Nikko AM Pulse

Q1 2013 Quarterly Comment from the Investment Team of Nikko AMs World Series Fund Platform.

In response to client feedback we have altered this comment from the Investment Team of Nikko AMs World Series Fund Platform to be a quarterly newsletter. This enables us to better discern trends in investor demand, both from our standpoint as fund providers as well as market observers. The slightly longer period of comment also gives us a chance to monitor longer term shifts in market direction and sentiment. The newsletter is now in two sections the first covers recent market performance, dynamics and manager performance which are observations gleaned from our insights as advisors to a range of investors, therefore capture our view of the environment faced by investors today. The second section contains our own insights on the pattern of investor demand, including direct feedback from our main distributor and client bases. This section may be of interest to investors and fund providers alike. The World Series Fund Platform of Nikko AM provides specialist investment solutions to a range of institutional and retail clients in Japan, Australia and throughout Asia. Totalling over $27 bn in AUM it represents a diverse range of strategies and third party managers, and is continuously evolving to cater to client demand. Please contact us at the details printed at the end of this letter to learn more about our product range.

quarter). Investors shrugged off the passing of the fiscal cliff deadline in the US, and were equally nonplussed as the US failed to avoid sequestration. An abundance of positive data and indicators lead to a surge in liquidity as well as a dampening of volatility, in continuation of a multi-year trend. Volatility only spiked once during the quarter, in a midFebruary wobble caused by the nearing of the sequester deadline in the US, as well as ubiquitous reminders (in France, the UK and Italy) of the structural problems in Europe. The Cypriot surprise bank levy of mid-March spooked markets keen to shake off the cloak of austerity, but did not entirely derail them. In the US equity markets were further boosted by a pickup in corporate activity. February was the strongest month for LBO activity since July 2007, with over $55 bn in transactions, while a series of going private transactions (e.g. Dell) and shareholder activism (Apple) coincided with a pickup in buyback activity, with buyback announcements hitting their highest level in 20 months in February. This trend is likely to lead to higher dividend payouts, which bodes well for those investors that have poured into high dividend funds of every description. In April, the tragic events in Boston have re-introduced a sense of jitters as was witnessed by the brief market dip in response to a rogue (hacked) tweet on April 23. The S&P fell 0.8%, only to recover minutes later, while the VIX spike from 13.6% to a high of 14.8%, which was also reversed minutes later. Elsewhere, Japans star continued to shine over the quarter, and was given a further boost by the monetary revolution put in place by the new governor of the BoJ in early April. Markets there rose 7.9% in March alone (Nikkei), bringing the quarters return to 20.1%. This was followed by a 2.2% spike in the day following the BoJ announcement. Asian markets were sluggish, leading them to underperform developed markets again in what has been an extended 27 month streak (the Hang Seng

Market update: A quarter of tempered optimism, a Cypriot surprise, a tech rout, and gold failing to glitter
It is said that the month of March comes in like a lion and out like a lamb, but this might equally have applied to the entire first quarter of 2013. An ebullient month of January was characterised by a surge in demand for equities, and global markets roared (the S&P 500 rose 5.2% in January and 10.6% for the quarter, while the FTSE 100 rose 6.5% in January and 10% for the
This information is for professional investors only. Not for redistribution. For more information, visit http://en.nikkoam.com/worldseriesfundplatform

