ensuring investment risk matches your clients’ needs
12Staying on track – Consumers, risk and investments
16Taking Smart Risk – Constructing an Asset Allocation
22BiographiesAbout the contributors
matters
32
Wel
com
e
We
are
now
ont
o th
e fo
urth
edi
tion
of R
isk m
atte
rs m
agaz
ine,
and
we
wou
ld li
ke to
than
k yo
u ou
r re
ader
s fo
r m
akin
g th
is pu
blic
atio
n a
succ
ess.
You
can
now
rea
d pa
st a
nd p
rese
nt is
sues
at
ww
w.r
iskm
atte
rson
line.
co.u
k.
As
part
of
ou
r ef
fort
s to
co
nsta
ntly
im
prov
e ho
w
we
com
mun
icat
e w
ith o
ur c
lient
s w
e w
ould
love
to h
ear s
ome
feed
back
from
you
. So
plea
se d
on’t
hesit
ate
to g
et in
touc
h w
ith u
s at i
nves
tor.s
ervi
ces@
allia
nzgi
.co.
uk.
A ke
y th
eme
in th
is m
onth
’s iss
ue is
und
erst
andi
ng h
ow ri
sk a
ffect
s us o
n a
psyc
holo
gica
l lev
el. I
n th
e ev
er-a
dvan
cing
area
of b
ehav
iour
al fi
nanc
e it
seem
s we
can
lear
n a
lot a
bout
how
we
shou
ld
inve
st, a
nd s
ome
of th
ese
idea
s are
cov
ered
her
e. It
strik
es m
e th
at b
y un
ders
tand
ing
how
we
as
indi
vidu
als p
erce
ive
risk
we
can
choo
se b
ette
r inv
estm
ent p
ropo
sitio
ns th
at a
re a
ble
to h
elp
us a
ll re
ach
our l
ife g
oals,
with
an
inve
stm
ent j
ourn
ey th
at is
sui
ted
to o
ur n
eeds
. We
at A
llianz
Glo
bal
Inve
stor
s an
ticip
ate
that
beh
avio
ural
fin
ance
will
beco
me
an i
ncre
asin
gly
impo
rtan
t pa
rt o
f in
vest
ing,
and
hope
to h
elp
you
lear
n m
ore
abou
t it t
hrou
gh th
is pu
blic
atio
n an
d ot
hers
.
I hop
e yo
u en
joy t
he re
ad.
Nic
k Sm
ithM
anag
ing
Dire
ctor
an
d He
ad o
f Ret
ail S
ales
for
Euro
pe e
xclu
ding
Ger
man
y
Impr
int
Edito
rial T
eam
Nevi
lle V
yas,
Allia
nz G
loba
l Inve
stor
s To
m H
ughe
s, Al
lianz
Glo
bal In
vest
ors
Des
ign
and
Art D
irect
ion
Susa
n La
ne, A
llian
z Glo
bal In
vest
ors
Deni
se A
lexa
nder
, Alli
anz G
loba
l Inve
stor
s
Publ
ishe
rAl
lianz
Glo
bal In
vest
ors
Cont
ribut
ors
Nick
Smith
, Alli
anz G
loba
l Inve
stor
sBr
uce
Mos
s, eV
alue
Inve
stm
ent S
olut
ions
Bren
dan
Lew
elly
n, A
dvise
r Hom
eDr
Wol
fgan
g M
ader
, risk
lab
Dr. C
hrist
ian
Schm
itt, r
iskla
b
Edito
rial a
ddre
ssAl
lianz
Glo
bal In
vest
ors (
UK) L
td.
1st F
loor
155
Bish
opsg
ate
Lond
onEC
2M 3
AD
Phot
ogra
phy
Foto
lia
Prin
ting
BHF G
raph
ics
This
mag
azin
e is
prin
ted
on m
ater
ial s
ourc
ed
from
FSC
cer
tifie
d fo
rest
s. Th
e pa
per i
s ISO
90
01 an
d IS
O 14
001
cert
ified
. Prin
ted
usin
g Ve
geta
ble
base
d in
ks.
ww
w. r
iskm
atte
rson
line.
co.u
k
© 2
013
Allia
nz G
loba
l Inve
stor
sAl
l rig
hts r
eser
ved
Subs
crip
tion
In o
rder
to e
nsur
e yo
u ca
n al
way
s re
ceiv
e yo
ur m
ost u
p to
dat
e co
py o
f Ri
sk m
atte
rs m
agaz
ine
plea
se se
nd
an e
-mai
l to
inve
stor
.ser
vice
s@al
lianz
gi.c
o.uk
det
ailin
g yo
ur n
ame
and
addr
ess.
Thi
s will
mak
e su
re yo
u ar
e ad
ded
to o
ur p
riorit
y mai
ling
list
for f
utur
e ed
ition
s.
Allia
nzGI
Risk
mat
ters
04
VOLA
TILI
TY: P
LOTT
ING
A CO
URSE
04
Two
scen
ario
s
06
Bene
fits
06
How
to a
chie
ve m
ore
cons
iste
nt
re
turn
s
08
ENSU
RIN
G IN
VEST
MEN
T RI
SK
M
ATCH
ES Y
OUR
CLI
ENTS
’ NEE
DS
10
Cont
extu
alis
ing
risk
10
Cons
truc
ting
risk
rate
d so
lutio
ns
11
Achi
evin
g co
mpl
iant
reco
mm
enda
tions
11
The
role
of t
he a
dvis
er
12
STAY
ING
ON
TRAC
K –
CON
SUM
ERS,
RI
SK A
ND
INVE
STM
ENTS
14
Mon
ey in
the
bank
14
Resi
dent
ial p
rope
rty
14
Tim
ing
14
The
Bina
ry a
ppro
ach
14
The
natu
re o
f div
ersi
ficat
ion
14
Com
mun
icat
ion
14
Wea
lth m
anag
emen
t or f
inan
cial
plan
ning
15
Wha
t is r
isk
anyw
ay?
16
TAKI
NG
SMAR
T RI
SK –
CO
NST
RUCT
ING
AN A
SSET
AL
LOCA
TIO
N
18
Stra
tegi
c Ass
et A
lloca
tion
(SAA
) –
Ta
king
Smar
t Ris
k…
20
Unde
rsta
nd. A
ct.
22
BIO
GRAP
HIES
& D
ISCL
AIM
ER
22
Biog
raph
ies
23
Disc
laim
er
Cont
ents
0408
1216
54Vo
latil
ity:
Plot
ting
a co
urse
Allia
nzGI
Risk
mat
ters
VOLA
TILI
TY/
04 -
07
... it
is n
ot o
nly r
etur
ns th
at m
atte
r but
thei
r pa
th; t
hus a
pply
ing
a vo
latil
ity-c
onst
rain
ed
appr
oach
to in
vest
ing
is li
kely
to im
prov
e yo
ur ch
ance
s of s
tayi
ng in
vest
ed, a
nd o
ver
the
long
term
, you
r ret
urns
.
“
“
Nic
k Sm
ith is
Man
agin
g Di
rect
or an
d He
ad o
f Ret
ail
Sale
s for
Nor
ther
n Eu
rope
ex
clud
ing
Germ
any
For a
ll in
vest
ors
a ke
y qu
estio
n w
hen
cons
truct
ing
a po
rtfo
lio is
whe
ther
w
e tr
y to
ach
ieve
the
max
imum
re
turn
, or w
heth
er w
e tr
y to
ach
ieve
th
e m
axim
um re
turn
at a
n ac
cept
able
leve
l of
risk.
The
latte
r of t
hese
tw
o sc
enar
ios
is no
w
beco
min
g th
e pr
eval
ent
view
in
the
asse
t m
anag
emen
t ind
ustr
y –
and
with
just
cau
se.
Rese
arch
ove
r the
last
10
year
s ha
s ta
ught
us
that
as in
vest
ors w
e are
ofte
n irr
atio
nal. H
istor
y sh
ows u
s tha
t if w
e bu
y equ
ities
and
hold
them
ov
er th
e lo
ng ru
n w
e st
and
a go
od c
hanc
e of
be
ing
wel
l re
war
ded.
How
ever
, w
e ca
nnot
co
pe
easil
y w
ith
the
vola
tility
of
th
is
inve
stm
ent,
part
icul
arly
on
the
dow
nsid
e. T
his
vola
tility
cau
ses
us t
o lo
se o
ur c
ompo
sure
, m
ove
to c
ash
and
erod
e ou
r re
turn
s. It
is th
eref
ore
clear
that
it is
not
onl
y re
turn
s th
at
mat
ter b
ut th
eir p
ath;
thus
appl
ying
a vol
atilit
y-co
nstra
ined
app
roac
h to
inve
stin
g is
likel
y to
im
prov
e yo
ur ch
ance
s of s
tayin
g in
vest
ed, a
nd
over
the
long
term
, you
r ret
urns
.
Two
scen
ario
s
In o
rder
to u
nder
stan
d th
e im
pact
of t
he p
ath
of re
turn
s we
can
look
at t
wo
simila
r inv
esto
rs
who
are b
oth
look
ing
for r
etur
ns o
f 4%
p.a.
(per
annu
m)
from
th
eir
£50,
000
inve
stm
ent.
Inve
stor
A a
chie
ves t
his r
etur
n by
usin
g a
wel
l-di
vers
ified
por
tfolio
in
orde
r to
con
siste
ntly
de
liver
4%
p.a.
thro
ugho
ut th
e 18
-yea
r lif
e of
th
eir i
nves
tmen
t. In
vest
or A
is w
ell r
ewar
ded,
w
ith th
eir £
50,0
00 tu
rnin
g in
to £
101,
290
(see
fig
ure
1).
The
seco
nd in
vest
or u
ses
a m
uch
less
div
ers-
ified
por
tfolio
, an
d th
eref
ore
suffe
rs f
rom
gr
eate
r vo
latil
ity; t
his
wou
ld im
pact
on
thei
r pa
th o
f ret
urns
and
, per
haps
, the
ir be
havio
ur.
We
know
tha
t w
e ar
e of
ten
irrat
iona
l, an
d gi
ven
this
we
coul
d as
sum
e th
at in
vest
or B
mig
ht n
ot b
e ab
le to
cop
e w
ith th
e vo
latil
ity o
f th
eir r
etur
ns. W
e mig
ht e
xpec
t the
m to
act i
n a
mor
e hu
man
way
. Th
eref
ore
in t
heir
less
di
vers
ified
por
tfolio
inve
stor
B lo
ses 4
% in
year
1;
due
to th
is lo
ss th
ey m
ove
thei
r por
tfolio
to
cash
, the
refo
re g
ettin
g 0%
in ye
ar 2;
afte
r a ye
ar
on th
e sid
e-lin
es th
ey d
ecid
e to
rein
vest
in ye
ar
3 as
the
mar
ket r
ises,
gain
ing
16%.
Thi
s wou
ld
ther
efor
e ac
hiev
e re
turn
s of -
4%, 0
% an
d th
en
16%,
agai
n a r
etur
n of
4%
p.a.
(see
figu
re 2)
.
Due
to in
vest
or B
losin
g th
eir c
ompo
sure
and
di
sinve
stin
g in
1 y
ear
out
of 3
the
y ha
ve
dim
inish
ed th
eir
retu
rns,
earn
ing
£5,9
36 le
ss
than
inv
esto
r A,
des
pite
hav
ing
the
sam
e an
nual
ised
retu
rn;
this
is ov
er 1
0% o
f th
eir
initi
al in
vest
men
t (se
e fig
ure
3).
Whi
le t
hese
are
hyp
othe
tical
exa
mpl
es,
we
can
lear
n on
e ke
y le
sson
fro
m t
his
path
of
retu
rns.
Give
n us
ual b
ehav
iour
pat
tern
s, w
hich
is
that
man
y inv
esto
rs a
re u
nabl
e to
cop
e w
ith
high
lev
els
of v
olat
ility
and
will
dive
st,
the
vola
tility
of r
etur
ns c
an d
amag
e th
e lo
ng-te
rm
earn
ing
pote
ntia
l of
the
inv
estm
ent
even
m
ore.
In th
ese
inve
stm
ent p
aths
we
have
also
fa
iled
to t
ake
into
acc
ount
the
effe
ct o
f in
flatio
n, t
axes
and
dea
ling
char
ges.
The
7
long
er-te
rm re
turn
s. In
vest
ors a
lso n
eed
to th
ink
hard
er a
bout
how
they
allo
cate
bet
wee
n as
set
class
es
as
mar
kets
m
ove,
and
how
th
ey
reba
lance
the
ir po
rtfol
ios.
By u
sing
an a
ctive
as
set
alloc
atio
n co
rrect
ly in
vest
ors
shou
ld b
e ab
le to
smoo
th o
ut so
me
volat
ility,
by c
aptu
ring
upsid
e ex
posu
re
and
redu
cing
dow
nsid
e ex
posu
re.
1 FS
A: A
sses
sing
suita
bilit
y: Re
plac
emen
t bus
ines
s an
d ce
ntra
lised
inve
stm
ent p
ropo
sitio
ns. A
pril
2012
. Cha
pter
4.1
1.
6VOLA
TILI
TY/
04 -
07
effe
ct o
f all
thre
e of
thes
e fa
ctor
s cou
ld b
e m
uch
grea
ter
on i
nves
tor
B th
an i
nves
tor
A, m
akin
g th
e di
ffere
nce
betw
een
the
two
port
folio
s eve
n gr
eate
r.
