invest - posb...corrections, yes, there have been a few. four major ones to be exact, using the msci...

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Four years on, many remain skeptical of the equities bull. Opinions on the global economy and risk asset markets remain deeply divided. In the language of the 1920s poem “Fire and Ice” by Robert Frost, there are people who will still not participate in equities for fear of “ice” – debt deflation in the West. There remain possibly an equal number who fear “fire” – inflation from quantitative easing and cheap money. Corrections, yes, there have been a few. Four major ones to be exact, using the MSCI All Country World Index as a proxy. On average, one every year. And there have been many regrets among bears who have witnessed, time and again, the bull rising “bloodied” from the dust to charge.

Despite the said global index having risen about 120% from its March 2009 low to its recent high in May, the uptrend in global equities is likely to continue over coming months.

There is neither fire nor ice on hand to end the equities bull. Euro area debt has, for now, been stabilized by the commitment of unlimited central bank support. US politicians were never going to send the country into deflation and financial crisis despite the haggling over the debt ceiling and government spending cuts. Life goes on and the equities risk premium goes down.

The US economy continues to grow but not as fast to warrant an end to cheap money. And rather than rising inflation – the feared “fire” – disinflation remains the dominant theme in the developed world. Even in Asia ex-Japan, with some exceptions, the general theme has been moderating inflation. Meanwhile, Japan is attempting to emerge from the permafrost of deflation. Even with tapering of QE, the Fed policy rate will likely remain at zero until end 2014 or even longer. In any event, rising Treasury yields are typically associated with equities gains in US cycles going back over 30 years. Much depends on the state of the economy.

Corporate earnings continue to grow, moderating the impact of price gains on valuations, which remain more typically mid-cycle than late-cycle. As moderate global economic growth gains momentum next year, the uptrend in equities – which had hitherto been driven to a large extent by normalisation of risk premiums and valuations – will move into its growth phase, relying more on earnings to move prices.

Meanwhile, bonds have moved into a mature phase. Even the gradual steepening of the US Treasury yield curve will have negative effects on both Asian sovereigns and corporate credits. Investors should become much more selective and generally reduce duration.

Commodities have been diverging from equities for more than a year, trading weaker while equities pushed higher. Equities are more anticipatory while commodities track global economic activity in “real time”. Commodity prices should pick up as economic growth strengthens later this year and next.

The US dollar should depreciate over the medium-term on the logic that the American economy needs a weaker currency to repair its current account balance. But near-term, swings in US government bond yields can cause sharp moves in the dollar. Further, Asia ex-Japan currencies could face added pressure from a dramatically weaker Yen.

Market Commentary

Quarterly Asset Allocation

Equities

Investor attitudes appear polarized between East and West. A major pre-occupation in the US market has been the timing of the Federal Reserve’s “tapering” of the size of quantitative easing. The underlying assumption: the recovery of the US economy will cause the Fed to start reducing the size of its USD85 billion monthly asset purchase programme in the coming months.

But in the East, the MSCI Asia Pacific ex-Japan has been underperforming, almost in lock-step with weakness in the US Purchasing Managers Index. (Figure 1) The implicit message here is the US economy is not strong enough.

So what is it? Is the bull market going to end in “fire” – overheated economies and rising inflation and interest rates? Or in “ice” – a renewed slump in economic activity and deflation?

Invest.Wise3rd Quarter 2013

MICA (P) 133/12/2012

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Neither. The global economy is growing but at nowhere near the rates that would cause us fear of “fire”. Indeed, recent global production data suggests some loss of momentum over the past few months.

Stating the obvious – the Federal Reserve will eventually reduce the size of “quantitative easing”. But this is not imminent. The unemployment rate remains higher than the target of 6.5% set by the Fed. And this is off a relentless slide in the labour force participation rate. Meanwhile, the inflation rate is nearly half what the Fed reckons is its tolerance threshold. And while the impact of “sequestration” – programmed government spending cuts – continues to work its way through the US economy, the Fed will likely err on the side of caution.

Besides, “tapering” is not the end of quantitative easing. It means the Fed will reduce the amount of assets it buys depending on the strength of the economic data. And eventually when it does exit QE, it does not necessarily mean government bond yields are going to surge. US government bond yields historically tend to be anchored by the Fed funds target rate. (Figure 2) And the Fed policy rate could stay at zero long after the end of QE.

