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db-X funds Deutsche Bank

Smart Beta : an alternative for your portfolio

November 2012

This document is for institutional investors only, and not for retail distribution

Table of contents

1

1. db-X funds

2. The emergence of “Smart Beta”

3. Risk Factors: a new portfolio construction paradigm?

4. Contacts

Slides

2 - 5

6 - 9

10 - 28

29 - 32



1. db-X funds

Funds made by Deutsche Bank


db-X funds


3 3

The db-X funds product range comprises 70 funds with AuM of EUR 9.26 Billion(1). Most of our funds are UCITS compliant and offer access to DB’s unique proprietary systematic strategies or to the management of highly regarded external asset managers. Our team also has a wealth of expertise in developing tailor-made, cost efficient solutions in order to support investors in achieving their specific requirements.

db-X funds was established in May 2002 as part of Deutsche Bank’s Markets division and is responsible for developing mutual funds investing in the full range of asset classes. The Markets division of the Corporate and Investment Bank is responsible for the origination, sale, structuring and trading of fixed income, equity, commodity, currency, derivative and enhanced cash products, establishing itself as a global leader in these products by combining its unique distribution franchise with its pricing, structuring and execution expertise.

UCITS has established itself as a quality label among retail and institutional investors, in terms of fund management, risk control and investment diversification. We believe that it is vital for independent companies to be involved in all areas of fund operations such as fund management, custody, fund administration and audit to ensure that funds are operated and risk-managed properly. We only work with globally recognised service providers in custody, fund administration and audit.

(1) Source: Deutsche Bank, as of 31 October 2012


db-X funds

Deutsche Bank

4

EUR 9.26 Bio Assets under Management(1)

Equity 33.18%

Alternative 26.50%

Fixed Income 18.22%

Commodities 16.12%

Multi Assets 4.40%

Currency 1.26%

Credit 0.32%

(1) Source: Deutsche Bank, As of 31 October 2012


Broad range of funds to meet investor demands

db-X funds awards

5

Awards

2012 1st HFMWeek 2012 Fund Award: Best UCITS Equity Fund CROCI Sectors Fund

1st UCITS Hedge Awards 2012: Best performing Commodity Fund Hermes Absolute Return Commodity Fund

1st The Hedge Fund Journal Awards 2012 The Leading UCITS Hedge Funds Platform

1st Structured Fund House of the Year Structured Product European Awards 2012

2011 1st UCITS HFS Index Awards 2011: Best Global Macro/CTA Fund dbX Systematic Alpha Index Fund

1st The Hedge Fund Journal Awards 2011 The Leading UCITS Hedge Funds Platform

1st World Finance HF Awards: Best Long Short Equity Fund CROCI Global 130/30

2nd Alternative Investments Award PWM CROCI Multi

2010 1st Geld-Magazin: Alternative Investments Award

(Hedge Funds with a Volatility of up to 5% Category) Dynamic Alternative Portfolio

1st Lipper Fund Awards: Austria Equity Group Large Best Fund Group (3 years)

1st Lipper Fund Awards: Germany Equity Group Large Best Fund Group (3 years)

1st Lipper Fund Awards: Luxembourg Equity Group Large Best Fund Group (3 years)

Past Performance is not a reliable indicator of future returns.



2. The emergence of “Smart Beta”

November 2012


db-X funds

Deutsche Bank

Smart Beta encompass 3 types of strategies

— Factor portfolios, i.e. where the intention is to exploit factors such as momentum, value,

growth and leverage, etc.

— Rules-based strategies, which, as the name suggests, are based on a subset of an overall

market or a reweighting of the broad market.

— Strategy Beta, which concentrates more on broader portfolio construction than characteristics.

An example is the currently popular strategy that aims to capture the efficacy of low-volatility

shares

7

Active Funds

Alpha

Alpha Alternatives

Beta

Factor Beta Factor Beta

Regional Beta

Country Beta

Sector Beta

Strategy Beta

ETFs

1970s 1980s 1990s 2000s

Smart

Beta


Industry evolution: emergence of “Smart Beta”

db-X funds

Deutsche Bank

Results from Northern Trust institutional survey (as of June 2012)

— Northern Trust engaged Greenwich Associates to interview 121 institutional investors,

41 of which were in Europe.

