21st century thinking on portable alpha

1
21st century thinkingon portable alpha

• James Gruver
• BNY Mellon Asset Management

2
The benefits of a multi-boutiqueasset management
approach
Boutique
Large manager

• Growth in sales, revenues, profits key priority
• Constantly looking to satisfy new client demand
• Greater depth of resources devoted to oversight
• Lack of ownership culture
• More layers of management

• Focused
• Small numbers of accountable individuals
• Accessible senior staff
• Purity of culture
• Scarce resources in systems, risk management,
  compliance
• Vulnerability to key person risk

BNY Mellon Asset Management the best of both
approaches

• BNY Mellon Asset Management
• Strikes the balance between economies of scale in
  distribution and infrastructure and diseconomies
  in investment manufacturing
• Encapsulates the focus on alpha generation and
  entrepreneurial culture of a boutique within a
  robust corporate framework

3
Specialist asset managers

• Depth and breadth in every sector and asset class

Active fundamental equity manager core, growth
value stylesA90.0bn
1
Fundamentally-based global quantitative
strategiesA225.4bn
Fund of hedge funds manager specialising in event
driven and relative value strategies A1.7bn
Active stock and bond selection within a global
frameworkA90.0bn
Specialists in currency and risk
managementA69.4bn
Investors in, and managers of, public, private,
global and US only real estate investment
strategies A3.7bn
Classical, fundamental long term global equity
investment management A39.0bn
Specialist fixed income and absolute return
manager A187.6bn
Active manager with structured investment
processes, focused on European and Emerging
Markets A60.7bn
3
Total AUM A1.3 trillion4
Source The Bank of New York Mellon Corporation
as at 2 July 2007. All references to AUM (which
are approximate) reflect the pro forma combined
AUM of both entities, based on the merger of
Mellon Financial Corporation and The Bank of New
York Company, Inc., which merged into a newly
created entity, The Bank of New York Mellon
Corporation on 1 Jul 2007. Franklin Portfolio
Associates has no affiliation to the Franklin
Templeton Group of Funds or Franklin Resources,
Inc. 1The Bank of New York Mellon corporation
holds 80 of the parent of Alcentra Inc. and
Alcentra Ltd. 2Mellon owns a minority interest.
35050 joint venture between WestLB and The Bank
of New York Mellon Corporation. Mellon Global
Investments distributes the capabilities of the
15 asset managers outline above.4 Total AUM of
US1.1T also includes the asset managers outlined
above as well as those of BNY Asset Management,
BNY Overlay Associates, The Dreyfus Corporation,
Estabrook Capital Management, LLC, Gannett Welsh
Kotler, LLC, Mellon Private Asset Management,
and external data. However, as at 2 Jul 2007
total AUM no longer includes the value of
securities lending.
4
Mellon Capital Management Over 30 years of
innovation
Our investment professionals are recognised for
their significantcontributions to the progress
of quantitative investment management
5
Mellon Capital A leader in global asset
allocation (global alpha)

Assets (US billions)
Total firm assets US174.9 bn
Source Mellon Capital as at 31 Dec 2006 Past
performance is not indicative of future
performance Includes US22.4 billion in
absolute return assets 6 clients have both
U.S. and global asset allocation accounts
6
Alpha what is it all about?

• Beta
• A measure of the sensitivity of a funds return
  to the changes in the benchmarks return
• Refers to market exposure

• Alpha
• Refers to value added
• A measure of manager skill
• You pay an active manager for alpha
• Pure alpha is uncorrelated to market returns

Alpha (sum of the fund returns) (beta of
fund)(sum of market returns) number of
observations
7
Traditional approach to portfolio construction

• Strategic allocation of assets and styles
• 100 asset / style allocation
• Returns are a combination of beta and alpha

100 asset/style allocation
Beta alpha combined
Beta alpha combined
8
21st century thinking on portable alpha

• Next generation separation of market exposure
  (beta) from selection skill (alpha)
• More control over return attribution and risk
  budgeting
• No disruption to manager structure or strategic
  asset allocation
• Total return benchmark return uncorrelated
  alpha return

100 beta allocation
100 alpha allocation

Portability
60 MSCI World / 40 Citigroup WGBI
Uncorrelated source of alpha
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Why invest globally?

• No country consistently outperforms
• Although markets may be highly correlated, there
  is still opportunity to add value

Source Mellon Capital Management, Unhedged
Returns in USD
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Mellon Capitals Global Alpha what is it?
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Mellon Capitals Global Alpha strategy

• Exploiting relative valuation opportunities
  across global markets
• Mellon Capital believe
• Mispricings within and across markets can be
  systematicallyidentified and exploited
• Long-term valuation relationships drive asset
  pricing
• Changes in investor sentiment and structural
  factors createexploitable investment
  opportunities due to the misalignment
  ofobjectives between local investors, central
  banks and non profit entities
• Mellon Capital seek investment opportunities
  which will mean-revert
• Use quantitative structural economic models, no
  price momentum models

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Identifying relative valuation opportunities

• Multiple diverse sources of alpha across global
  currency, equity and fixed interest markets- look
  for breadth in decisions- must have good
  information
• Uses only the highest quality of data from the
  most liquid markets no emerging markets, no
  commodities
• Alpha that is identified is not lost in
  transactions costs

Efficient, liquid and transparent markets
EURO ZONE
EURO
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Low correlation with otherstrategies and major
indices