Figure 1: Weak US PMI Along With APxJ Equities

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Source: Bloomberg, as of 13 June 2013

Figure 2: The Fed’s Policy Rate Drives US Treasury Yield Trends

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Further, it is not the eventual exit from QE but the manner of the exit from QE that is likely to determine the fate of the equities market. Stocks will weather the exit better if the US economy can self-sustain economic and corporate earnings growth by then. Indeed, over the past 30 years, the bottoming and reversal of the 10-year US Treasury yield have been associated with significant gains on the S&P 500 rather than bear markets.

Indeed, if the 10-year US Treasury bond yield rises on a stronger economy while the Fed anchors the short end of the curve through a zero policy-rate, the resulting curve steepening could be positive for equities. There has not been one equities bear market in the US in 40 years that was not preceded by a flattening and usually eventual inversion of the Treasury yield curve.

Meanwhile, the Bank of Japan has started quantitative easing on a grand scale, with a plan to double the monetary base in two years. This is an unprecedented monetary shock to the psychology of Japanese savers – pushing funds out of deposits into risk assets, including international assets.

Asia ex-Japan equities, which had been struggling under the burden of modest global economic expansion, could get a boost later in 2H-13 from a gradual improvement in growth around the world.

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Fixed Income

Bonds are at an advanced phase of the market cycle. Net inflows into US bond and other income funds have already reached a cyclical extreme. (Figure 3) Going forward, recurrent anxieties surrounding the Federal Reserve’s eventual tapering/exit from quantitative easing and a steepening of the Treasury yield curve are likely to create downside pressures on prices.

Total returns have turned negative over the past few months around the world. We have already seen Asian credits being sold off in lockstep with rising Treasury yields in the US. (Figure 4) The pressures are unlikely to ease. Indeed, as the clock ticks closer to the eventual Fed tapering and exit from quantitative easing, outflows from US-based funds could accelerate, putting even more pressure on Asian credits, particularly those with high levels of foreign ownership.

Chinese equities are going through a base building phase. They could trade in a broad sideways range over coming months pending clearer policy signals from the government and central bank. This is a market that needs monetary stimulus and faster growth at a time when the government appears more concerned about longer-term structural reforms and preventing the build-up of a credit bubble. Nevertheless, equities valuations in China – trading in both price to earnings and price to book terms are below global financial crisis lows. This suggests the downside is limited and a value trade for patient contrarians.

Figure 3: Net Inflows Into US Bond and Income Funds May Have Peaked

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Figure 4: Investors Sell Asian Credits as US Treasury Yield Climbs Higher

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While there is still a large amount of risk-averse cash sitting on negative real interest rates in key financial centres around the world, a collapse in the bond market remains unlikely. What is likely is the gradual erosion in the mark-to-market gains. Rather than a “great rotation” out of bonds into equities, we will likely see a gradual drift towards stocks. That process appears to have already started in the US with pension funds. We are cutting bonds to underweight and reducing duration. Our focus will be on alpha names, namely those in the “A” to “BBB” range, rather than high alpha credits. We would generally agree with credit extension over duration extension as the preferred strategy for improving yield. But we would nevertheless be careful as we move down credit quality for higher yields. And our bias would be towards shorter tenor papers. Our preferred “sweet spot” would be in the “BB” names.

Among Chinese high yielders – largely in the property sector – we are mindful that pricing remains tight. There we would focus on benchmark names in the “BB” rating range – those with liquidity, good project locations, size, and diversified exposures to major tier two/three cities, preferring tested repeat issuers.

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Currencies

The US Dollar continues to trade in a broad range. Last quarter, we wrote of the possibility of the US Dollar index (DXY) – which was then close to the top of a year-long range – pulling back. That has since played out. Over coming months, the US dollar is likely to trade back to the bottom of that range.

Beyond that, the logic of the DBS view is that the US dollar needs to weaken in the medium to longer-term to repair the country’s twin budget and current account deficits.

But in between, investors need to be watchful of three things: 1) There is the risk of US dollar spikes on further rises in US Treasury yields as the clock ticks towards an eventual exit from the Federal Reserve easy money policy 2) Asia ex-Japan economies face growing competitive pressures from the strengthening of their currencies against both the US dollar and the Yen. It is also a “double whammy” for Taiwan and South Korea given the Yen’s depreciation against the Dollar 3) The market perception of US progress towards redressing its “twin deficits”. Shale energy should help narrow the current account deficit while the US Congressional Budget Office believes Washington will significantly narrow its fiscal deficit over the next two years.