— “Passive investment products” are “increasingly important tools”:

— Approximately one-third of respondents say passive products make up more than 40%

their assets, and a sizeable number expect to increase allocations.

— Approximately 45% of institutions in Europe report that passive funds represent more than

40% of equity and fixed income assets, and approximately 57 % expect to cross that

threshold in the next three years.

— Nonetheless, traditional indexing has shown some limits :

— As institutions ramp up their use of passive strategies, they have begun to examine

benchmark construction and 37 % describe themselves as “concerned” or “very

concerned” that the standard construction of cap-weighted indices may affect achieving

their goals.

— Globally, 63 % of participating institutions say that known benchmark inefficiencies should

be addressed and removed, a figure that jumps to 78% in Europe.

8

Source : Northern Trust, Invesment & Pensions Europe


Why do investors look for smart beta?

db-X funds

Deutsche Bank

9


Smart Beta and Risk Factors : growing recognition The Smart Beta and Risk Factors investment themes are becoming high profile, with significant press coverage


3. Risk Factors : a new portfolio construction paradigm?

November 2012


db-X funds

Deutsche Bank

— Investors are increasingly aware of the need to diversify away from traditional risk

premia.

— Traditional portfolios of equities and bonds are dominated by equity risk in times of

market stress.

— Even endowments models (e.g. the “Yale Model”) of seeking diversification through

allocation to alternative assets proved ineffective during the most recent financial

crisis.

— Is true diversification fundamentally unachievable?

— Gradually, a new paradigm is emerging – diversification through investment in risk

factors :

— Old ideas, applied in new ways

— Capturing liquid, uncorrelated sources of return

— Simple, logical and well documented strategies

— Portfolios constructed to maximise diversification benefits.

— Some of the world’s most sophisticated and cost-sensitive investors are leading the

way.

11


A Risk Factor approach to portfolio construction Motivation

db-X funds

Deutsche Bank

Risk Factors approach : a high profile theme The first movers

11/26/2012 10:53:15 AM 2010 DB Blue template

12

Norges Bank Investment

Management, manager of the

Norwegian state oil fund

Began a study of portfolio

returns in 2008, following

equity market losses –

identified systematic risk

premia as a meaningful

diversifier to its large equity

beta portfolio

In the process of

implementing risk factor

approach across multiple

factors

AP2, one of the Swedish

state pension funds

Identified systematic risk

premia as underlying of many

hedge funds – manager were

generating alternative beta

rather than alpha

AP2 is now implementing risk

premia investments as a

transparent, liquid, alternative

to hedge funds, and a

diversifier to equities

PKA pension, a large Danish

occupational pension fund

manager

Implementing a strategic

overhaul of its entire

investment strategy

Unwinding all traditional

external equity mandates, in

favor of a highly diversified

portfolio of risk premia

investments

Several large European institutions have launched high profile initiatives to re-shape their portfolio allocation to

benefit from risk factors returns.


db-X funds

Deutsche Bank

What do we mean by Risk Factors? A few tentative definitions


13

Others represent

systematic investment in

assets with certain

characteristics, or trading of

related investment to

capture relative value :

Equity investment

strategies such as Value,

Size and Momentum.

Convertible arbitrage,

merger arbitrage strategies

Implied/realized volatility

strategies.

Carry strategies like FX

carry and Rates term

structure carry.

Some Risk Factors

represent simple exposure

to the excess return of an

asset class.

Among these:

The Equity risk premium,

The Credit risk premium

A premium generated for

taking a certain type of

return

Persistent source of return

that can be accessed

systematically, also referred

to as risk premium or

alternative beta


db-X funds

Deutsche Bank

Alternative assets, hedge funds: The traditional access to risk premia


14

Hedge Fund risk premia strategies Historical performances

0

100

200

300

400

500

600

Dec-93 Feb-97 Apr-00 Jun-03 Aug-06 Oct-09

S&P 500 Total Return

DJ Credit Suisse Hedge Fund Index

JPM Global Aggregate Bond Index

Source: Deutsche Bank, Bloomberg, based on historical data from 12/31/1993 to

30/11/2012

Past returns is no guarantee of future performances.