Nikko AM Pulse
Q1 2013
and the Shanghai Composite lost 1.2% and 1.4%, respectively, in the quarter). A mid-February lull for the lunar New Year stalled a lack lustre quarter in which concerns focused on the impact of tightening measures in China and the trickle down impact on real estate valuations. Persistent tensions in the Korean peninsula, as well as a growing scepticism towards tech stocks did little to shore up sentiment elsewhere. Growth remained under the microscope, which caused a deterioration in the momentum for commodities. Precious metals in particular saw precipitous price declines from February on, and the gold spot price lost 4.6% over the quarter, followed by a significant fall in mid-April, leading some commentators to speculate that 2013 will mark the first year the metal posts negative annual returns since 2000. Manager performance Hedge funds as a whole performed strongly in January, although in February and March returns were more muted. Long/short equity funds performed strongly sector (the HFRX Equity Hedge was up 5.14% for the quarter) while relative value and event driven strategies were both strong (the HFRX Special Situations Index outperformed other sectors, returning 7.36% for the quarter). Credit strategies continued to eke out compelling returns, despite the regular clamour for an end to the bubble. CTAs struggled with the trend reversal in mid-February, and along with global macro managers were the laggards of the sector. Fixed income as an asset class was underpinned by strong technicals as inflows into EMD and high yield and corporate bond funds continued. Safe haven asset such as government bonds saw losses in January with some reversal in February, although the ongoing strength in the government bond sector suggests that the desire for safety remains strong. Returns in fixed income trailed equities throughout the quarter, with the brightest spots in high yield debt, and corporate debt the most disappointing

In our last letter we mentioned Nikko AMs own experience in raising a fund focused on US economic revival the fund was hugely popular among Japanese retail investors and raised $2.5 bn in its first week of launch. In March, US equity funds attracted $4.9 bn in the first week, which is the most inflows in over a month, continuing a strong technical trend that has been in place since the start of the year. In our engagement with clients we have seen strong demand for income based products in particular so called flexible income solutions solutions that have an open mandate to allocate between fixed income and equity and can be essentially opportunistic in order to seek the best risk/reward solution. The search for income has extended to MLPs as a play on the energy and resource sector that has seen seismic shifts in demand as the energy independence theme continues to run in the US. The uncertainty regarding the tax treatment of such investments for non-US investors does not seem to have affected this surging interest. The decline of gold in recent months has created somewhat of a quandary for investors. The use of the metal as a hedge against monetary debasement seems to be established, but previous physical hoarding and potential liquidation of ETFs present real technical headwinds. Inflation also seems to ebb and flow as a concern, and the recent spread widening in US Tips (in mid-April the US 10 Year TIPS breakeven rate had its largest daily fall since November 2011, dropping -9 bps to 2.27%) suggests that fear of inflation has become less acute as commodity prices have fallen and macro data appears softer.

As always we welcome your comments and feedback.

Demand Dynamics: A quarter of great rotation and muted inflation concerns

The quarter started with chatter of a pending great rotation into equities as investors would seek to remedy underweight positions that arose from an abundance of caution in the fourth quarter of last year. The ongoing spread compression and weak outlook for fixed income has further supported this.
This information is for professional investors only. Not for redistribution. For more information, visit http://en.nikkoam.com/worldseriesfundplatform

The Investment Team Nikko AM World Series Fund Platform April 2013

Nikko AM Pulse
Q1 2013

Further Information Fund Managers

If you are a fund manager that can add value with specialist expertise in strategies which Nikko AM does not have inhouse, please contact us we may be interested in appointing you as sub-advisor to a new product launch for our 300 intermediaries across Asia.

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

E: worldseriesfundplatform-managers@nikkoam.com

E: worldseriesfundplatform-distributors@nikkoam.com

Important Information

Distributors

This document is for information purposes only and is not intended to be an offer, or a solicitation of an offer, to buy or sell any investments and should not be regarded as investment advice. In making any investment decision, prospective investors must rely on their own examination of the merits and risks involved. This document has been prepared and issued by Nikko Asset Management Europe (Nikko AME), on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst reasonable care has been taken to ensure that the information is accurate and any assumptions made or simulations used are fair and reasonable, neither Nikko AME, nor any director, officer or employee thereof, shall in any way make guarantee, representation or warranty of and be responsible for the accuracy or completeness of this document. Any opinions expressed in this document may be subject to change without notice. Nikko AME is authorised and regulated by the Financial Services Authority and is registered in England No. 1803699. Registered address: 1 London Wall, London, EC2Y 5AD.

Investors
If you are an institutional investor and looking for investment research, insights or solutions including single manager and multi-manager offerings across a range of investment types, please contact us about our world-wide third party fund manager research and product range.

E: worldseriesfundplatform-distributors@nikkoam.com

This information is for professional investors only. Not for redistribution. For more information, visit http://en.nikkoam.com/worldseriesfundplatform