Bene
fits
The
bene
fits o
f a vo
latilit
y-ta
rget
ed a
ppro
ach
are
thre
efol
d.
First
ly, fr
om a
pur
ely i
nves
tmen
t per
spec
tive
if yo
u ar
e ab
le
to d
elive
r mor
e co
nsist
ent r
etur
ns o
ver t
he lo
ng te
rm, a
nd
avoi
d sig
nific
ant d
raw
dow
ns, d
ue to
Sie
gel’s
par
adox
* you
ar
e abl
e to
deliv
er g
reat
er re
turn
s.
Seco
ndly,
if w
e loo
k at t
he b
ehav
iour
al b
iase
s tha
t we k
now
ex
ist w
e ca
n se
e th
at in
vest
ors
are
likel
y to
beh
ave
mor
e lik
e in
vest
or B
whe
n fa
ced
by vo
latil
ity. T
here
fore
, if w
e ar
e ab
le t
o de
liver
a s
moo
ther
rid
e w
hich
is a
ble
to m
eet
expe
ctat
ions
whi
ch ar
e cle
ar fr
om th
e out
set,
inve
stor
s are
m
ore
likel
y to
keep
thei
r com
posu
re. If
we
are
able
to ke
ep
our
com
posu
re a
nd r
emai
n in
vest
ed w
e w
ill m
aint
ain
som
e ris
k in
the
port
folio
, allo
win
g us
to p
oten
tially
del
iver
be
tter l
ong-
term
retu
rns.
For t
hose
inve
stor
s who
hav
e a
regu
lato
ry re
spon
sibilit
y, it
mak
es se
nse
to ap
ply a
vola
tility
-targ
eted
appr
oach
. In th
e UK
, for
exa
mpl
e, th
e re
gula
tor h
as sp
ecifi
ed th
at:
“Whe
re a
firm
crea
tes o
r use
s risk
-rat
ed p
ortfo
lios a
s par
t of
its C
IP (C
entra
lised
h In
vest
men
t Pro
posit
ion)
, it m
ust e
nsur
e th
e por
tfolio
s alig
n ac
cura
tely
with
the r
isk d
escr
iptio
ns a
nd
outp
uts f
rom
any
risk
pro
filin
g to
ol it
empl
oys.”
1
The
abov
e in
dica
tes t
hat w
here
a c
lient
’s ris
k to
lera
nce
is es
tabl
ished
it is
cruc
ial t
o in
vest
in a
por
tfolio
that
adh
eres
to
this
risk
leve
l. By
targ
etin
g th
is yo
u ca
n en
sure
that
an
inve
stor
’s ris
k tol
eran
ce an
d th
eir p
ortfo
lios a
re al
igne
d.
How
to a
chie
ve m
ore
cons
iste
nt re
turn
s
Finall
y, th
e cr
ucial
que
stio
n is
how
can
inve
stor
s effe
ctive
ly ta
rget
volat
ility t
o ach
ieve
smoo
ther
retu
rns.
Ther
e are
a fe
w
simpl
e th
ings
inve
stor
s ca
n do
to h
elp;
one
of t
hese
is to
ap
ply
true
dive
rsifi
catio
n. In
thi
s ed
ition
of
Risk
mat
ters
W
olfg
ang M
ader
talks
abou
t how
to cr
eate
a ro
bust
stra
tegi
c as
set a
lloca
tion.
We
feel
that
des
pite
som
e pr
oble
ms w
hen
corre
latio
ns b
reak
dow
n su
ch a
s in
2008
, dive
rsifi
catio
n st
ill re
main
s the
main
driv
er in
main
tain
ing
a con
siste
nt le
vel o
f vo
latilit
y in
a por
tfolio
. Whi
le th
is is
no g
uara
ntee
of r
etur
ns,
a wel
l-dive
rsifi
ed p
ortfo
lio w
hich
is ab
le to
adhe
re to
the r
isk
tole
ranc
es o
f the
inve
stor
is a
vita
l too
l in
gene
ratin
g go
od
“...th
e cr
ucia
l que
stio
n is
how
ca
n in
vest
ors e
ffect
ivel
y tar
get
vola
tility
to a
chie
ve sm
ooth
er
retu
rns.
The
re a
re a
few
sim
ple
thin
gs in
vest
ors c
an d
o to
hel
p;
one
of th
ese
is to
app
ly tr
ue
dive
rsifi
catio
n.
“* Si
egel
’s Pa
rado
xSie
gel’s
par
adox
sta
tes
that
if a
fixe
d fra
ctio
n of
a g
iven
amou
nt o
f m
oney
is lo
st a
nd th
en th
e sa
me
fract
ion
of th
e re
main
ing
amou
nt
is ga
ined
, the
resu
lt is
less
than
the
orig
inal
am
ount
. For
exa
mpl
e if
an in
vest
or h
as £
10,0
00 a
nd lo
ses
10%
and
then
gain
s 20
% he
has
m
ade
£10,
800
over
all.
Anot
her
inve
stor
has
£10
,000
and
mak
es
10%
with
no
loss
es. T
he d
iffer
ent r
esul
ts ar
e re
flect
ed b
elow
.
The
diffe
renc
e be
twee
n th
ese
two
retu
rns i
s Sie
gel’s
par
adox
.
Inve
stor
1: £
10,0
00 -
£1,0
00 =
£9,
000
+ £
1,80
0 =
£10
,800
Inve
stor
2: £
10,0
00 +
£1,
000
= £
11,0
00
Figur
e 3: In
vest
ors A
and
B
Inve
stor
ASo
urce
: Allia
nz G
loba
l Inve
stor
sIn
vest
or B
Year
s
0
£20,
000
£40,
000
£60,
000
£80,
000
£100
,000
£110
,000
01
23
45
67
89
1011
1213
1415
1617
18
Value
Figur
e 1: In
vest
or A
£40,
000
£50,
000
£60,
000
£70,
000
£80,
000
£90,
000
£100
,000
£110
,000
01
23
45
67
89
1011
1213
1415
1617
18
Inve
stor
ASo
urce
: Allia
nz G
loba
l Inve
stor
s
Year
s
Value
Year
1
£50,
000
Year
2
£52,
000
...Ye
ar 17
£9
7,39
5
Year
18
£10
1,29
1
Year
To
tal In
vest
or A
ach
ieve
s thi
s ret
urn
byus
ing
a w
ell-d
iver
sifie
d po
rtfo
lioin
ord
er to
cons
iste
ntly
del
iver
4% p
.a. t
hrou
ghou
t the
18
year
s.
Figur
e 2: In
vest
or B
Inve
stor
BSo
urce
: Allia
nz G
loba
l Inve
stor
s
£40,
000
£50,
000
£60,
000
£70,
000
£80,
000
£90,
000
£100
,000
01
23
45
67
89
1011
1213
1415
1617
18Ye
ars
Value
Inve
stor
B h
as a
less
div
ersi
fied
port
folio
, los
ing
4% in
year
one
, ge
ts 0
% in
year
2 h
avin
g m
oved
po
rtfo
lio to
cash
, the
n re
inve
sts
in ye
ar 3
gai
ning
16%
.
Year
1
£50,
000
Year
2
£48,
000
...Ye
ar 17
£8
2,20
3
Year
18
£95
,355
Year
To
tal
Allia
nzGI
Risk
mat
ters
Thes
e hy
poth
etic
al e
xam
ples
are
for i
llust
ratio
n on
ly a
nd d
o no
t rep
rese
nt a
ny
perf
orm
ance
of a
n ac
tual
inve
stm
ent.
89
Allia
nzGI
Risk
mat
ters
INVE
STM
ENT
RISK
/ 08
- 11
Ensu
ring
inve
stm
ent
risk
mat
ches
your
cli
ents
’ nee
dsRi
sk is
a di
fficu
lt, m
ultif
acet
ed to
pic a
nd ad
viser
s hav
e a v
ital r
ole
in e
xplai
ning
it to
thei
r clie
nts,
says
Bru
ce
Mos
s, eV
alue’s
Stra
tegy
Dire
ctor
Few p
eopl
e lik
e to
thin
k ab
out r
isk. W
e liv
e in
an
unce
rtai
n w
orld
, and
risk
is
ever
ywhe
re.
Even
lyin
g in
bed
with
th
e du
vet
over
you
r he
ad d
oes
not
elim
inat
e al
l risk
– t
he h
ouse
cou
ld g
o up
in
flam
es o
r a m
eteo
r cou
ld h
it th
e bu
ildin
g! S
o to
ge
t us
thro
ugh
the
day,
wha
t mos
t of u
s do
is
thin
k ab
out
som
ethi
ng e
lse. R
isk is
put
to
the
back
of o
ur m
inds
, and
if w
e do
thin
k abo
ut it
we
tend
to b
e et
erna
l opt
imist
s. It
won
’t ha
ppen
to
me!
Ther
e is
anot
her
alte
rnat
ive,
w
hich
is
to
unde
rsta
nd a
nd m
anag
e ris
ks.
Mos
t w
ell-r
un
com
pani
es
adop
t th
is ap
proa
ch.
Risk
m
anag
emen
t inv
olve
s ide
ntify
ing
poss
ible
risk
s, qu
antif
ying
thei
r im
pact
if
thin
gs g
o w
rong
, ad
optin
g m
easu
res
to r
educ
e ris
k ex
posu
res,
and
whe
re n
eces
sary
put
ting
in p
lace
con
tin-
genc
y pla
ns –
how
to g
et b
y if t
he w
orst
shou
ld
happ
en. W
hilst
det
aile
d ris
k m
anag
emen
t an
d co
ntin
genc
y pl
ans
of t
he s
ort
unde
rtak
en b
y co
mpa
nies
wou
ld b
e ex
cess
ive
for
ordi
nary
in
vest
ors,
ther
e ar
e so
me
simpl
e id
eas
whi
ch
shou
ld b
e ad
opte
d. T
he fi
rst s
tep
for a
com
pany
is
to u
nder
stan
d w
hat
are
the
key
busin
ess
func
tions
that
wou
ld se
vere
ly af
fect
its p
rofit
s, or
ev
en it
s sur
viva
l, if s
omet
hing
wer
e to
go
wro
ng.
For
reta
il in
vest
ors
this
trans
late
s to
und
er-
stan
ding
thei
r fin
ancia
l goa
ls an
d pr
iorit
ies,
and
the
impa
ct o
f risk
on
the
pote
ntia
l out
com
es –
m
ost
obvi
ously
infla
tion
and
poor
inve
stm
ent
retu
rns.
Advis
ers h
ave
a ke
y rol
e he
re a
nd, in
the
new
pos
t-RDR
(Ret
ail D
istrib
utio
n Re
view
) wor
ld,
it is
an e
xcel
lent
opp
ortu
nity
to d
emon
stra
te th
e va
lue
of ad
vice
.
Bruc
e M
oss i
s the
foun
der a
nd
stra
tegy
dire
ctor
of e
Valu
e, o
ne
of th
e UK
’s le
adin
g pr
ovid
ers o
f an
alys
is, fo
reca
stin
g an
d pl
anni
ng so
lutio
ns.
1110
Allia
nzGI
Risk
mat
ters
Cont
extu
alis
ing
risk
Whe
n co
nsid
erin
g ris
k, it
is im
port
ant
to
unde
rsta
nd it
s im
pact
on
futu
re fi
nanc
ial p
lans
an
d ob
ject
ives
. Typ
ical
fina
ncia
l obj
ectiv
es ar
e:•
Retir
emen
t with
an in
com
e goa
l nor
mal
ly
expr
esse
d as
a p
erce
ntag
e of
cur
rent
ea
rnin
gs a
t an
ant
icip
ated
ret
irem
ent
date
;•
The
repa
ymen
t of
a h
ome
loan
by
a sp
ecifi
ed ag
e;•
Fund
ing
scho
ol fe
es;
• Ca
pita
l gr
owth
or
, at
le
ast,
capi
tal
pres
erva
tion
in re
al te
rms;
and
• In
com
e ge
nera
tion
from
capi
tal.
Whi
lst,
this
list
is no
t ex
haus
tive,
ot
her
obje
ctive
s ca
n no
rmal
ly be
des
crib
ed a
s a
capi
tal s
um o
r inc
ome
stre
am at
a fu
ture
dat
e.
For a
reta
il inv
esto
r, ris
k nee
ds to
be
trans
late
d in
to th
e im
pact
on
thes
e go
als.
For e
xam
ple,
w
hat
is th
e ris
k of
not
ach
ievin
g th
e de
sired
re
tirem
ent i
ncom
e at
the
spec
ified
retir
emen
t ag
e, w
hat
mig
ht a
rea
sona
ble
wor
st c
ase
shor
tfall
be i
n th
e ho
me
loan
rep
aym
ent?
Th
ese
risks
are
tim
e-de
pend
ent
and
in t
he
case
of r
etire
men
t inc
ome
depe
nden
t on
the
cost
of b
uyin
g an
ann
uity
at s
ome
date
in th
e fu
ture
. Sto
chas
tic fo
reca
stin
g un
ique
ly o
ffers
a w
ay to
qua
ntify
thes
e ris
ks, a
nd th
e ch
ance
s of
thei
r occ
urre
nce.
The
cha
nces
of a
chie
ving
a go
al c
an b
e ea
sily
asse
ssed
, tog
ethe
r with
the
likel
ihoo
d an
d siz
e of
pot
entia
l sho
rtfa
lls.