The following strategies are fundamentally

aiming to access specific risk premia.

— Merger arbitrage

— Volatility trading

— Convertible arbitrage

— Index arbitrage

While a fund manager’s expertise may enable

to achieve superior risk adjusted returns, a

significant part of the performance of these

strategies is often due to an exposure to a

alternative risk premium.


db-X funds

Deutsche Bank

— Market Beta: some hedge fund strategies are inherently correlated to the market,

while others have shown reduced diversification benefits in times of market stress.

— Cost: the traditional 2/20 fee model is a significant premium for access.

— Illiquidity: most hedge funds have limited liquidity or gating arrangements.

— Transparency: frequent lack of transparency which exposes investors to style drift,

potentially leading to concentration risks.

— While UCITS rules are a clear step toward increased liquidity and transparency,

hedge funds still can be realistically only a relatively small part of an overall portfolio.

— By taking a systematic approach instead, it is possible to access parts of hedge

funds returns that can be replicated in a liquid, cost effective manner.

The well known drawbacks of hedge funds


15

Alternative assets, hedge funds: The traditional access to risk premia

“Hedge funds have a fee structure appropriate for true

alpha generation while most returns come from systematic

risks. We want to get paid for taking risk, not pay for it.”

Thomas Franzen, Chief Investment Strategist at AP2

Financial Times, 22 April 2012


db-X funds

Deutsche Bank

Risk Factors expertise within Deutsche Bank Equity Quantitative Strategy Group


16

— The genesis of most of Deutsche Bank’s risk factor strategies is the research of the Equity

Quantitative Strategy Group.

— The group consists of seventeen professionals in the US, Asia and Europe, with additional

offshore support.

— The DB Quantitative Strategy Group was ranked #1 in both the 2011 All-Europe Institutional

Investor Research Survey and the 2011 US Research Institutional Investor Survey.

— Both the US and Europe teams have been ranked Top 3 in the Greenwich Survey for 2011.


db-X funds

Deutsche Bank

— Explainable : risk premia should have a strong basis for existence

— Persistent : there must be a rationale for the persistence of the risk premia

— Attractive risk/return profile : each single risk premium must demonstrate

good returns characteristics

— Unique : when building a diversified portfolio, each risk premium is intended

to exhibit low correlations to traditional market beta as well as other risk

premia.

— Accessible : the risk premium must be accessible at a level of cost that is

sufficiently low to avoid dilution of the return.

Risk Factors expertise within Deutsche Bank Identifying risk factors

Each identified Risk Factor is intended to meet several criteria


17


db-X funds

Deutsche Bank

— The objective is to isolate risk premia that can be :

— Fully transparent : each single strategy is fully systematic, relying on

well-defined rules

— Liquid :strategies are designed to allow cost-efficient entry and exist to

investors with no lock-ups

— Low cost : a well defined systematic approach allows efficient

transaction costs.

— Portfolio construction then involves combining a range of theses return

generators that are designed to capture different sources of risk premium.

— By creating a portfolio of liquid factors it is possible to build a more

diversified portfolio, thereby reducing drawdown risk and improving risk-

adjusted returns.

Risk Factors expertise within Deutsche Bank Risk factors implementation and portfolio construction

A disciplined, systematic approach towards simple and robust strategies


18


db-X funds

Deutsche Bank

Value

— The concept of value investing dates back to the original Fama-Fench paper from 1992 which argues that

cheap stocks outperform expensive stocks in the long run.

— Traditional examples: Price-to-Earning and Enterprise Value-to-EBITDA ratios, where investment are made

into companies that are viewed as cheap.

Quality/Profitability

— In reporting seasons, earning quantity tend to get most attention – in reality though the quality of earnings is

a better gauge of future earnings performance

— Accruals – the difference between cash and accounting earnings – are a good measure of earning quality.

Accrual earnings are less reliable than cash earnings because they involve subjective judgments regarding

the period in which revenues and expenses are recognized.

— Academic research (Sloan) has highlighted that earning performance related to accruals exhibits lower

persistence than earning attributed to cash flow.