• Mellon Global Alpha component correlation
  coefficients with major indices (Mar 89 Mar
  07)

Alpha generated has low correlation with market
returns
Source Mellon Capital ManagementCalculation
for the Mellon Global Alpha Trust
14
Correlation between strategies
(Mar 89 Mar 07)
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Bringing it all together -Mellon Capitals
active risk budgeting process
12 cross-country equity signals
6 cross-country bond signals

• Active risk budgeting process
• Dynamic risk budgeting allocates to superior
  expected alpha sources
• Multi-dimensional risk process ensures portfolio
  diversification

10 stockvs. bond signals
11 currency signals
AdvanceGlobal AlphaFund
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Risk management must be multi dimensional
17
Advance Global Alpha Fund

• Key facts
• A long-short equity, bond currency fund
• Inception 28 Sept 2005
• Australian-domiciled trust
• Daily pricing cash flows
• 10 alpha target (goal return above benchmark)
• Benchmark 60 MSCI World / 40 WGBI
• A 367.2 million as at 30 September 2007

The Advance Global Alpha Fund is issued by
Advance Asset Management Limited ABN 98 002 538
329 AFSL 240902. A Product Disclosure Statement
(PDS) for the Fund is available at
advance.com.au, via 1800 819 935 or from your
financial adviser. You should consider the PDS
before deciding whether to acquire, continue to
hold or dispose of interests in the Fund.
18
Performance
Advance Global Alpha Fund (as at 30 September
2007)
Past performance is not a guarantee of future
performance Benchmark 60 Morgan Stanley Capital
International World Equity Index unhedged (MSCI
World) and 40 Citigroup World Government Bond
Index currency hedged (Citigroup Index). The
Advance Global Alpha Fund is issued by Advance
Asset Management Limited ABN 98 002 538 329 AFSL
240902. A Product Disclosure Statement (PDS) for
the Fund is available at advance.com.au, via 1800
819 935 or from your financial adviser. You
should consider the PDS before deciding whether
to acquire, continue to hold or dispose of
interests in the Fund.
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Sub-prime and Global Alpha

• Global Alpha generally doesnt hold individual
  stocks or debt tranches
• So no direct impact
• Short-term returns can be influenced if
  long-short macro exposures are impacted by other
  markets responses to sub-prime
• Markets responses to sub-prime could result in
  higher correlations and higher volatility

20
Summary 21st century thinking on using portable
alpha

• Diversification Low correlation with other
  strategies and major indices positions fund to
  add value rather than diworsifying
• Experience Mellon Capital has over 30 years of
  innovation and 17 years managing global alpha
  strategies
• Performance The Global Alpha strategy has a
  proven track record and strategy that rewards
  clients over the long term

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Important information

• The information provided within is for use by
  professional investors.
• Advance Asset Management Limited (Advance) ABN 98
  002 538 329 AFSL No.240902 is the responsible
  entity and the issue of units in the funs which
  are parts or the Advance Alliance Investment
  Suite wholesale untis. A Product Disclosure
  Statement (PDS) for the relevant fund is
  available at advance.com.au, via1800 819 935 or
  from your financial adviser. Investors should
  consider the PDS before deciding whether to
  acquire, continue to hold or dispose of interest
  in the fund.
• This presentation consists of three parts. The
  first two parts have being prepared by Mellon
  Capital Management and the last part being
  prepared by St.George Investment Solutions
  (SGIS). SGIS is a division of St.George Bank
  Limited (ABN 92 055 513 070) and operates under
  the financial services license of St.George Bank
  Limited, AFSL NO. 240997. All information
  relating to Mellon Capitals Management for
  presentation by BNY Mellon Asset Management.
  Mellon Capital Management Corporation and BNY
  Mellon Asset Management are both ultimately owned
  by The Bank of New York, Mellon Corporation.
• Any views and options in the presentation are
  those of SGIS and/or Mellon Capital Management
  and are not intended to be construed as
  investment advise. This presentation has been
  prepared for general information only and does
  not take into account a persons investment
  objectives, financial situation or needs.
  Investors should therefore consider whether the
  information is appropriate to them, having regard
  to these factors.
• Past performance is not indicative of future
  performance. Investments are subject to risk and
  there is no guarantee that the investment
  objectives will be achieved. The value of
  investment and the income from them can fall as
  well as rise and investors may not get back the
  full amount originally invested. Estimates of
  GDP, CPI, income and capital growth projection
  rates etc, are based on assessment of current and
  likely future economic conditions, as well as
  investment managers past and likely future
  performance. Such figures are purely estimates
  and may vary with changing circumstances.
  Hypothetical or simulated performance results do
  not represent actual trading results/returns. No
  representation is being made that any investment
  will or is likely to achieve profits similar to
  the ones in the presentation.
• Material contained in this presentation is a
  summary only and is based on information believed
  to be reliable and received from sources within
  the market. The opinions contained in this
  presentation are and must be construed solely as
  statements of opinion and not statements of fact
  or recommendations to purchase, sell or hold any
  securities. It is not the intention of SGIS that
  this presentation be used as the primary source
  of the participants/audiences information but as
  an adjunct to their own resources and training.
  No representation is given, warranty made or
  responsibility taken as to the accuracy,
  timeliness or completeness of any information or
  recommendation contained in this presentation and
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  e in contract or tort (including for negligence)
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