This
appr
oach
for a
dvise
rs to
disc
uss r
isk w
ith
clien
ts m
ay se
em in
cons
isten
t with
the u
se o
f a
psyc
hom
etric
risk
que
stio
nnai
re. I
t is
not.
The
aim
is
to p
ut t
he v
ague
con
cept
of
risk
in
cont
ext.
This
is pr
ecise
ly w
hat
the
Finan
cial
Serv
ices
Aut
horit
y (“
FSA”
1 ) in
tend
ed i
n its
M
arch
201
1 gu
idan
ce o
n ris
k pr
ofilin
g an
d in
vest
men
t sui
tabi
lity.
Done
wel
l, a
disc
ussio
n of
risk
, an
d ho
w i
t ca
n be
man
aged
, ca
n en
hanc
e a
clien
t’s p
erce
ptio
n of
the
valu
e of
fin
ancia
l adv
ice.
Whi
lst r
isk q
uest
ionn
aire
s ar
e im
port
ant a
nd
very
use
ful,
thei
r pu
rpos
e is
simpl
y to
div
ide
the
popu
latio
n in
to “r
isk b
ucke
ts”.
Ther
e is
no
abso
lute
link
age
betw
een
a ris
k pr
ofile
and
an
bala
nced
or m
oder
ate
attit
ude
to ri
sk w
ill ne
ed
a di
ffere
nt fu
nd d
epen
ding
on
the
inve
stm
ent
time
horiz
on.
Achi
evin
g co
mpl
iant
reco
mm
enda
tions
Key i
ssue
s for
the
advis
er to
und
erst
and
are:
• Th
e m
etho
dolo
gy i
nvol
ved
in t
he r
isk
ratin
g (a
reg
ulat
ory
requ
irem
ent
since
th
e ad
viser
has
to ta
ke re
spon
sibilit
y fo
r th
e ra
ting)
;•
How
the
risk
of
each
fun
d va
ries
with
te
rm, a
nd h
ence
whi
ch fu
nd to
pick
; and
• If
the c
lient
has
exi
stin
g as
sets
, how
thes
e sh
ould
be
take
n in
to a
ccou
nt in
sele
ctin
g a n
ew fu
nd.
Takin
g ea
ch
of
thes
e po
ints
in
tu
rn,
met
hodo
logy
var
ies
wid
ely.
As m
entio
ned
abov
e, s
ome
ratin
gs a
re b
ased
on
the
shor
t-te
rm h
istor
y of
the
fund
, and
ther
e w
ill be
a
tend
ency
for t
hese
ratin
gs to
be
unst
able
, and
va
ry a
s mar
ket c
ondi
tions
chan
ge. P
rosp
ectiv
e ris
k ra
tings
usin
g a
stoc
hast
ic a
sset
mod
el a
re
gene
rally
a m
ore
relia
ble
and
stab
le in
dica
tor
of fu
nd ri
sk. H
ere
it is
impo
rtan
t to
unde
rsta
nd
the
qual
ity o
f the
stoc
hast
ic m
odel
use
d. If
the
mod
el is
sim
ply
a M
ean
Varia
nce
Co-V
aria
nce
(MVC
) mod
el it
will
not b
e ab
le to
han
dle
term
de
pend
ency
i.e. t
he ap
pare
nt ri
sk o
f a fu
nd w
ill no
t var
y, ho
wev
er lo
ng th
e cli
ent’s
inve
stm
ent
time
horiz
on.
A go
od s
toch
astic
mod
el w
ill pr
oduc
e a
full
rang
e of
eco
nom
ic sc
enar
ios
– kn
own
as a
n ec
onom
ic sc
enar
io g
ener
ator
(ESG
). It
will
take
ac
coun
t of
al
l pl
ausib
le
econ
omic
and
inve
stm
ent
even
ts i
n a
cons
isten
t m
anne
r. In
flatio
n fo
reca
sts
are
an in
tegr
al p
art o
f the
m
odel
, as
are
fore
cast
s of
futu
re b
ond
yiel
ds
used
to
dete
rmin
e th
e co
st o
f bu
ying
an
annu
ity a
t an
ant
icipa
ted
retir
emen
t da
te.
Allo
wan
ce fo
r “re
al w
orld
” fea
ture
s suc
h as
the
term
dep
ende
ncy
of re
turn
s an
d vo
latil
ity a
re
poss
ible
with
an
ESG.
Ass
et s
trate
gies
can
th
eref
ore
be
cons
truct
ed
to
min
imise
an
in
vest
or’s
risk
of f
ailin
g to
mee
t a
goal
at
a de
signa
ted
time
in t
he f
utur
e. B
y th
e sa
me
toke
n, a
n ES
G en
able
s the
risk
of a
fund
to b
e as
sess
ed
over
th
e di
ffere
nt
dura
tions
as
socia
ted
with
a cli
ent’s
obj
ectiv
es.
INVE
STM
ENT
RISK
/ 08
- 11
Firm
s rem
ain
resp
onsi
ble
for a
sses
sing
su
itabi
lity,
incl
udin
g as
sess
ing
the
risk
a cu
stom
er is
will
ing
and
able
to ta
ke, e
ven
whe
n us
ing
tool
s.
“
“
inve
stm
ent
stra
tegy
or
asse
t al
loca
tion
to
whi
ch it
is m
appe
d. T
he p
roce
ss is
to d
ivid
e up
a
sens
ible
spec
trum
of a
sset
allo
catio
ns, f
rom
ve
ry
caut
ious
to
sp
ecul
ativ
e.
Thes
e as
set
allo
catio
ns
are
to
a co
nsid
erab
le
exte
nt
illust
rativ
e, a
nd th
ere
is no
gua
rant
ee th
at th
ey
are
suita
ble
to
mee
t cli
ents
’ di
fferin
g ob
ject
ives
. To
take
acco
unt o
f clie
nts’
goal
s, th
e as
set a
lloca
tions
nee
d to
be
term
-dep
ende
nt.
A m
oder
atel
y cau
tious
inve
stor
will
have
a ve
ry
diffe
rent
asse
t allo
catio
n if
his g
oal is
five
year
s aw
ay ra
ther
than
25
year
s aw
ay.
Cons
truc
ting
risk
rate
d so
lutio
ns
The
FSA1 , w
hen
it pu
blish
ed it
s gu
idan
ce in
M
arch
201
1, fo
cuse
d a
lot o
f atte
ntio
n on
the
cons
truct
ion
and
use
of r
isk q
uest
ionn
aire
s (o
ne q
uest
ionn
aire
in w
ides
prea
d us
e at
the
tim
e ha
d to
be
with
draw
n ra
pidl
y du
e to
se
rious
fla
ws
in i
ts c
onst
ruct
ion)
. Ho
wev
er,
ther
e was
little
gui
danc
e on
how
to en
sure
that
in
vest
men
t rec
omm
enda
tions
are a
ppro
pria
te,
and
mat
ch a
clie
nt’s
attit
ude
to ri
sk. T
he F
SA1
did
stre
ss v
ery
clear
ly th
at i
t w
as v
ital
for
inve
stm
ent r
ecom
men
datio
ns to
be
“sui
tabl
e”,
but s
adly
offe
red
no h
elp
on to
how
to a
chie
ve
this.
Ho
wev
er,
ther
e w
ere
som
e us
eful
po
inte
rs, f
or e
xam
ple
the
FSA1 sa
id,
“Eve
n w
here
the
risk
prof
ile o
f the
cus
tom
er is
co
rrec
tly a
sses
sed,
the p
rodu
ct o
r por
tfolio
(and
un
derly
ing
asse
t-allo
catio
n) d
oes
not
alw
ays
mat
ch th
is pr
ofile
. Thi
s can
be d
ue to
a fa
ilure
to
sele
ct
inve
stm
ents
th
at
mat
ch
the
risk
a cu
stom
er is
willi
ng a
nd a
ble
to ta
ke o
r a fa
ilure
to
take
acc
ount
of a
ll as
pect
s of
a c
usto
mer
’s in
vest
men
t obj
ectiv
es a
nd fi
nanc
ial s
ituat
ion”
.
The
FSA1 al
so m
ade
it cl
ear t
hat:
“(Ad
viser
) Fir
ms
rem
ain
resp
onsib
le
for
asse
ssin
g su
itabi
lity,
inclu
ding
ass
essin
g th
e ris
k a c
usto
mer
is w
illing
and
able
to ta
ke, e
ven
whe
n us
ing
tool
s. To
ol p
rovid
ers h
ave a
role
to p
rovid
e cle
ar s
uppo
rtin
g in
form
atio
n to
firm
s th
at w
ill us
e th
e to
ols,
to h
elp
them
use
the
m a
s de
signe
d”.
Fund
risk
rat
ings
can
pro
vide
som
e he
lp t
o ad
viser
s w
ith
the
sele
ctio
n of
su
itabl
e in
vest
men
t so
lutio
ns
for
thei
r cli
ents
.
Neve
rthe
less
the
re a
re c
onsid
erab
le d
iffer
-en
ces
in t
he m
etho
dolo
gy u
sed
in t
hese
ra
tings
.
The
mos
t ub
iqui
tous
risk
rat
ing
is th
e CS
ER
Euro
pean
sta
ndar
d. T
his
uses
up
to fi
ve y
ears
of
hist
oric
al d
ata a
nd, in
theo
ry, p
uts f
unds
into
se
ven
risk
cate
gorie
s. Th
e m
etho
dolo
gy h
as
been
hea
vily c
ritici
sed
for c
ompr
essin
g th
e risk
cla
ssifi
catio
n in
to a
few
cen
tral b
ands
, whi
ch
does
no
t ad
equa
tely
en
able
in
vest
ors
to
dist
ingu
ish
betw
een
diffe
rent
fu
nds.
Furt
herm
ore,
bec
ause
the
risk
ratin
g is
base
d on
hist
oric
al d
ata,
it is
not s
tabl
e. It
has
bee
n ar
gued
that
this
unde
rmin
es o
ne o
f CES
R’s k
ey
obje
ctiv
es, w
hich
is th
at th
e in
dica
tor
shou
ld
be r
easo
nabl
y ro
bust
ove
r tim
e in
diff
erin
g m
arke
t con
ditio
ns. T
his
failin
g w
ill be
true
of
any
ratin
g sy
stem
bas
ed o
n hi
stor
ical
dat
a, al
thou
gh it
can
be a
mel
iora
ted
to so
me
exte
nt
by u
sing
a lon
ger p
erio
d of
hist
oric
data
(whi
ch,
of co
urse
, for
man
y fun
ds w
ill no
t be
avai
labl
e)
or b
y us
ing
a re
lativ
e ra
ting
syst
em a
gain
st
cash
and
equ
ities
. The
oth
er p
robl
em is
the
ab
senc
e of
any
lin
kage
bet
wee
n a
hist
oric
ratin
g an
d th
e ris
k pr
ofile
s de
term
ined
by
the
part
icula
r risk
que
stio
nnai
re w
hich
an
advis
er
may
be
usin
g.
A be
tter a
ppro
ach
is to
use
a fo
rwar
d-lo
okin
g ris
k ra
ting,
bas
ed o
n ho
w th
e fu
nd is
inve
sted
. A
stoc
hast
ic as
set m
odel
is n
orm
ally
use
d to
do
this,
so
that
the
fund
’s se
nsiti
vity
is as
sess
ed
agai
nst
a w
ide
rang
e of
diff
eren
t ec
onom
ic sc
enar
ios.
This
over
com
es
the
prob
lem
as
socia
ted
with
hist
oric
fund
ratin
gs w
hich
are
ro
oted
in
a sp
ecifi
c pe
riod
of i
nves
tmen
t m
arke
t co
nditi
ons.
The
othe
r fe
atur
e of
thi
s ap
proa
ch is
that
the
risk r
atin
g of
the
fund
s can
be
link
ed w
ith t
he o
utpu
t fro
m s
ome
of t
he
lead
ing
risk p
rofil
e qu
estio
nnai
res.
At fa
ce v
alue
this
mea
ns th
at a
n ad
viser
can
ta
ke th
e re
sult
from
the
risk q
uest
ionn
aire
and
kn
ow w
hich
fun
d to
sel
ect.
How
ever
, a r
isk
rate
d or
tar
get
risk
fund
can
not
“tak
e …
ac
coun
t of a
ll asp
ects
of a
cust
omer
’s in
vest
men
t ob
ject
ives
and
finan
cial s
ituat
ion”
, so
advis
ers
mus
t und
erst
and
thei
r clie
nt’s
circu
mst
ance
s an
d ob
ject
ives
. A k
ey e
lem
ent
of t
his
is th
e in
vest
men
t tim
e ho
rizon
– a
n in
vest
or w
ith a
For a
dvise
rs o
fferin
g an
initi
al an
d on
-goi
ng fu
ll po
rtfo
lio re
view
ing
serv
ice,
the
choi
ce o
f a ri
sk
rate
d fu
nd w
ill ne
ed t
o ta
ke a
ccou
nt o
f th
e le
vel o
f risk
in a
ny p
ortfo
lio o
f exi
stin
g as
sets
w
hich
the
clien
t has
. The
FCA
has m
ade
it cle
ar
that
sel
ling
good
or
adeq
uate
ly pe
rform
ing
exist
ing
asse
ts, a
nd b
uyin
g a
risk
rate
d/ta
rget
ris
k fun
d w
ith ad
ditio
nal c
osts
, sim
ply t
o en
sure
th
at th
e po
rtfo
lio m
atch
es th
e cu
stom
er’s
risk
prof
ile, is
unl
ikely
to b
e an
acce
ptab
le o
utco
me.