Low Beta

— Historical long term studies (Baker) show that low volatility and low beta portfolios can offer combination of

high average returns couples with low drawdown.

— Explanations for structural alpha in low-risk stocks appear to be rooted in irrational investor behavior leading

to market inefficiency.

— Metrics used to monetize the low risk factor include realized volatility and market beta.

Equity Risk Factors identification Examples of cash factors



19


db-X funds

Deutsche Bank

Momentum

— Prior stock returns have been shown to have explanatory power in the cross section of common stock

returns – this temporal pattern in prices is referred to as momentum.

— Jegadeesh and Titman (1993) show that a strategy that simultaneously buys past winners and sells past

losers generates significant abnormal returns over holding periods of 3 to 12 months.

Liquidity

— Investors expect to be rewarded for taking a risk when investing in illiquid assets

— Recent DB research “Solving the Liquidity Puzzle”, January 2011, investigated whether an illiquidity

premium exists in the European equity market using a number of popular as well as novel liquidity

measures (like the Absolute Return to Turnover Ratio).

Size

— The Fama-French paper argues that investors have historically received additional returns by investing in

stocks of companies with relatively small market capitalization.

Growth

— Growth investing involves investing in stock whose earning are expected to grow at an above-average rate

as compared to the industry or overall market

— Examples of measuring growth include 12M trailing EPS growth, Long term EPS growth, P/E vs. 5Y P/E

and 12 M trailing dividend growth

Equity Risk Factors identification Examples of cash factors



20


db-X funds

Deutsche Bank

A few reasons for Risk Premia, across asset classes Carry, value, momentum everywhere

Sources of Risk Premia and possible explanations


21

Value Carry Momentum

Economic

Rational, reflecting compensation

for distress risk which materializes

in weakening economies and/or

during liquidity crises

Carry trades vulnerable to sharp

negative skew

Reward for priced business cycle risk,

trends in the business cycle drive

trends in prices

Behavioural

Overreaction : unpopular value

stocks that have done badly are

oversold and become under-

priced, to be corrected when

sentiment improves

Reward for providing insurance or

certainty to the market

Extrapolation of past prices and

overconfidence

Gradual diffusion of firm-specific

information across investing public

Institutional

Need for allocation to appear

prudent. Risk consideration, VAR,

Solvency may prevent investors

from accessing cheap assets

Carry trades often done with leverage

Highly levered carry portfolios have

significant downside risk and need to

be properly monitored and risk

managed

Majority of institutional investors are

index trackers, while market indices

exhibit some momentum themselves.

Investors have low tolerance for

underperformance, which influences

fund manager to hug their benchmark

indices to try to minimize ‘career risk’,

becoming closet index trackers


Source Deutsche Bank Market Research A new Asset Allocation Paradigm, July 2012

Past performance is not a reliable indicator of future returns. Performance does not include any fees associated with products on the Risk Factors.

db-X funds

Deutsche Bank

This document is for institutional investors only, and not for retail distribution This document is for institutional investors only, and not for retail distribution

Style and Market Risk Premia Simulated Results



db-X funds

Deutsche Bank


Style and Market Risk Premia Simulated Results



db-X funds

Deutsche Bank


Risk Factors : a few results Diversification does matter (simulated results)



db-X funds

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Mean Variance

Optimization Fixed Weights

Portfolio weights are determined as

the combination that maximizes the

return for a given level of variance

Portfolio weights are

determined proportionally to

the level of realized volatility

Portfolio weights are determined to

be fixed weighted independently of

expected risks or returns

Stability of portfolio

Risk Parity

If the market data assumptions

change the mean variance portfolio

might be significantly different

implying a necessary change to

allocations *

Risk Parity provides

diversification benefit. Expected

Returns are not an input for the

asset allocations

The fixed weights portfolio brings

some diversification benefits but

these are not proportional to the

risks within the portfolio

Low High


Risk Factors portfolio construction methodologies Limitations of Mean Variance Optimization

Risk Parity is a dynamic allocation mechanism which determines the weights of underlyings within a portfolio, in such a way that the “risk” is

distributed evenly among its components.

“Risk Distribution” is achieved by assigning a lower weight to components with a higher historical volatility; consequently, components with a

lower historical volatility will be assigned a higher weight.