Commodities

The price divergence between commodities and equities should be resolved later this year with stronger global economic growth.

Commodity prices have been diverging from equities since last December – with the Thomson Reuters/Jefferies CRB index trading lower despite a strong uptrend in global equities. The divergence is probably due to the anticipatory nature of equities markets.

Stocks move up on expectation of stronger economic and earnings growth while commodity prices tend to respond more to “real-time” economic conditions. (Figure 5)

Figure 5: Commodity Movements Follow Global PMI Readings

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Near-term, downside pressures on commodities should continue. In industrial metals, inventories remain generally high, likely capping price upside over the coming months.

For example, Chinese steelmakers ramped up production in 2Q-13, apparently more aggressively than seasonally stronger demand would justify. This suggests an inventory overhang, with knock-on implications for iron ore prices. Similarly, copper prices – which edged up in May on a spike in China’s export data – are now coming off on a pullback in year-on-year export figures from China. In any event, this appears to have been artificially boosted for much of the year by financial flows dressed up as trade for currency arbitrage purposes.

Amid the cyclical weakness in commodities, it is useful to be mindful of the longer-term trend. Over the past 200 years or so, commodity “super cycles” have seen upswings ranging from 10 to 35 years and complete cycles ranging from 20 to 70 years. And these long-term moves have been associated with major shifts in global output. The most recent of these “super cycles” started in1999 and was associated with the rise of emerging markets. This would be one of the shortest of the super cycles in 200 years if it is indeed over as some commentators now suggest.

Since it was driven by emerging market demand for a wide range of basic materials, the end of this “super cycle” would presume the end of strong growth in high population economies such as China, India and Indonesia. Their demographics and ongoing urbanisation suggest this is unlikely. For example, the United Nations says another 300 million Chinese would be urbanised by 2050. This means China will have to build additional urban infrastructure to cater for numbers equal to the population of the United States.

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Understanding Portfolio Strategies

Hedge Funds Strategies 101

Hedge funds come in many shapes and sizes and are typically privately managed investment funds. They operate many diverse investment strategies that seek to generate returns that are less dependent on the direction of traditional equity, bond, commodity and currency markets. This makes them useful in diversifying traditional risk factors in an investment portfolio. There are a number of well established hedge fund strategies.

1. “Equity long short” investing is one of the most common and well-known strategies. It is an extension of traditional long only equity investing but adds the ability to sell short and to use leverage. The basis of “equity long short” investing is to seek good companies or undervalued companies and to buy them, while “shorting” poorly run or overvalued companies. A “short” is an asset held in anticipation of a fall in value. By balancing long and short exposures, market risk can be hedged to the desired level. Most “equity long short” funds run a net long bias, that is they have more “long” exposure than short exposure. Some of these funds are market neutral and are equally long and short the market. The reason: to hedge out all their market exposure. The risk they are primarily exposed to is company specific risk. Notable equity long short managers include Omega Advisers run by Leon Cooperman and Lone Pine Capital, run by Stephen Mandel.

2. “Credit long short” investing is another strategy. It is less common than “equity long short” investing but the main principles are similar. The manager seeks good and undervalued companies to buy long and poorly run or overvalued companies to sell short. In this case, however, instead of trading in the equity of these companies, the manager buys and sells the debt of the companies. These debt instruments include bonds, convertible bonds, bank debt, trade receivables and credit default swaps. One of the most notable credit long short managers is JP Morgan alumnus Andrew Feldstein, whose BlueMountain Capital has performed consistently even through the 2008 crisis.

3. A special case of credit long short is “capital structure arbitrage”. This is a more sophisticated form of “credit long short” that typically involves buying and selling the equity or debt instruments issued by the same company. Company capital structures are sometimes not properly valued because the investors who trade equities and the investors who trade bonds have different objectives. Examples of “capital structure arbitrage” are buying long the senior debt versus selling short the subordinated debt of the same company. In case of default or reorganisation, the recovery value in the senior security is higher than in the subordinated security. This means the investor makes money. Capital structure arbitrage is the preserve of a few specialized funds. One such example is Pine River Capital, a firm based in Minnesota whose mortgage trade made money in the 2008 crisis.