So
ftwar
e sol
utio
ns ar
e ava
ilabl
e to
mak
e it e
asy
for
advis
ers
to r
isk r
ate
exist
ing
asse
ts, a
nd
decid
e w
hich
risk
rat
ed f
und
or f
unds
to
reco
mm
end.
In th
is w
ay a
dvise
rs’ r
ecom
men
-da
tions
can
take
acco
unt o
f exis
ting
asse
ts, t
he
dura
tion
of t
heir
inve
stm
ent
obje
ctive
s, an
d m
atch
clie
nts’
risk p
rofil
es.
The
role
of t
he a
dvis
er
It is
clea
rly th
e FC
A’s i
nten
tion
that
the
advis
er
shou
ld ta
ke fu
ll res
pons
ibilit
y for
ens
urin
g th
at
inve
stm
ent
reco
mm
enda
tions
are
sui
tabl
e,
and
take
acc
ount
of t
heir
“cus
tom
er’s
inve
st-
men
t obj
ectiv
es a
nd fi
nanc
ial s
ituat
ion”
. Fun
d m
anag
ers
can
help
by
risk
ratin
g th
eir f
unds
, bu
t fun
d m
anag
ers c
anno
t kno
w ab
out c
lient
s’ in
vest
men
t ob
ject
ives
or
othe
r as
sets
whi
ch
they
may
hol
d to
mee
t the
se o
bjec
tives
. It i
s cle
arly
the
adv
iser‘s
rol
e to
und
erst
and
thei
r cli
ents
’ circ
umst
ance
s, an
d to
ens
ure
that
they
un
ders
tand
the m
etho
dolo
gy th
ey ar
e usin
g to
ris
k as
sess
th
e in
vest
men
ts
they
ar
e re
com
men
ding
. Ad
viser
s sh
ould
rel
ish t
his
role
bec
ause
it c
an a
dd c
onsid
erab
le v
alue
to
thei
r cli
ents
, and
can
pro
vide
the
m w
ith a
n im
port
ant o
n-go
ing
role
hel
ping
them
achi
eve
thei
r in
vest
men
t go
als,
with
out
incu
rrin
g an
un
acce
ptab
le le
vel o
f risk
.
1 FS
A be
cam
e FC
A (F
inan
cial C
ondu
ct A
utho
rity)
and
PR
A (P
rude
ntia
l Reg
ulat
ory A
utho
rity)
in A
pril 2
013.
eVal
ue
ww
w.ev
alue
is.co
m
prov
ides
m
arke
t-lea
ding
an
alys
is, fo
reca
stin
g an
d pl
anni
ng so
lutio
ns th
at e
nabl
e bo
th
advis
ers
and
cons
umer
s to
un
ders
tand
th
e po
tent
ial
risk
and
retu
rn f
rom
diff
eren
t in
vest
men
t ch
oice
s. O
ur so
lutio
ns a
re u
sed
by a
roun
d a
quar
ter o
f a
mill
ion
inve
stor
s, as
wel
l as
80%
of t
he U
K’s
Finan
cial
Serv
ices c
ompa
nies
and
50%
of it
s fin
ancia
l adv
isers
.
1312
Stay
ing
on tr
ack
– co
nsum
ers,
risk
and
inve
stmen
ts
Behav
iour
al F
inan
ce t
ells
us t
hat
we
do n
ot, n
orm
ally,
mak
e ra
tiona
l dec
ision
s. In
pa
rticu
lar w
e kn
ow t
hat
reta
il in
vest
ors
do n
ot, o
vera
ll, m
ake
the
mos
t of
the
in
vest
men
t opp
ortu
nitie
s bef
ore t
hem
. But
we n
eed
to ac
know
ledg
e tha
t inv
estm
ent
decis
ions
are
usu
ally
mad
e w
ith a
dvice
, and
that
the
inve
stm
ent p
rovid
ers a
lso p
lay
thei
r par
t in
the
who
le p
roce
ss. C
once
ptio
ns an
d m
issco
ncep
tions
abou
t “ris
k” p
lay a
cent
ral
role
in a
ll th
is. W
e co
nsid
er w
hat
the
prof
essio
nals
in t
he p
roce
ss, t
he a
dvise
rs a
nd t
he
prov
ider
s, ca
n do
to h
elp
reta
il inv
esto
rs ac
hiev
e be
tter o
utco
mes
. Br
enda
n Ll
ewel
lyn
runs
st
rate
gic c
onsu
ltanc
y M
arke
ting
Edge
, and
is a
Dire
ctor
of A
dvise
r Hom
e,
help
ing n
anci
al ad
vise
rs ru
n,
deve
lop
and
mar
ket t
heir
prac
tice.
ww
w.m
arke
tinge
dgec
onsu
ltanc
y.co
m
and
ww
w.a
dvis
erho
me.
com
Allia
nzGI
Risk
Mat
ters
STAY
ING
ON
TRAC
K /
12 -
15
BREN
DAN
LLEW
ELLY
N
Inve
stor
mist
akes
Cons
eque
nces
Too
muc
h m
oney
in
the
bank
A ne
ar 10
0% ri
sk of
real
loss
in re
turn
fo
r a ve
ry lo
w ri
sk of
nom
inal
loss
Too
muc
h m
oney
in
resid
entia
l pro
pert
yUs
ually
in a
singl
e sto
ck –
your
hou
se.
So as
set c
lass r
isk, lo
catio
nal r
isk,
and
very
low
liqui
dity
Too
little
inve
sted
whe
n
mar
kets
are
low
A lo
ss in
annu
al te
rms o
f 20%
of th
e gr
owth
from
a re
gular
inve
stmen
t –
buy a
nd h
old
strat
egy1
Too
muc
h in
vest
ed w
hen
m
arke
ts ar
e hi
ghAs
abov
e, an
d a g
reat
er ex
posu
re
to d
owns
ide r
isk to
capi
tal
A bi
nary
appr
oach
–
conf
iden
t or n
otBr
eaks
the B
uffe
t max
im
– in
vest
freq
uent
ly an
d of
ten
Phan
tom
div
ersif
icatio
nUn
expe
cted
inve
stmen
t out
com
es
– af
fect
ing
inve
stor c
onfid
ence
We
shou
ld n
ot ta
ke th
e fin
ding
s of t
he B
ehav
iour
al
Econ
omis
ts a
s im
mut
able
por
trai
ts o
f hum
an
natu
re; p
eopl
e ar
e re
cept
ive
to in
form
ed
pers
uasi
ve a
rgum
ent,
and
this
is w
here
the
ad
vise
r com
es in
to h
is o
wn.
“
“
1 Ca
ss B
usin
ess S
choo
l, 201
0.
1514ST
AYIN
G O
N TR
ACK
/12
- 15
their
por
tfolio
– th
eir p
ensio
n fu
nd fo
r exa
mpl
e.
In th
eir u
se o
f clie
nt ri
sk p
rofil
ing
tool
s ad
viser
s ca
n an
d sh
ould
re
flect
th
is in
th
eir
reco
mm
enda
tions
, and
this
sens
itivit
y to
clie
nt
attit
ude
shou
ld le
ad to
gre
ater
long
-term
clie
nt
satis
fact
ion.
Wha
t is r
isk
anyw
ay?
Risk
is a
cont
inge
ncy;
rew
ard
is an
out
com
e –
so
reall
y the
re ca
n be
no s
ensib
le tr
ade-
off b
etw
een
the
two.
Risk
is to
cer
tain
ty a
s gain
is to
loss
. But
co
nsum
ers s
ee ri
sk as
a sy
nony
m fo
r los
s. I r
an a
co
nsum
er
wor
ksho
p re
cent
ly w
here
an
in
vestm
ent w
as c
onsid
ered
low
-risk
bec
ause
it
hadn
’t fa
llen.
Aga
inst
this
leve
l of
bas
ic m
is-co
mpr
ehen
sion t
he so
phist
icatio
n in r
isk pr
ofilin
g ha
s a
high
risk
of
failin
g th
e co
nsum
er.
The
prob
lem
is th
at ri
sk m
eans
wha
t con
sum
ers t
hink
it m
eans
– no
t wha
t we s
ay it
mea
ns. It
’s ve
ry ha
rd
for t
he in
vestm
ent s
ecto
r, adv
isers
and
prov
ider
s, to
cha
nge
the
mea
ning
of
such
bas
ic w
ords
. Pr
ofes
siona
lly
nece
ssar
y di
stinc
tions
lik
e
“cap
acity
for r
isk v
ersu
s at
titud
e or
app
etite
for
risk”
may
be
coun
terp
rodu
ctive
in
term
s of
co
nsum
er
com
mun
icatio
n.
For
one
thin
g,
capa
city
for r
isk is
reall
y ab
out c
apac
ity fo
r los
s. Bu
t mor
e fu
ndam
enta
lly, r
isk is
see
n as
a b
ad
thin
g, s
o an
und
ue fo
cus
on ri
sk a
t the
adv
iser
leve
l will
tend
not
to h
ave
the
desir
ed re
sults
. By
analo
gy,
som
e ye
ars
ago
Alfa
Rom
eo,
in a
n at
tem
pt to
addr
ess t
heir
repu
tatio
n fo
r rus
tines
s, ra
n a
TV c
omm
ercia
l w
ith o
ne o
f th
eir c
ars
subm
erge
d in
the
North
Sea
for 1
2 m
onth
s. It
emer
ged
rust-
free,
yet t
he p
ost r
esea
rch
show
ed
that
Al
fa’s
repu
tatio
n as
ru
st-pr
one
was
re
info
rced
by
the
cam
paig
n! N
euro
-Lin
guist
ic Pr
ogra
mm
ing
prac
titio
ners
w
ould
no
t be
su
rpris
ed b
y thi
s – o
ppos
ing
a ne
gativ
e te
nds t
o co
nfirm
the
nega
tive.
Advis
ers
need
to b
e ve
ry
care
ful
in t
heir
langu
age
– w
hen
in d
oubt
, ex
pres
s thi
ngs i
n th
e pos
itive
.
2 Ba
nk o
f Eng
land
, Sep
tem
ber 2
013.
3 Ca
ss B
usin
ess S
choo
l, 201
0.
Too
man
y m
ainstr
eam
equ
ity f
unds
are
par
a tra
cker
s, an
d a p
ortfo
lio of
10 fu
nds m
ay n
ot h
ave
any m
ater
ial e
ffect
on
“man
ager
risk
”. M
oreo
ver,
amon
gst
mor
e ge
nuin
ely
activ
ely
man
aged
so
lutio
ns c
erta
in th
emes
, sec
tors
or s
tyle
s m
ay
be c
omm
on to
man
y of
the
fund
s –
crea
ting
a co
ncen
tratio
n ris
k. Sim
ilarly
, as
set
class
es i
n ce
rtain
m
arke
ts
can
exhi
bit
high
le
vels
of
corre
latio
n.
We
tend
to th
ink
that
pas
sive
fund
s, w
ith th
eir
zero
man
ager
risk
, are
inhe
rent
ly lo
w r
isk, b
ut
inde
x fun
ds h
ave t
o m
irror
valu
e cha
nges
with
in;
no re
balan
cing
take
s pl
ace
if a
sub-
sect
or g
ets
over
heat
ed,
inde
ed
the
inde
x co
nstit
uent
w
eight
ings
will
be u
p-w
eight
ed t
o m
atch
tha
t su
b-se
ctor
. It f
alls t
o ad
viser
s to
ensu
re th
at th
eir
clien
ts’ p
ortfo
lios o
ffer g
enui
ne di
vers
ifica
tion.
Com
mun
icat
ion
Advis
ers h
ave a
lway
s mad
e use
of t
he lo
ng-te
rm
inve
stmen
t sta
tistic
s sho
win
g th
e rela
tivel
y sm
all
num
ber
of p
erio
ds in
the
last 1
00 y
ears
whe
n in
vesto
rs w
ere
mor
e at
risk
in th
e m
arke
t tha
n ou
t. Ne
verth
eles
s, ad
viser
s ar
e no
t th
e on
ly pe
ople
crea
ting
com
mun
icatio
n m
essa
ges.
If the
m
arke
t or t
he e
cono
my
is in
the
dold
rum
s the
n th
e med
ia w
ill, qu
ite na
tura
lly, b
e ful
l of b
ad n
ews.
So, th
e adv
iser h
as to
beco
me t
he m
ost d
omin
ant
com
mun
icato
r. In
pra
ctice
thi
s w
ill in
volve
a
rang
e of
tec
hniq
ues
– fa
ce t
o fa
ce,
regu
lar
new
slette
rs,
or j
ust
lette
rs a
nd a
con
certe
d ec
omm
s pr
ogra
mm
e. Th
e ke
y to
th
is is
cons
isten
cy; n
ot m
ore c
omm
unica
tion
whe
n th
e m
arke
ts ar
e hig
h, or
low.
The o
ther
cruc
ial th
ing i
s to
set
exp
ecta
tions
: at t
he s
tart
of a
new
clie
nt
relat
ions
hip,
advis
er a
nd c
lient
mus
t be
ad id
em
on b
road
attit
udes
to va
lue f
luct
uatio
ns.