Risk factors portfolio construction : the case for Risk Parity 3 assets Risk Parity Example

Portfolio 1

Asset Volatility Equal Weight

A 40% 33.3%

B 20% 33.3%

C 10% 33.3%

Portfolio 2

Asset Volatility Risk Parity Weight

A 40% 14.3%

B 20% 28.6%

C 10% 57.1%

Equal nominal weights do not ensure equal risk allocation.

Given asset A’s high volatility in comparison to assets B

and C, asset A’s performance will contribute much more to

the overall portfolio performance in case of an equally

weighted portfolio

Risk Parity weights are approximately proportional to the

inverse of the volatility of each asset.

Therefore, the Risk Parity methodology ensures that the

contribution of each asset is evenly distributed amongst

its components.


db-X funds

Deutsche Bank

— The chart on the right hand side

shows the historical simulated

performance of a diversified portfolio

of several equity risk factors

(“Portfolio”) compared to a long equity

investment.

— The Portfolio has a risk-parity based

allocation, based on the inverse of the

one year trailing realised volatility of

each factor.

— The Portfolio is rebalanced monthly.

— In comparison to a long equity

investment, the portfolio demonstrates

an improved risk-return profile and

drawdowns are significantly reduced.


27

Risk Parity Portfolio : historical results

Equity Risk Factors portfolio construction : an example Risk Parity Portfolio based on several Equity Risk Factors

Past Performance is not a reliable indicator of future returns.

Risk Parity Portfolio is monthly rebalanced. Factors are weighted proportional to inverse of realized volatilities on each rebalancing date. Volatility is calculated with 1 year

rolling window with monthly return data. Risk Factor Portfolio contains Low Beta, CROCI Market Neutral, Quality, Momentum, Volatility and Dividends strategies, as calculated

by Deutsche Bank. Further details on each Risk Factor available upon request.

Performance does not include any fees associated with products on the Portfolio.


db-X funds

Deutsche Bank

— Deutsche Bank has developed an extensive framework to help investors in

re-considering their existing portfolio allocation.

— Several high profile pension funds are now entering in the implementation

process, either on their absolute return or traditional equity allocation.

— This investment theme has gained a lot of traction among fund investors,

looking for either :

— Equity allocation replacements,

— Absolute return type funds, implementing solid and transparent systematic

strategies.

Risk factors : a new portfolio construction paradigm? Next steps : implementation

Leveraging existing research to build product


28



4.Contacts



www.dbxfunds.com

Overview

www.dbxfunds.com is an intuitive and

accessible portal that aims to cater for all

your investment resource needs

An easy to navigate site

that enables you to:

— find out more about us and our

range of funds

— access fund specific information

and view key performance data

— download key fund data and materials

— Utilise useful tools that aim to help you

analyze your investment choices

30

Frankfurt +49 69 910 38808

Contacts

Fund related information

db-X funds

London +44 207 547 8699

Zurich +41 44 227 37520

31

E-Mail [email protected]

Website www.dbxfunds.com

db-X funds

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Disclaimer This document is intended for discussion purposes only and does not create any legally binding obligations on the part of Deutsche Bank AG and/or its affiliates

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© Deutsche Bank AG 2012. All rights reserved.

CROCI® Disclaimer Deutsche Bank’s Cash Return On Capital Invested (CROCI®) valuation metric attempts to transform an accounting return to an economic return. Cash flows are calculated on

an operating (pre-exceptional) basis and compared to the 'real' (economic) invested capital in a business. The latter may include items such as R&D or brands that cannot

appear on a balance sheet under current accounting standards. A judgement on current share price valuation can be made by comparing the current and expected Cash Return

On Capital Invested with the true asset multiple of the company, sector or region. CROCI® charts show the results of our calculation and include annual returns, the real invested

capital base on an annualised basis, and the valuation of the company, again on an annualised basis. If you require any further information on our methodology, please contact

[email protected]. CROCI® is a registered trade mark of Deutsche Bank AG in certain jurisdictions. Deutsche Bank AG reserves all of its registered and unregistered

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© Deutsche Bank AG 2012. All rights reserved.

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