4. “Convertible arbitrage” combines elements of equity, credit and volatility trading. The typical trade in convertible arbitrage is to buy the convertible bond, sell short a proportion of equity, and hedge out the credit risk with credit default swaps or an asset swap. Convertibles can also be used to create high carry levered positions with little equity risk. They also feature in distress or stressed investing. Convertible arbitrage was once a much favoured strategy but reliance on excessive leverage has made the strategy less popular among investors. Philippe Jabre, formerly portfolio manager of the GLG Market Neutral Fund remains one of the foremost convertible arbitrageurs with his own Jabre Capital Multi Strategy Fund.

5. “Fixed income arbitrage” refers to non-credit related bond and bond derivative trading. It is usually expressed in sovereign bonds and the two main types of funds come in the form of macro and arbitrage. Macro fixed income investing is based on the premise that pricing in fixed income markets reflect macro conditions and economic policy. Managers seek to make money by having a macro view and expressing it by trading sovereign fixed income securities and derivatives. Arbitrage strategies are predicated that relationships between different securities tend to a no-arbitrage position over time. Managers seek inefficiently priced securities and bet that they converge to efficient pricing. Fixed income arbitrage was made famous by the ill-fated LTCM. Today, fixed income arbitrageurs are few and far between.

6. “Distress investing” involves investing in the securities of companies in distress or bankruptcy. This can range from equity to debt, bank debt, credit default swaps, trade claims, and options, among others. These securities are often incorrectly valued and holders of such securities are forced to dispose of them at uneconomic prices. Sometimes the manager will be an activist in steering the outcome of the bankruptcy process. “Distress investing” brings together business valuation, legal understanding of bankruptcy processes, trading ability and an understanding of the motivations of incumbent stakeholders from shareholders to creditors to management. The distressed investor par excellence is Randy Smith who pioneered the approach at Bear Stearns some 30 years ago. He remains active today managing Alden Global Capital, a distressed investing hedge fund.

7. “Merger arbitrage” invests in situations where one company is taking over another. It usually involves buying the target company and selling the acquiring company (in a stock offer) or just the target (in a cash offer.) The strategy has evolved to include investing in any hard catalyst (announced deal) situation to include de-mergers or spinoffs, asset sales and other special corporate actions. The strategy seeks to make money by deciding if a situation will evolve as announced or not. More evolved strategies also bet on the path of a situation playing out to completion or a deal breaking down. Notable merger arbitrageurs include the likes of John Paulson, before his excursion into the mortgage market, Tom Sandell and Bernard Oppetit.

8. “Global Macro” is one of the oldest and most well-known hedge fund strategies. Broad types of macro strategies include Fixed Income, the most common type, which avoids the risk inherent in equities or corporate credit; Commodities, which are very much driven by demand and supply and thus correlated to industrial production; FX, which is an extension of fixed income macro with elements of inflation and rates and finally - Equities, which is a less common expression of global macro as it contains the idiosyncratic risk inherent in companies’ financial performance and outlook.

By Bryan Goh, Senior Vice President, DBS Bank

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DBS 3-Month Tactical Model Portfolio – Q3 2013

US equities 12% (+4%)

Europe Equities 18%

Japan Equities 3.5% (+3.5%)

China Equities 5%

Asia Pacific Equities ex Japan 41%

Emerging Markets Equities ex Asia

4%

Global Bonds ex Asia 1% (-3%)

Asia Bonds ex Japan 7%

Alternatives 7.2%

(-0.8%)

Cash 1.3%

(-3.7%)


Europe Equities 16%

Japan Equities 3% (+3%)

China Equities 5%



3%

Global Bonds ex Asia 10.5% (-2.5%)


Alternatives 6.3%

(-0.7%)

Cash 1.2%

(-3.8%) US equities 15% (+5%)

Europe Equities 7%


China Equities 4%



2%

Global Bonds ex Asia 14% (-3%)


Alternatives 4.5% (-0.5%)

Cash 7.5% (-6.5%)


Europe Equities 2%



Global Bonds ex Asia 28.5% (-1.5%)


Alternatives 2.6% (-0.4%)

Cash 20.9% (-5.1%)

US equities 2%


Global Bonds ex Asia 52%


Cash 39%

1. Defensive

3. Balanced 4. Growth

5. Aggressive

Notes:Percentages denote actual tactical asset allocation weights for a 3 month time horizon.Asia Pacific ex Japan equities excludes both Japan and China equities. Figures in brackets refer to the tactical weight shifts versus the strategic allocation. Taking the Balanced model as an example, “US Equities 15% (+5%)” represents an overweight of 5% compared to the neutral weight of 10%.