Wea
lth m
anag
emen
t or f
inan
cial
pla
nnin
g
The
shift
in e
mph
asis
from
inve
stmen
t adv
ice to
fin
ancia
l plan
ning
is m
ost a
pplic
able
for c
lient
s at
the
accu
mul
atio
n st
age.
For
this
segm
ent,
the
focu
s is o
n pl
ans t
o m
atch
goa
ls, w
ith in
vestm
ent
entir
ely a
s a m
eans
to an
end.
How
ever
, ther
e are
m
any
inve
stors
bey
ond
the
accu
mul
atio
n st
age
who
may
take
a m
ore
caut
ious
atti
tude
tow
ards
w
ealth
pre
serv
atio
n. I
ndee
d, se
vera
l clie
nts w
ill ha
ve a
low
er ri
sk ap
petit
e for
certa
in el
emen
ts o
f
Mon
ey in
the
bank
Reta
il ba
nk d
epos
its s
tand
at
£1.3
tril
lion2 .
Ever
yone
nee
ds a
deg
ree
of li
quid
ity, b
ut th
is le
vel o
f com
mitm
ent t
o ca
sh in
dica
tes
mor
e th
an a
desir
e fo
r acc
ess t
o ca
pita
l. It r
epre
sent
s a
de fa
cto
inve
stm
ent s
trate
gy w
here
cas
h, a
n as
set
whi
ch w
ill ra
rely
del
iver
pos
itive
rea
l re
turn
s, is
a cor
e lon
g-te
rm h
oldi
ng. O
ne o
f the
ca
uses
of
this
is th
e fe
ar i
nves
tors
hav
e of
lo
sing
thei
r cap
ital. Y
et su
ch re
lianc
e on
cash
is
only
rat
iona
l if
the
oppo
rtun
ity c
ost
of r
eal
asse
t inv
estm
ent f
orgo
ne is
pro
perly
exp
lore
d.
We
belie
ve t
hat
a co
nsum
er’s
satis
fact
ion
curv
e re
flect
s a g
reat
er d
egre
e of
conc
ern
at a
lo
ss t
han
plea
sure
at
a ga
in. B
ut t
he a
dvise
r w
ith a
clo
se, p
rofe
ssio
nal r
elat
ions
hip
with
a
clien
t ca
n in
fluen
ce t
his
pref
eren
ce s
et. W
e sh
ould
not
take
the
findi
ngs o
f the
Beh
avio
ural
Ec
onom
ists
as im
mut
able
por
traits
of h
uman
na
ture
; pe
ople
ar
e re
cept
ive
to
info
rmed
pe
rsua
sive
argu
men
t, an
d th
is is
whe
re t
he
advis
er co
mes
into
his
own.
Resi
dent
ial p
rope
rty
In th
e UK
the
capi
tal g
ains t
ax e
xem
ptio
n of
the
prim
ary
resid
ence
give
s so
me
ratio
nale
for t
his
natio
nal
obse
ssio
n,
but
the
extra
ordi
nary
w
eigh
ting
to p
rope
rty –
it’s t
he U
K’s l
arge
st sin
gle
asse
t clas
s with
£4.2
trilli
on ti
ed u
p –
perp
etua
tes
unhe
lpfu
l myt
hs lik
e “m
y hom
e is
my p
ensio
n”2 .
Mor
eove
r, th
e m
ajorit
y ha
ve ju
st on
e ho
ldin
g –
the
hous
e th
ey li
ve in
. Thi
s cre
ates
an
extra
risk
di
men
sion
– th
e as
set c
lass
mig
ht b
e bu
oyan
t, bu
t just
not w
here
you
live.
Or yo
ur ar
ea m
ight
be
buoy
ant,
but j
ust n
ot yo
ur st
reet
, or y
our t
ype
of
prop
erty
. So
an in
divid
ual w
ith £
2m n
et w
ealth
, in
cludi
ng a
hom
e w
ith £
1.75m
equ
ity, r
uns
a pr
ofou
ndly
imba
lance
d an
d hi
ghly
riske
d po
rtfol
io; h
e may
not
see i
t qui
te lik
e tha
t, but
the
advis
er ca
n at
leas
t adv
ise th
at su
ch an
imba
lance
co
nstit
utes
a d
istin
ctive
inve
stmen
t vie
w –
at
thos
e lev
els it’
s not
just
abou
t som
ewhe
re n
ice to
liv
e.
Tim
ing
This
is no
t so
muc
h ab
out d
elibe
rate
atte
mpt
s to
seco
nd g
uess
the
mar
ket.
It’s m
ore
the
fact
that
sto
ck m
arke
t inflo
ws c
orre
late w
ith m
arke
t leve
ls.
In a
Cass
Busin
ess S
choo
l Stu
dy (2
010)
the i
mpa
ct
of t
his
was
sta
ted
as a
n eq
uiva
lent
to
a 20
% re
duct
ion
in a
nnua
l ret
urn3 . I
n th
e sa
me
study
, in
stitu
tiona
l inv
esto
rs a
chie
ved
par;
that
is, t
heir
retu
rns r
efle
cted
the m
arke
t’s re
turn
s.
Nota
bly,
the
UK st
ruct
ured
pro
duct
s sec
tor h
ad
its f
ines
t hou
r, or
yea
r, in
200
9, ju
st w
hen
the
equi
ty m
arke
ts w
ere
at th
eir m
ost d
epre
ssed
. It’s
regr
etta
ble
that
mor
e de
fined
out
com
es a
re
soug
ht ju
st w
hen
the
oppo
rtuni
ties
for
open
-en
ded
inve
stmen
ts ar
e at t
heir
grea
test
. Muc
h of
th
is co
ncer
ns
the
unde
rsta
ndin
g of
ris
k –
cons
umer
s ca
n te
nd t
o th
ink
that
whe
n th
e en
viron
men
t is
diffi
cult
and
the
mar
kets
are
de
pres
sed,
the c
hanc
es of
futu
re lo
ss ar
e gre
ater
.
Neve
rthele
ss,
this
isn’t
all
abou
t co
nsum
er
attit
udes
. The
que
stion
for
advis
ers
is w
heth
er
their
ow
n co
nfid
ence
cor
relat
es w
ith m
arke
t le
vels?
Sim
ilarly
, if a
n in
vestm
ent h
ouse
is m
ore
likel
y to
eng
age
in fu
nd la
unch
es, o
r to
incr
ease
its
mar
ketin
g bu
dget
s dur
ing
bull m
arke
t hig
hs,
then
it to
o is
a co
-con
spira
tor
in th
e bu
y-hi
gh
path
olog
y an
d its
in
evita
ble
eros
ion
of
cons
umer
’s ca
pita
l.
The
Bina
ry a
ppro
ach
The
insti
tutio
nal in
vesto
rs re
ferre
d to
in th
e Ca
ss
Busin
ess S
choo
l Stu
dy w
ere
relat
ively
succ
essfu
l be
caus
e th
ey, a
s cus
todi
ans o
f pen
sion
sche
me
mon
ies,
need
ed to
inve
st on
a re
gular
basis
. Ret
ail
inve
stors
ove
r the
last
20 ye
ars h
ave,
large
ly as
a
resu
lt of
regu
latio
n to
dep
ress
hig
h co
mm
issio
n re
gular
inve
stmen
t pl
ans,
mov
ed m
ore
to a
n in
vest
or n
ot in
vest
patte
rn. A
key t
enet
from
the
War
ren
Buffe
t can
on of
tene
ts is
“inv
est r
egul
arly
and
ofte
n”. T
hat w
ay, th
e ris
k of a
dver
se ti
min
g is
man
aged
. Thi
s is
a m
atte
r of
eng
ende
ring
a be
tter
unde
rsta
ndin
g of
inve
stmen
t ris
k –
the
risk,
in p
artic
ular
, of
not
inve
sting
. It
is als
o a
mat
ter
of
enco
urag
ing
phas
ing
whe
re
appr
opria
te.
The
natu
re o
f div
ersi
ficat
ion
The
lay v
ersio
n of
dive
rsifi
catio
n is
abou
t th
e av
oida
nce o
f a si
ngle
bask
et o
f egg
s; bu
t thi
s onl
y w
orks
if th
e egg
s, an
d ind
eed t
he ba
sket
s, an
d the
ro
ad th
ey ta
ke, h
ave
acce
ptab
ly lo
w co
rrelat
ions
.
... d
iver
sific
atio
n is
abo
ut th
e av
oida
nce
of a
si
ngle
bas
ket o
f egg
s; bu
t thi
s onl
y wor
ks if
the
eggs
, and
inde
ed th
e ba
sket
s, an
d th
e ro
ad
they
take
, hav
e ac
cept
ably
low
corr
elat
ions
.
“
“
Allia
nzGI
Risk
mat
ters
Allia
nzGI
Risk
mat
ters
TAKI
NG
SMAR
T RI
SK/
16 -
21
16Taki
ng S
mar
t Ri
sk –
Con
struc
ting
an A
sset
Allo
catio
nris
klab
Gm
bH (
“risk
lab”
) is
an A
llian
z Gl
obal
Inv
esto
rs c
ompa
ny r
egist
ered
with
Bun
desa
nsta
lt fu
r Fin
anzd
iens
tleist
ungs
aufsi
cht
(ww
w.ban
.de)
as
a pr
ovid
er o
f n
ancia
l ser
vices
in G
erm
any.
riskl
ab
prov
ides
risk
man
agem
ent a
nd st
rate
gic a
nd d
ynam
ic as
set a
lloca
tion
solu
tions
to su
ppor
t the
inve
stm
ent
advis
ory a
ctivi
ties o
f pro
perly
regi
ster
ed a
nd li
cens
ed a
flia
tes o
f Alli
anz G
loba
l Inve
stor
s thr
ough
out t
he
wor
ld. P
leas
e see
the l
ast p
age o
f thi
s doc
umen
t for
info
rmat
ion
conc
erni
ng th
ese a
flia
tes.
DR. W
OLF
GAN
G M
ADER
AN
D DR
. CHR
ISTI
AN S
CHM
ITT
Stra
tegi
c ass
et
allo
catio
n is
the
mos
t im
port
ant d
eter
min
ing
fact
or fo
r the
por
tfolio
re
turn
. How
ever
, ge
nera
ting
an a
dequ
ate
retu
rn is
a m
ajor
ch
alle
nge
in to
day’
s lo
w in
tere
st-r
ate
envi
ronm
ent.
“
“
Dr.
Wol
fgan
g M
ader
is D
irect
or
and
Head
of A
sset
Allo
catio
n St
rate
gies
at ri
skla
b Gm
bH
Dr.
Chri
stia
n Sc
hmitt
is
Man
agin
g Di
rect
or at
risk
lab
GmbH
17
1819
Allia
nzGI
Risk
mat
ters
To d
eter
min
e th
e qu
antit
ativ
e ef
fect
s in
the
SAA
of
a br
oade
r in
vest
men
t un
iver
se, w
e se
t up
an
alte
rnat
ive
port
folio
sho
wn
in
figur
e 2.
Her
ein
the
prop
ortio
n of
bon
ds w
as r
educ
ed b
y 20
% in
fa
vour
of
equi
ties
and
a 15
% ne
w in
vest
men
t in
alte
rnat
ive
asse
t cla
sses
, like
infra
stru
ctur
e, re
al e
stat
e an
d he
dge
fund
stra
tegi
es. A
t th
e sam
e tim
e, d
iver
sific
atio
n w
as in
crea
sed
by w
ay o
f a w
ider
spre
ad
with
in th
e bo
nd an
d eq
uitie
s seg
men
t.
The
alte
rnat
ive
port
folio
’s lo
ng-te
rm a
ntici
pate
d vo
latil
ity, a
t 6.4
%, is
ex
pect
ed to
be
1.5
perc
enta
ge p
oint
s per
year
hig
her t
han
that
of t
he
base
pro
file.
Con
ditio
nal V
alue
-at-R
isk (o
ver t
he p
erio
d of
one
yea
r an
d at
a c
onfid
ence
leve
l of 9
5%) s
houl
d al
so ri
se o
n th
e ba
sis o
f our
sim
ulat
ions
, fro
m -7
.9%
to -9
.9%.
In t
he c
ase
at h
and,
re-
riskin
g w
ould
be
nece
ssar
y al
ongs
ide
dive
rsifi
catio
n, i
ndic
atin
g th
e ne
ed t
o pr
ovid
e an
add
ition
al r
isk
TAKI
NG
SMAR
T RI
SK/
16 -
21
Figur
e 1: B
ase
Prof
ile
40%
EUR
Core
Gov
ernm
ent B
onds
30%
Wor
ld E
quiti
es
30%
EUR
Corp
orat
e Bo
nds
40%
EUR
30%
Wor303
%EUEU
R
Figur
e 2: A
ltern
ativ
e Pr
ofile
25%
EUR
Corp
orat
e Bo
nds
18%
Wor
ld E
quiti
es15
% EU
R Co
rpor
ate
Gove
rnm
ent B
onds
12%
Emer
ging
Mar
ket E
quiti
es5%
Wor
ld E
quiti
es S
mal
l-Cap
5% In
frast
ruct
ure
Debt
5% G
loba
l Hig
h Yi
eld
Bond
s5%
Em
ergi
ng M
arke
ts G
ov. B
onds
USD
2% V
olat
ility
2% In
frast
ruct
ure
Equi
ty2%
Hed
ge Fu
nds
Figur
e 3
Risk
& R
etur
nLo
ng-t
erm
Pr
ofile
Base
Pro
file
Alte
rnat
ive
Prof
ile
Retu
rn (p
.a.)
2.9%
4.0%
Vola
tility
p.a
.4.
9%6.
4%
Shar
pe R
atio
0.28
0.39
CVaR
1Co
nfid
ence
Le
vel
Base
Pro
file
Alte
rnat
ive
Prof
ile
1 ye
ar95
%-7
.9%
-9.9
%
5 ye
ars
95%
-9.2
%-9
.5%
1 Cond
ition
al V
alue
at R
isk (C
VaR)
. Sou
rce:
risk
lab.
The c
urre
nt m
arke
t en
viron
men
t is
char
acte
rised
by
low
no
min
al in
tere
st r
ates
and
the
pote
ntia
l of n
egat
ive
real
re
turn
s. Ou
r vie
w is
that
des
pite
the
talk
of ta
perin
g in
the
US, t
he lo
w in
tere
st-r
ate
envir
onm
ent
will
cont
inue
for
so
me t
ime t
o co
me.
We a
lso b
elie
ve th
at w
e cou
ld se
e inf
latio
n be
gin
to ri
se. A
s re
gula
r rea
ders
of R
isk m
atte
rs w
ill be
aw
are,
we
call
this
com
bina
tion
of lo
w in
tere
st-r
ate
polic
ies a
nd in
flatio
nary
tend
encie
s (a
nd/o
r ant
icipa
ted
infla
tion)
fina
ncia
l rep
ress
ion.
Stra
tegi
c Ass
et A
lloca
tion
(SAA
) – Ta
king
Smar
t Ris
k…
Stra
tegi
c ass
et al
loca
tion
(SAA
) pla
ys a
pivo
tal r
ole i
n de
term
inin
g th
e ex
tent
to
whi
ch o
vera
ll in
vest
men
t re
sults
flu
ctua
te. T
his
step
is
ther
efor
e th
e m
ost
elem
enta
ry d
ecisi
on w
hen
decid
ing
on a
n in
vest
men
t pro
gram
. In
our a
naly
sis, w
e to
ok a
clo
ser l
ook
at w
hat a
st
rate
gic a
sset
allo
catio
n sh
ould
look
like,
giv
en th
e cu
rren
t clim
ate
of
finan
cial
repr
essio
n. A
lthou
gh t
hese
are
onl
y sim
ulat
ions
, an
d fo
reca
sts
are
no g
uara
ntee
of
futu
re d
evel
opm
ents
, the
fin
ding
s al
low
us t
o dr
aw so
me
inte
rest
ing
conc
lusio
ns.
Our
star
ting
poin
t is
a po
rtfo
lio c
onsis
ting
of 7
0% b
onds
(40
% go
vern
men
t bon
ds fr
om co
re Eu
rozo
ne co
untri
es an
d 30
% co
rpor
ate
bond
s) an
d 30
% eq
uitie
s (de
velo
ped
mar
kets)
as is
show
n in
figu
re 1.
Our a
naly
ses s
how
that
the
simul
ated
long
-term
ann
ual r
etur
n (te
n-ye
ar h
orizo
n av
erag
e) o
f the
bas
e po
rtfo
lio –
des
pite
the
signi
fican
t sh
are o
f equ
ities
– is
onl
y 2.9
%. T
his i
s low
er th
an th
e env
isage
d ta
rget
re
turn
for a
def
ensiv
e in
vest
or, w
hich
is lik
ely t
o be
aro
und
4%. T
hese
re
turn
exp
ecta
tions
are
acc
ompa
nied
by
an a
ntic
ipat
ed v
olat
ility
of
4.9%
. Hist
oric
ally
(sin
ce 2
000)
the
ret
urns
rea
lised
as
the
resu
lt of
su
ch a
n al
loca
tion
wer
e at
4.2
% an
nual
ret
urn
and
4.7%
vol
atilit
y. Th
ese
attra
ctiv
e re
turn
s, w
hich
wer
e pr
edom
inan
tly t
he r
esul
t of
fa
lling
inte
rest
rate
s, se
em u
nlike
ly to
repe
at th
emse
lves
in th
e fut
ure.
Whe
n de
term
inin
g a b
ette
r sui
ted
SAA,
two
basic
step
s are
ther
efor
e ne
cess
ary:
• In
crea
sing
the
aver
age
shar
e of
retu
rn-g
ener
atin
g ris
ky a
sset
s in
ord
er to
raise
the
port
folio
’s ta
rget
ed re
turn
s.•
Broa
deni
ng th
e in
vest
men
t uni
vers
e be
yond
ass
et c
lass
es a
nd
regi
ons,
with
an
eye
tow
ards
cor
rela
tion
stru
ctur
e an
d ta
king
adva
ntag
e of
the
pot
entia
l fo
r di
vers
ifica
tion.
Thi
s m
akes
it
poss
ible
to re
duce
risk
whi
le ke
epin
g fo
reca
st re
turn
s ste
ady.
budg
et to
ach
ieve
targ
et re
turn
s in
the
long
term
due
to th
e cu
rren
t ca
pita
l mar
ket s
ituat
ion.
How
ever
, the
incr
ease
d ris
k is
adeq
uate
ly
com
pens
ated
for, a
s dem
onst
rate
d by
the
com
para
bly h
ighe
r Sha
rpe
ratio
(0.3
9 vs
. 0.2
8).
Alth
ough
the
perc
eptio
n of
an in
crea
sed
risk t
urns
out
to b
e tru
e ov
er
the
cour
se o
f a s
ingl
e ye
ar, t
he a
ltern
ativ
e po
rtfo
lio’s
CVaR
leve
l is
com
para
ble
over
a fi
ve-y
ear p
erio
d (s
ee fi
gure
3).
This
is a
resu
lt of
th
e al
tern
ativ
e po
rtfo
lio’s
high
er an
ticip
ated
retu
rns i
n th
e lo
ng te
rm,
amon
g ot
her f
acto
rs.
It is
inte
rest
ing
to n
ote
that
the
hist
oric
ally
low
er vo
latil
ity o
f the
bas
is po
rtfo
lio a
ppea
rs d
ecep
tive
at se
cond
gla
nce.
A fu
ture
-orie
nted
risk
an
alys
is re
veal
s th
at th
e co
ncen
tratio
n ris
k in
the
base
allo
catio
n is
com
para
bly h
igh.
The
risk
ana
lysis
, dep
icte
d as
a ri
sk c
asca
de, s
how
s th
e ris
k con
tribu
tion
of e
ach
asse
t cla
ss in
rela
tion
to it
s sha
re o
f
Figur
e 4 Higher Risk RC in
%-1
5.0
-12.
5
-10.
0
-7.5
-5.0
-2.5 0
0 10
20
30
40
50
60
70
80
90
10
0
Asse
t Allo
catio
n in
%
Gov.
Bon
dsCo
re E
URCo
rpor
ates
EUR
Equi
tyW
orld
Risk
Port
folio
Div
ersif
i-ca
tion
Bene
fit
Risk
Undi
vers
ified
Port
folio
Risk
Por
tfolio
-7
.9%
Dive
rsifi
catio
n Be
nefit
4.
7%
Risk
Und
iver
sifie
d Po
rtfo
lio
-12.
6%
0 10
20
30
40
50
60
70
80
90
10
0
RC in
%-1
7.5
-15.
0-1
2.5
-10.
0-7
.5-5
.0-2
.5 0
Higher Risk
Risk
Port
folio
Div
ersif
i-ca
tion
Bene
fit
Risk
Undi
vers
ified
Port
folio
Risk
Por
tfolio
-9
.9%
Dive
rsifi
catio
n Be
nefit
6.
3%
Risk
Und
iver
sifie
d Po
rtfo
lio
-16.
3%
Asse
t Allo
catio
n in
%
Gov.
Bon
dsCo
re E
URCo
rpor
ates
EUR
High
Yiel
dGl
obal
Gov.
Bon
dsEm
Mkt
sUS
D
Equi
tyEm
Mts
Equi
ty W
orld
Smal
l-Cap
Real
Esta
te
Infr
astr
uctu
reD
ebt
Infr
astr
uctu
reEq
uity
Vola
tility
Hed
geFu
nds
Sour
ce: r
iskla
b.
Sour
ce: r
iskla
b.
Sour
ce: r
iskla
b.
2021
A gr
eate
r foc
us o
n in
vest
ing
in
high
-pot
entia
l ass
et cl
asse
s is
the
first
step
in ta
rget
ing
adeq
uate
retu
rns.
“
“
TAKI
NG
SMAR
T RI
SK/
16 -
21
the
port
folio
, as
wel
l as
the
dive
rsifi
catio
n ef
fect
(fig
ure
4), w
hich
re
sults
from
com
parin
g th
e ov
eral
l risk
and
the
sum
of t
he in
divi
dual
ris
ks. I
t be
com
es a
ppar
ent
that
the
equ
ities
had
the
hig
hest
risk
co
ntrib
utio
n in
the
port
folio
. How
ever
, the
alte
rnat
ive
port
folio
has
a
high
er d
iver
sific
atio
n ef
fect
, whi
ch in
crea
ses s
ubst
antia
lly. A
s a re
sult,
in
vest
ors
in t
his
scen
ario
onl
y ne
ed t
o ac
cept
add
ition
al r
isk fo
r a
high
er an
ticip
ated
retu
rn.
Look
ing
back
, the
alte
rnat
ive
port
folio
may
be
asso
ciate
d w
ith h
ighe
r ris
ks (m
ore
vola
tile)
, but
the
mor
e ba
lanc
ed a
sset
allo
catio
n sh
ould
re
duce
the
over
all r
isk o
f the
por
tfolio
in th
e lo
ng te
rm. T
his b
ecom
es
part
icula
rly cl
ear w
hen
we e
valu
ate r
isk an
d re
turn
with
in a
supp
osed
in
flatio
nary
clim
ate.
The
anal
ysis
of th
e po
rtfo
lios i
n va
rious
hist
oric
al
infla
tiona
ry s
cena
rios
show
s th
at th
e al
tern
ativ
e po
rtfo
lio d
eliv
ered
hi
gher
hist
oric
ally
real
ised
retu
rns a
nd a
hig
her S
harp
e ra
tio th
an th
e ba
se p
ortfo
lio d
urin
g pe
riods
of r
ising
infla
tion.
It d
emon
stra
tes t
hat a
m
ore
dive
rsifi
ed p
ortfo
lio h
as h
istor
ical
ly p
rovi
ded
inve
stor
s w
ith a
m
ore
solid
foot
ing
for t
he an
ticip
ated
clim
ate
of fi
nanc
ial r
epre
ssio
n.
Unde
rsta
nd. A
ct.
Stra
tegi
c as
set a
lloca
tion
is th
e m
ost i
mpo
rtan
t det
erm
inin
g fa
ctor
fo
r the
por
tfolio
retu
rn. H
owev
er, g
ener
atin
g an
ade
quat
e re
turn
is a
m
ajor
chal
leng
e in
toda
y’s lo
w in
tere
st-r
ate
envir
onm
ent.
A gr
eate
r fo
cus
on i
nves
ting
in h
igh-
pote
ntia
l as
set
class
es i
s th
eref
ore
the
first
step
in ta
rget
ing
adeq
uate
retu
rns.
Alon
gsid
e th
is “r
e-ris
king”
of
the
port
folio
, bro
ad d
iver
sific
atio
n of
inv
estm
ents
pl
ays
a pi
vota
l rol
e, a
s th
e sp
read
ing
of r
isks
with
in t
he p
ortfo
lio
shou
ld p
rincip
ally
lead
to a
mor
e at
tract
ive
risk/
retu
rn p
rofil
e.
But d
iver
sific
atio
n al
one
is no
t eno
ugh
to e
ffect
ivel
y lim
it ris
k ov
er
time.
As t
he ch
arac
teris
tics o
f hig
h-ris
k inv
estm
ents
chan
ge in
pha
ses
of s
tress
, and
the
loss
es w
ithin
a p
ortfo
lio c
an g
row
too
ser
ious
, dy
nam
ic ris
k man
agem
ent i
s also
a m
ust.
Such
risk
man
agem
ent c
an
enab
le in
vest
ors
to e
ffect
ivel
y he
dge
loss
es, t
here
by p
rote
ctin
g ris
k ca
pita
l w
hile
st
ill al
low
ing
them
to
pr
ofit
from
po
tent
ial
perfo
rman
ce.
Allia
nzGI
Risk
mat
ters
Inpu
t
Asse
t cla
sses
and
benc
hmar
ks u
sed
for t
he b
ase a
nd al
tern
ativ
e por
tfolio
ar
e as
follo
ws.
The
hypo
thet
ical
per
form
ance
and
sim
ulat
ions
sho
wn
desc
ribe
the
long
ter
m (
10 y
ears
ave
rage
) ex
pect
atio
ns o
f th
e ye
arly
pe
rform
ance
s and
vola
tiliti
es o
f eac
h as
set c
lass
. The
hist
oric
al yi
elds
and
vola
tiliti
es (
p.a.)
wer
e ca
lcul
ated
in t
he t
ime
betw
een
29/2
/200
0 an
d 31
/03/
2013
.