Capital preservation with minimal risk exposure

Capturing modest capital growth through a balanced risk-and-return approach

Maximising capital growth potential through exposure to a large portion in risky assets

Capturing some capital growth with low risk exposure

Higher wealth enhancement throughgreater exposure to risky assets

2. Conservative

Asset Allocation

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Asset Class Region 3m view 12m view Rationale

Equities US Overweight Overweight (Previous: Neutral)

- We maintain our 3M OW stance while upgrading our 12M view to OW as well because of the improving economy and corporate earnings.- Eventual rates normalization will unlikely be negative for US equities if it is done against a backdrop of rising employment and strong economic outlook. Favour cyclical yielding stocks over defensive yielding stocks.

Europe Neutral Neutral - We stay Neutral on Europe as the economy remains mired in recession while the jobless rate stays elevated in the face of austerity measures. - That said, the pledge of unlimited bond purchases by the European Central Bank has vastly reduced the likelihood of further systemic risks. - European equities have underperformed US and Asia year-to-date and the market currently trades below its long-term mean on Price-to-Book basis. Nonetheless growth remains scarce and our Neutral stance.

Japan Overweight Overweight - We keep our 3M/12M OW stance on Japan. It is among our major high conviction calls and we view the recent pullback as a buy opportunity. - The Japanese equity market is expected to benefit from the government’s plan to double its monetary base as well as recent government initiatives. - Japan has revised up its 1Q GDP growth to 4.1%, an early sign that its recently launched stimulus program is bearing fruit.

China Neutral (Previous:

Overweight)

Overweight - We downgrade China to 3M Neutral while staying 12M OW. - We believe that China’s macro momentum is starting to decelerate as the country shifts towards a consumption-driven economic model. The HSBC Flash Manufacturing PMI for June shows a decline from 49.2 in May to 48.3. A figure below 50 is contractionary. The market continues to suffer from a lack of catalysts and for it to re-rate from here, structural reforms must take place. However, the timeline for such policy moves lacks clarity at this juncture. - A 3M Neutral on China is appropriate on cheap valuations.

Asia Pacific ex- Japan

Neutral (Previous:

Overweight)

Overweight - We downgrade APxJ from 3M OW to 3M Neutral and this tactical switch is mainly driven by our near-term cautious stance on Australia, a market which accounts for significant weight within APxJ.- We believe that recessionary risk in Australia is on the rise given the decline in investment spending and the softening of global commodities demand. As China transits to a more domestically-driven economy, commodities demand will decline as an offshoot.- Australian banks, which have thus far been benefitting from the global search for yield, is likely to pull back

Emerging Markets

Neutral (Previous:

Overweight)

Overweight - We downgrade EM equities from 3M OW to 3M Neutral and this view ties in with weakening China growth. - Despite moderating economic growth, inflation in EM countries (Brazil, Turkey) remains high and limits the room for policymakers to maneuver. - Valuations for key markets like Brazil and Russia are currently trading below their long-term mean on both Price/Earnings and Price/Book.

Bonds Global ex-Asia

Underweight Underweight - Global bonds to face further downside risk as a hawkish Federal Reserve statement suggests that QE tapering is at hand. Stay 3M and 12M UW.

Asia ex-Japan Neutral (Previous:

Overweight)

Neutral (Previous:

Overweight)

- We downgrade APxJ bonds from 3M/12M OW to 3M/12M Neutral. Asian bonds are vulnerable to further downside as QE tapering and the eventual normalization of rates draw closer. - Recent sharp moves in US Treasuries are particularly negative for Asian credits given the tightening of spreads in recent years. Reduce duration towards shorter tenor papers while avoiding bonds with high foreign ownership.

Alternatives N/A Underweight (Previous:

Overweight)

Overweight Property (3M Neutral; 12M Neutral) – REITs to face downward pressure as interest rates normalise. However, the risk-reward looks fair. Commodities (3M Neutral; 12M Overweight) – Range-bound trading expected for commodity markets as the supply outlook remains unfavourable while inventory is high relative to demand. As China’s economic momentum shifts to a lower gear, we would expect limited catalysts for commodities demand during the 2nd half. Downgrade to 3M Neutral. Gold (3M Underweight; 12M Underweight) – Impending QE tapering, USD resilience and steady growth to weigh on gold.Hedge Funds (3M Neutral; 12M Neutral) – Maintain 3M/12M Neutral.