Forw
ard-
look
ing
anal
yses
Forw
ard-
look
ing
anal
yses
are
bas
ed o
n da
ta f
rom
sim
ulat
ions
of
the
riskl
ab Ec
onom
ic S
cena
rio G
ener
ator
.
• Ri
skfre
e ra
te:
expe
cted
lon
g-te
rm a
vera
ge a
nnua
l re
turn
on
the
mon
ey m
arke
t
• Th
e ex
pect
ed re
turn
s and
vol
atilit
ies o
f the
ass
et c
lass
es a
re d
eriv
ed
from
the
cur
rent
mar
ket
cond
ition
s pl
us t
he lo
ng-te
rm n
orm
ativ
e as
sum
ptio
ns (
whi
ch a
re e
xpec
ted
to h
old
at t
he e
nd o
f a
10-y
ear
perio
d):
– In
flatio
n: 2
% pe
r ann
um
– Yi
eld
of G
erm
an g
over
nmen
t bon
ds (z
ero-
coup
on b
onds
): 1-
year
bo
nd 3
%, 10
-yea
r bon
d 4%
– Sp
read
s: sw
ap 0
.35%
, AA
0.65
%, A
0.8
%, B
BB 1%
– Eq
uity
pre
miu
m: d
evel
oped
mar
kets
4%,
em
ergi
ng m
arke
ts 5
%
Retu
rn a
nd R
isk
Valu
e-at
-Ris
k (V
aR)
For a
giv
en p
ortfo
lio, p
roba
bilit
y an
d tim
e ho
rizon
, VaR
is d
efin
ed a
s a
thre
shol
d va
lue s
uch
that
the p
roba
bilit
y tha
t the
mar
k-to
-mar
ket l
oss o
n th
e po
rtfo
lio o
ver t
he g
iven
tim
e ho
rizon
exc
eeds
this
valu
e –
assu
min
g no
rmal
mar
kets
and
no
tradi
ng in
the
port
folio
– is
the
give
n pr
obab
ility
leve
l.
Cond
ition
al-V
alue
-At-
Risk
(CVa
R)
The
CVaR
is
calc
ulat
ed b
y as
sess
ing
the
likel
ihoo
d (a
t a
spec
ific
conf
iden
ce l
evel
) th
at a
spe
cific
los
s w
ill ex
ceed
the
val
ue a
t ris
k.
Mat
hem
atic
ally
spea
king,
CVa
R is
deriv
ed b
y ta
king
a w
eigh
ted
aver
age
betw
een
the
valu
e at
risk
and
loss
es e
xcee
ding
the
valu
e at
risk
.
Asse
t Cla
ssBe
nchm
ark
Curr
ency
Expe
cted
Retu
rn (v
.)Ex
pect
edVo
latil
ity (p
.a.)
Hist
oric
Retu
rn (p
.a.)
Hist
oric
Vola
tility
(p.a
.)
Gov.
Bond
s EUR
JPM
EMU
Inve
stm
ent G
rade
Inde
xEU
R1.
9 %
5.4
%5.
4 %
3.8
%Go
v. Bo
nds C
ore E
URBo
fA M
L AAA
Euro
Gov
ernm
ent I
ndex
EUR
0.9
%4.
5 %
5.6
%3.
9 %
Gov.
Bond
s US
BofA
ML U
S Tre
asur
y Ind
exhe
dged
in EU
R1.
0 %
4.5
%6.
0 %
4.7
%Pf
andb
riefe
BofA
ML E
uro
Pfan
dbrie
f Ind
exEU
R1.
5 %
2.4
%4.
9 %
2.2
%Co
vere
d Bo
nds E
URBo
fA M
L Eur
o Co
vere
d Bo
nd In
dex
EUR
2.2
%3.
2 %
5.2
%2.7
%Go
v. Bo
nds l
.-L EU
RBa
rcla
ys Eu
ro G
ovt I
nf-L
inke
d Bo
nd In
dex
EUR
1.6
%5.
7 %
5.6
%5.1
%Co
rpor
ates
EUR
BofA
ML E
uro
Corp
orat
e Ind
exEU
R2.
4 %
3.8
%5.
4 %
3.5
%Co
rp. F
in. E
URBo
fA M
L Eur
o Fin
ancia
l Inde
xEU
R2.
8 %
4.6
%5.1
%4.
2 %
Corp
. Non
-Fin
. EUR
BofA
ML E
uro
Non-
Finan
cial In
dex
EUR
2.1 %
3.4
%5.
8 %
3.2
%Hi
gh Y
ield
Glo
bal
BofA
ML G
loba
l Hig
h Yi
eld
Cons
tr In
dex
hedg
ed in
EUR
3.9
%10
.7 %
8.0
%10
.4 %
Gov.
Bond
s Em
. Mkt
s. US
DJP
M Em
Mkt
s Bon
d Gl
obal
Div
Inde
xhe
dged
in EU
R3.
7 %
8.5
%11
.0 %
8.8
%Eq
uity
Euro
peM
SCI E
urop
e Net
TR
Inde
xEU
R6.1
%15
.6 %
0.9
%16
.2 %
Equi
ty N
orth
Am
eric
aM
SCI N
orth
Am
eric
a Net
TR
Inde
xEU
R6.
0 %
14.4
%0.
2 %
16.2
%Eq
uity
Asia
MSC
I Pac
ific N
et T
R In
dex
EUR
5.7
%14
.5 %
–0.4
%16
.2 %
Equi
ty Em
. Mkt
s.M
SCI E
mer
ging
Mar
kets
Net
TR
Inde
xEU
R7.0
%19
.9 %
6.0
%21
.7 %
Equi
ty W
orld
MSC
I Wor
ld N
et T
R In
dex
EUR
6.0
%13
.7 %
0.3
%15
.1 %
Equi
ty W
orld
Smal
l-Cap
MSC
I Wor
ld Sm
all C
ap N
et T
R In
dex
EUR
6.5
%16
.4 %
5.9
%17
.8 %
Real
Esta
teUK
IPD
All P
rope
rty T
R In
dex
hedg
ed in
EUR
3.7
%9.
3 %
6.5
%4.
5 %
Infra
stru
ctur
e Deb
tBo
fA M
L Eur
o Si
ngle
A U
tiliti
es In
dex
EUR
4.3
%5.
4 %
6.4
%3.
6 %
Infra
stru
ctur
e Equ
ity–
EUR
6.0
%4.
0 %
0.0
%0.
0 %
Com
mod
ities
DJ U
BS C
omm
odity
TR
Inde
xhe
dged
in EU
R4.
5 %
17.7
%4.
9 %
17.4
%Vo
latil
ityris
klab
Varia
nce P
rem
ium
Trad
ing
Inde
xEU
R5.1
%5.
0 %
7.2 %
5.3
%He
dge F
unds
HFRI
Fund
of F
unds
Inde
xhe
dged
in EU
R4.
6 %
5.1 %
3.5
%5.
4 %
Priva
te Eq
uity
LPX5
0 TR
Inde
xEU
R10
.0 %
18.1
%–3
.0%
24.9
%Ca
shEU
R Lib
or 1
Mon
th T
R In
dex
EUR
1.5
%1.4
%2.
5 %
0.4
%
Appe
ndix
to a
rtic
le
Note
: We
use
the
riskl
ab V
aria
nce
Prem
ium
Tra
ding
Inde
x as
the
benc
hmar
k fo
r vol
atili
ty in
the
hist
oric
al a
naly
ses.
The
benc
hmar
k’s e
xpos
ure
to th
e vo
latil
ity ri
sk p
rem
ium
is
simila
r to
that
of t
he fo
rwar
d-lo
okin
g da
ta. W
e us
e th
e Bo
fA M
L EU
R Si
ngle
A U
tiliti
es In
dex
as th
e be
nchm
ark
for i
nfra
stru
ctur
e de
bt in
the
hist
oric
al a
naly
ses.
We
cons
ider
this
benc
hmar
k rep
rese
ntat
ive
albe
it ex
hibi
ting
a lo
wer
dur
atio
n th
an ty
pica
l for
the
asse
t cla
ss. T
he fo
rwar
d-lo
okin
g as
sum
ptio
ns a
re b
ased
on
expe
rt in
put f
or a
sam
ple
port
folio
of
EUR
seni
or d
ebt i
nves
tmen
ts in
to co
nstr
uctio
n an
d op
erat
iona
l pha
se o
f Pub
lic P
rivat
e Pa
rtne
rshi
ps, t
rans
port
conc
essio
ns an
d re
gula
ted
utili
ties (
Sour
ce: A
llian
zGI in
frast
ruct
ure
debt
team
). No
te al
so th
at re
turn
s are
stat
ed b
efor
e al
l fee
s, an
d th
at su
ch re
turn
s will
be
decr
ease
d by
asse
t man
agem
ent f
ees,
but i
ncre
ased
by c
omm
itmen
t and
fron
t-end
fees
pa
id d
irect
ly b
y th
e bo
rrow
er, t
he e
xpec
ted
net e
ffect
of s
uch
fees
is c
onsid
ered
to b
e ne
utra
l and
no
grea
ter t
han
± 0.
1%. T
here
are
no
repr
esen
tativ
e, c
omm
erci
ally
ava
ilabl
e be
nchm
arks
for i
nfra
stru
ctur
e eq
uity
as a
n as
set c
lass
. The
refo
re, w
e cu
rren
tly u
se ze
ro re
turn
s for
the
asse
t cla
ss in
the
hist
oric
al an
alys
es. T
he fo
rwar
d-lo
okin
g as
sum
ptio
ns ar
e ba
sed
on e
xper
t inp
ut fo
r a m
ixtu
re o
f 1/3
win
d en
ergy
and
2/3
sola
r ene
rgy
inve
stm
ents
(Sou
rce:
Alli
anzG
I inf
rast
ruct
ure
equi
ty te
am).
For c
onsis
tenc
y of
com
paris
on a
cros
s in
vest
men
t opp
ortu
nitie
s, in
frast
ruct
ure
debt
, infra
stru
ctur
e eq
uity
and
priv
ate
equi
ty re
turn
s hav
e be
en d
eriv
ed u
nder
the
assu
mpt
ion
of b
eing
alre
ady f
ully
inve
sted
from
the
begi
nnin
g, w
hen,
in fa
ct, a
mor
e gra
dual
accr
etio
n of
inve
stm
ent i
s like
ly. So
urce
: risk
lab,
Alli
anz G
loba
l Inve
stor
s, Pe
riod:
29/
02/2
000
to 31
/03/
2013
; The
hyp
othe
tical
per
form
ance
an
d sim
ulat
ions
show
n ar
e fo
r illu
stra
tive
purp
oses
onl
y and
do
not r
epre
sent
actu
al p
erfo
rman
ce; t
hey a
re n
ot a
relia
ble
indi
cato
r for
futu
re re
sults
.
2322
Nick
Sm
ith is
Man
agin
g Di
rect
or a
nd H
ead
of
Reta
il Sa
les
for E
urop
e ex
-Ger
man
y. Ni
ck jo
ined
Al
lianz
Glo
bal In
vest
ors i
n O
ctob
er 2
000
as H
ead
of
UK
Inst
itutio
nal
&
Reta
il M
arke
ting.
In
No
vem
ber 2
001
he a
ssum
ed th
e ro
le o
f Hea
d of
Re
tail
Sale
s &
Mar
ketin
g fo
r Al
lianz
GI (
UK).
In
Oct
ober
201
1 he
was
app
oint
ed H
ead
of R
etai
l Sa
les
for
Euro
pe
ex-G
erm
any
for
Allia
nzGI
Eu
rope
. Prio
r to
join
ing
Allia
nzGI
, Nick
was
Hea
d of
Mar
ketin
g fo
r In
vest
ec A
sset
Man
agem
ent,
and
prio
r to
that
he
was
Mar
ketin
g M
anag
er fo
r St
anda
rd
Char
tere
d’s
fund
m
anag
emen
t bu
sines
s. He
has
29
year
s of
fun
ds m
arke
ting
expe
rienc
e. H
e gr
adua
ted
from
Lon
don
Scho
ol
of Ec
onom
ics w
ith a
Law
Deg
ree
in 19
83.
Bren
dan
Llew
elly
n ha
s ove
r 30
year
s’ ex
perie
nce
in fi
nanc
ial se
rvice
s, an
d w
as m
arke
ting
dire
ctor
of
Scot
tish
Amica
ble
until
199
6. B
rend
an le
ctur
es o
n M
BA c
ours
es o
n a
rang
e of
sub
ject
s in
cludi
ng
inno
vatio
n, a
nd n
ow c
onsu
lts o
n st
rate
gy a
nd it
s re
latio
nshi
p w
ith ex
tern
al co
mm
unica
tions
. Clie
nts
inclu
de G
E Ca
pita
l, Nu
cleus
Fin
ancia
l, Ba
rclay
s W
ealth
, Llo
yd’s
of L
ondo
n, A
EGON
and
the
ABI
. Br
enda
n w
rites
a re
gular
colu
mn
for I
ncisi
ve M
edia
as
th
e Ar
mch
air
Criti
c co
verin
g in
vest
men
ts,
plat
form
s, di
strib
utio
n an
d m
arke
ting.
Allia
nzGI
Risk
mat
ters
Dr.