Cash N/A Underweight Underweight Negative real interest rates around the world make cash very unattractive.

Tactical Asset Allocation – Q3 2013

Figures and estimates are as of 27 June 2013.Asia Pacific ex Japan equities excludes both Japan and China equities.

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Strategic Asset Allocation Models

Strategic Asset Allocation Models for 2013

Investment Objectives of the Model Portfolios

The DBS Strategic Model Portfolios have been developed in consultation with Morningstar Associates, LLC based on a set of capital market assumptions. Morningstar Associates, LLC, the industry leader in fund of funds management, investment consulting and retirement advisory services, has developed five portfolios for DBS Bank.

Each portfolio is diversified across many types of asset classes and investment styles in order to benefit from the top performing asset classes and reduce the impact of lower performing asset classes.

• Defensive-Thismodelisideallysuitedforinvestorswhoareseekingtopreservetheircapitalandareuncomfortablesustaininglosses.Its4%allocation to equities means the portfolio will have lower returns while striving to reduce risk exposure over the medium to long term. To help minimize risk; this model has a sizeable allocation to cash, global and Asia ex-Japan bonds.

• Conservative-Thismodel is ideallysuitedfor investorswhoarefairlyriskadverseandareseekingmorestablereturns. Its26%allocationtoequities strives to capture some growth potential, without assuming too much risk over the medium to long term.

• Balanced-Thisportfolioisideallysuitedforinvestorswhoareseekingtostrikeabalancebetweenriskandreturns.Althoughthe42%allocationto equities and 5% allocation to alternative investments give this model a riskier profile than either the Defensive or Conservative models, it is better positioned for modest growth over the medium-to-long term.

• Growth-Thismodelisideallysuitedforinvestorsseekingtogrowtheircapitalandwhocantoleratehigherriskandconsiderablemarketvolatilityover the medium-to-long term. Although its 62% allocation to equities (with a sizeable bias to Asian equities) and 7% exposure to alternative investments position the model for growth, it also exposes the investor to potentially high losses.

• Aggressive-Thismodelisideallysuitedforinvestorswhoareseekingtomaximizegrowthandcantoleratelossesandmarketfluctuationsover

the medium-to-long term. Its 76% allocation to equities and 8% exposure to alternative investments position the investor to capture the upside of the market, but also expose them to the potential of sustaining extensive losses on the downside. This model has the highest allocation to Asia Pacific and China equities, while still maintaining some exposure to bonds and cash.

The target investment horizon of a Strategic Asset Allocation Model portfolio is five years.

Defensive Conservative Balanced Growth Aggressive

Equities

US 2% 12% 10% 8% 8%

Europe 0% 2% 7% 16% 18%

Japan 0% 0% 0% 0% 0%

China 0% 0% 4% 5% 5%

Asia Pacific ex Japan 2% 12% 19% 30% 41%

Emerging Markets ex Asia 0% 0% 2% 3% 4%

Equities 4% 26% 42% 62% 76%

Bonds

Global ex Asia 52% 30% 17% 13% 4%

Asia ex Japan 5% 15% 22% 13% 7%

Bonds 57% 45% 39% 26% 11%

Alternatives 0% 3% 5% 7% 8%

Cash 39% 26% 14% 5% 5%

Expected Return (%) 2.1 5.0 7.6 10.1 11.6

Expected Risk (%) 4.4 8.0 12.0 15.9 18.5

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Notes:

• Theexpectedannual returnof thestrategicportfolio isbasedoncapitalmarketassumptionsderived fromMorningstar’seconometricmodel that reliesonhistoric, current and forecasted data on the indices highlighted below. The information is for reference only.

• Theexpected risk (orannual standarddeviation)of thestrategicportfolio represents theexpected risk levelof theportfoliobasedonhistoricalassetclassrelationships (correlations) and volatility, using monthly returns from 2003 to 2013 based on the indices highlighted below. The information is for reference only.

• MorningstarAssociates’modelportfoliosstartedon1October2010.Morningstarreviewsthestrategicassetallocationonanannualbasis.ThecurrentStrategicAsset Allocation (SAA) is as of end May 2013.

• Basedonthemodelportfolios,theAggressivemodelhasthehighestrisk,followedbyGrowth,BalancedandConservative,withDefensivebeingtheleastrisky.The risk consideration that was used in formulating the Strategic Asset Allocation was the annualized quarterly average drawdown. A maximum annualized average quarterly drawdown constraint is in place for the different portfolios, with the defensive portfolio having the most restrictive and the aggressive portfolio having the most accommodative risk constraints.