Wol
fgan
g M
ader
is D
irect
or a
nd H
ead
of
Asse
t Al
loca
tion
Stra
tegi
es a
t ris
klab
GmbH
/Al
lianz
GI G
loba
l Sol
utio
ns. B
efor
e jo
inin
g ris
klab
, Dr
. Mad
er w
as a
con
sulta
nt f
or in
sura
nce
and
inve
stm
ent a
dviso
ry c
ompa
nies
. He
also
wor
ked
as a
rese
arch
er an
d le
ctur
er at
the
Depa
rtm
ent o
f Ba
nkin
g an
d Fi
nanc
e at
th
e Un
iver
sity
of
Augs
burg
. Dr.
Mad
er c
ompl
eted
his
stud
ies
in
Busin
ess
Adm
inist
ratio
n at
the
Uni
vers
ity o
f Au
gsbu
rg. H
e re
ceiv
ed h
is Ph
.D. a
fter d
efen
ding
hi
s th
esis
on
“Hed
ge
Fund
s –
Alte
rnat
ive
Inve
stm
ent S
trate
gies
and
Por
tfolio
Mod
els”
. He
is a
frequ
ent
spea
ker
at c
onfe
renc
es o
n to
pics
re
late
d to
in
vest
men
t st
rate
gies
an
d ris
k m
anag
emen
t. He
is t
he e
dito
r of
the
Ger
man
ed
ition
s of t
he st
anda
rd te
xtbo
oks o
f Joh
n C.
Hul
l.
BiographiesBI
OGR
APHI
ES/
22 -
23
Bruc
e M
oss i
s the
foun
der a
nd st
rate
gy d
irect
or
of e
Valu
e, th
e UK
’s le
adin
g pr
ovid
er o
f ana
lysis
, fo
reca
stin
g an
d pl
anni
ng s
olut
ions
whi
ch h
ave
been
des
igne
d fo
r bo
th a
dvise
r an
d co
nsum
er
use,
and
inte
grat
e risk
pro
filin
g an
d in
-dep
th fu
nd
rese
arch
with
por
tfolio
revi
ew a
nd c
onst
ruct
ion
tool
s. Br
uce
was
at
the
fore
front
of
prod
uct
deve
lopm
ent
and
deliv
ery
as e
Valu
e’s o
nlin
e st
ocha
stic
adv
ice
syst
ems
cam
e to
be
used
by
finan
cial i
nstit
utio
ns, i
ndep
ende
nt a
dvise
rs a
nd
wor
kpla
ce e
mpl
oyee
s ac
ross
the
UK. A
fello
w o
f th
e In
stitu
te
of
Actu
arie
s, Br
uce
accr
ued
cons
ider
able
ex
perie
nce
as
a co
nsul
tant
on
pe
nsio
n an
d be
nefit
issu
es, w
hile
wor
king
clos
ely
with
a r
ange
of f
inan
cial s
ecto
r em
ploy
ers
as a
pa
rtne
r at T
ower
s W
atso
n. A
leng
thy
and
varie
d ca
reer
with
in th
e in
dust
ry h
as se
en h
im e
stab
lish
stro
ng
area
s of
re
leva
nt
expe
rtise
in
cludi
ng
finan
cial
pla
nnin
g, p
ensio
n an
d be
nefit
pro
duct
de
sign,
risk
asse
ssm
ent a
nd as
set c
onsu
lting
.
Havi
ng le
d de
velo
pmen
t at
eVa
lue
over
alm
ost
two
deca
des,
and
now
as
the
stra
tegy
dire
ctor
, Br
uce’s
vie
ws
on p
ensio
n an
d be
nefit
issu
es a
re
ofte
n so
ught
by a
rang
e of
med
ia p
ublic
atio
ns, a
s w
ell a
s on
tele
visio
n an
d ra
dio.
Dr. C
hris
tian
Schm
itt is
Man
agin
g Di
rect
or a
nd
head
of
Asse
t Lia
bilit
y M
anag
emen
t at
risk
lab/
Allia
nzGI
Glo
bal S
olut
ions
. Bef
ore
join
ing
riskl
ab
in 2
002
as H
ead
of P
ortfo
lio A
naly
tics h
e w
orke
d fo
r Deu
tsch
e Ban
k AG
as C
hief
Mar
ket R
isk O
ffice
r an
d Vi
ce P
resid
ent
Risk
Man
agem
ent
Serv
ices
. Dr
. Chr
istia
n Sc
hmitt
hol
ds a
deg
ree
in b
usin
ess
engi
neer
ing
from
Kar
lsruh
e Te
chni
cal U
nive
rsity
. Af
ter u
nive
rsity
, he
wor
ked
as a
n as
socia
te a
t the
Ce
ntre
fo
r Eu
rope
an
Econ
omic
Rese
arch
(Z
entru
m fü
r Eur
opäi
sche
Wirt
scha
ftsfo
rsch
ung,
ZE
W)
and
com
plet
ed h
is Ph
D at
Man
nhei
m
Univ
ersit
y. Dr
. Ch
ristia
n Sc
hmitt
is
a CF
A Ch
arte
rhol
der,
and
lect
ures
on
asse
t lia
bilit
y m
anag
emen
t in
th
e Ce
rtifi
ed
Inte
rnat
iona
l In
vest
men
t An
alys
t (C
IIA)
prog
ram
me
of t
he
Germ
an A
ssoc
iatio
n fo
r Fi
nanc
ial A
naly
sis a
nd
Asse
t M
anag
emen
t (D
VFA
– De
utsc
he
Vere
inig
ung
für
Fina
nzan
alys
e un
d As
set
Man
agem
ent).
Disc
laim
er
riskl
ab is
not
lice
nsed
to c
ondu
ct b
usin
ess o
utsid
e of
Ger
man
y an
d is
not r
egist
ered
with
the
Unite
d St
ates
Se
curit
ies a
nd E
xcha
nge
Com
miss
ion
or an
y reg
ulat
ory a
utho
rity i
n As
ia P
acifi
c.
Inve
stin
g in
volv
es ri
sk. T
he va
lue o
f an
inve
stm
ent a
nd th
e inc
ome f
rom
it w
ill fl
uctu
ate a
nd in
vest
ors m
ay n
ot
get b
ack t
he p
rinci
pal in
vest
ed. P
ast p
erfo
rman
ce is
not
indi
cativ
e of
futu
re p
erfo
rman
ce. T
his i
s a m
arke
ting
com
mun
icat
ion.
It is
for i
nfor
mat
iona
l pur
pose
s onl
y. Th
is do
cum
ent d
oes n
ot c
onst
itute
inve
stm
ent a
dvic
e or
a re
com
men
datio
n to
buy
, sel
l or h
old
any s
ecur
ity an
d sh
all n
ot b
e de
emed
an o
ffer t
o se
ll or a
solic
itatio
n of
an o
ffer t
o bu
y any
secu
rity.
The
hypo
thet
ical
per
form
ance
and
sim
ulat
ions
show
n ar
e fo
r illu
stra
tive
purp
oses
onl
y and
do
not r
epre
sent
ac
tual
per
form
ance
; the
y ar
e no
t a r
elia
ble
indi
cato
r for
futu
re r
esul
ts. B
ack-
test
ings
and
hyp
othe
tical
or
simul
ated
per
form
ance
dat
a has
man
y inh
eren
t lim
itatio
ns o
nly s
ome
of w
hich
are
desc
ribed
as fo
llow
s:
(i) It
is d
esig
ned
with
the
bene
fit o
f hin
dsig
ht, b
ased
on
hist
oric
al d
ata,
and
doe
s not
refle
ct th
e im
pact
that
ce
rtai
n ec
onom
ic a
nd m
arke
t fac
tors
mig
ht h
ave
had
on th
e de
cisio
n-m
akin
g pr
oces
s, if
a cl
ient
’s po
rtfo
lio
had
actu
ally
bee
n m
anag
ed. N
o ba
ck-te
stin
gs, h
ypot
hetic
al o
r sim
ulat
ed p
erfo
rman
ce c
an c
ompl
etel
y ac
coun
t for
the
impa
ct o
f fin
anci
al ri
sk in
actu
al p
erfo
rman
ce.
(ii) I
t doe
s not
refle
ct ac
tual
tran
sact
ions
and
cann
ot ac
cura
tely
acco
unt f
or th
e ab
ility t
o w
ithst
and
loss
es.
(iii)
The
info
rmat
ion
is ba
sed,
in p
art,
on h
ypot
hetic
al as
sum
ptio
ns m
ade f
or m
odel
ing
purp
oses
that
may
not
be
real
ized
in th
e ac
tual
man
agem
ent o
f por
tfolio
s.
No r
epre
sent
atio
n or
war
rant
y is
mad
e as
to
the
reas
onab
lene
ss o
f th
e as
sum
ptio
ns m
ade
or t
hat
all
assu
mpt
ions
use
d in
ach
ievi
ng th
e re
turn
s hav
e be
en st
ated
or f
ully
con
sider
ed. A
ssum
ptio
n ch
ange
s may
ha
ve a
mat
eria
l impa
ct o
n th
e m
odel
retu
rns p
rese
nted
. The
bac
k-te
stin
g of
per
form
ance
diff
ers f
rom
act
ual
port
folio
per
form
ance
bec
ause
the
inve
stm
ent s
trate
gy m
ay b
e ad
just
ed at
any t
ime,
for a
ny re
ason
.
Inve
stor
s sho
uld
not a
ssum
e tha
t the
y will
expe
rienc
e a p
erfo
rman
ce si
mila
r to t
he b
ack-
test
ings
, hyp
othe
tical
or
sim
ulat
ed p
erfo
rman
ce s
how
n. M
ater
ial d
iffer
ence
s be
twee
n ba
ck-te
stin
gs, h
ypot
hetic
al o
r sim
ulat
ed
perfo
rman
ce re
sults
and
actu
al re
sults
subs
eque
ntly
achi
eved
by a
ny in
vest
men
t stra
tegy
are
poss
ible
.
The
view
s and
opi
nion
s exp
ress
ed h
erei
n, w
hich
are
subj
ect t
o ch
ange
with
out n
otic
e, ar
e th
ose
of th
e iss
uer
or it
s af
filia
ted
com
pani
es a
t the
tim
e of
pub
licat
ion.
Cer
tain
dat
a us
ed a
re d
eriv
ed fr
om v
ario
us s
ourc
es
belie
ved
to b
e re
liabl
e, b
ut th
e ac
cura
cy o
r com
plet
enes
s of
the
data
is n
ot g
uara
ntee
d an
d no
liab
ility
is
assu
med
for a
ny d
irect
or c
onse
quen
tial lo
sses
arisi
ng fr
om th
eir u
se. T
he d
uplic
atio
n, p
ublic
atio
n, e
xtra
ctio
n or
tran
smiss
ion
of th
e co
nten
ts, ir
resp
ectiv
e of
the
form
, is n
ot p
erm
itted
.
This
mat
eria
l has
not
bee
n re
view
ed b
y an
y re
gula
tory
aut
horit
ies.
In m
ainl
and
Chin
a, it
is u
sed
only
as
supp
ortin
g m
ater
ial t
o th
e of
fsho
re in
vest
men
t pro
duct
s offe
red
by c
omm
erci
al b
anks
und
er th
e Q
ualif
ied
Dom
estic
Inst
itutio
nal In
vest
ors s
chem
e pu
rsua
nt to
appl
icab
le ru
les a
nd re
gula
tions
.
This
docu
men
t is
bein
g di
strib
uted
by
the
follo
win
g Al
lianz
Glo
bal I
nves
tors
com
pani
es: A
llian
z Gl
obal
In
vest
ors U
S LL
C, a
n in
vest
men
t adv
iser r
egist
ered
with
the
US S
ecur
ities
and
Exc
hang
e Co
mm
issio
n (S
EC);
Allia
nz G
loba
l Inv
esto
rs E
urop
e Gm
bH, a
n in
vest
men
t co
mpa
ny in
Ger
man
y, au
thor
ized
by t
he G
erm
an
Bund
esan
stal
t fur
Fina
nzdi
enst
leist
ungs
aufs
icht
(BaF
in);
RCM
(UK)
Ltd.
, whi
ch is
auth
orize
d an
d re
gula
ted
by
the
Fina
ncia
l Ser
vice
s Aut
horit
y in
the
UK; A
llianz
Glo
bal I
nves
tors
Hon
g Ko
ng L
td. a
nd R
CM A
sia P
acifi
c Lt
d.,
licen
sed
by t
he H
ong
Kong
Sec
uriti
es a
nd F
utur
es C
omm
issio
n; A
llian
z Gl
obal
Inve
stor
s Si
ngap
ore
Ltd.
, re
gula
ted
by t
he M
onet
ary
Auth
ority
of
Sing
apor
e [C
ompa
ny R
egist
ratio
n No
. 199
9071
69Z]
; and
Allia
nz
Glob
al In
vest
ors
Japa
n Co
., Lt
d., r
egist
ered
in Ja
pan
as a
Fin
anci
al In
stru
men
ts B
usin
ess
Ope
rato
r; Al
lianz
Gl
obal
Inve
stor
s Kor
ea Lt
d., li
cens
ed b
y the
Kor
ea Fi
nanc
ial S
ervi
ces C
omm
issio
n; an
d Al
lianz
Glo
bal In
vest
ors
Taiw
an Lt
d., li
cens
ed b
y Fin
anci
al Su
perv
isory
Com
miss
ion
in Ta
iwan
.
For y
our f
ree
subs
crip
tion
to
Risk
mat
ters
mag
azin
e em
ail:
inve
stor
.ser
vice
s@al
lianz
gi.c
o.uk