• TheinvestortypeclassificationfortheportfoliohasnodirectrelationshipwiththeFinancialNeedsAnalysiscustomerriskprofiletypesandtheportfoliosarenotassigned any product risk rating based on the bank’s proprietary risk rating methodology.

• TheabovemodelportfoliosareeffectivefromJulytoSeptember2013andaresubjecttochange.• AsiaPacificexJapanequitiesexcludesbothJapanandChinaequities.• Theexpectedreturnandexpectedriskarebasedonthefollowingindicesforcalculation: o Equity: US - Russell 3000 TR USD; Europe - FTSE World Europe TR EUR; Japan - Topix TR JPY; Asia Pacific ex Japan - MSCI Pacific Ex Japan NR USD; Emerging

Market ex China - MSCI EM Ex Asia NR USD; China - MSCI AC Zhong Hua NR USD o Bond: Global Aggregate - BarCap Global Aggregate TR USD; Asia Pacific - BarCap Asian Pac non Japan TR USD o Alternatives: 10% S&P Global REIT TR USD (Property), 30% DJ UBS Commodity TR USD (Commodities), 30% S&P GSCI Gold TR (Gold) and 30% Greenwich

Global HF (Hedge Funds) o Cash: BofAML HKD LIBOR 1 Mon CM TR

Morningstar Associates’ Asset Allocation Approach:A hallmark of Morningstar Associates’ asset allocation approach is to broadly diversify the models across investment styles, sectors, sub-asset classes, market caps, and regions. This approach aims to ensure that some part of the portfolio will be performing well in most markets, while the long-term gains of all parts will accrue to investors over time.

In determining the asset allocation targets, Morningstar Associates uses a multifaceted approach that features of a number of sophisticated mathematical models to forecast returns on various asset classes. The modelling process is designed to provide asset targets appropriately aligned with current market conditions and investor expectations. Morningstar Associates also subjects the asset allocation models to 10,000 simulations to determine how well or poorly they stand up to different market conditions over a five-year period and then make any necessary adjustments.

Morningstar Associates refines the asset allocation targets based on local market characteristics and behaviours. This results in significant overweight to the Asian markets, both equity and fixed income, in the DBS Strategic Asset Allocation Models, although each model retains varying degrees of exposure to the global markets.

In determining the most efficient asset targets for the DBS Strategic Asset Allocation Models, Morningstar Associates also factored in a couple of client considerations. First, a maximum “annualized average quarterly drawdown” constraint was imposed for each model. The maximum annualized average quarterly drawdown is the largest average quarterly percentage loss (on an annualized basis) that Morningstar Associates will tolerate for each model, based on calculations using data over the past 10 years. By accommodating the drawdown, the asset mix can be optimised to better meet investor’s long-term performance and risk expectations, as well as better understand each model’s risk potential. In addition, Morningstar Associates maintained a minimum 5% strategic allocation to cash in each model to provide a buffer against market volatility.

Disclaimer by Morningstar Associates:Morningstar Associates, LLC, a registered investment advisor registered with the United States Securities and Exchange Commission, and a wholly owned subsidiary of Morningstar, Inc., provides consulting services to DBS Bank Ltd and/or its subsidiaries (“DBS”) in the construction of the Model Portfolios. Morningstar Associates constructs the Model Portfolios using its proprietary methodology; DBS has the authority to accept, reject or modify the allocations. The Morningstar name and logo are registered trademarks of Morningstar, Inc. These trademarks and the Model Portfolios have been licensed for use by DBS. Morningstar Associates is not affiliated with DBS.

Morningstar Associates acts as consultant to DBS and does not provide advice to DBS’ investment clients. Neither Morningstar Associates nor Morningstar, Inc. acts as an investment advisor to the client or customer of DBS. DBS has engaged the services of Morningstar Associates to preserve the independence and objectivity of the analyses provided. Morningstar Associates does not have any discretionary authority or control over purchasing or selling securities or making other decisions for investors. The use of a Model Portfolio by a DBS representative or by a DBS client does not establish an advisory relationship with Morningstar associates. Morningstar Associates does not provide individualised advice to any investor, does not determine client suitability, and does not take into account any information about any investor or any investor’s assets. Individual investors should ultimately rely on their own judgment and/or the judgment of a financial advisor in making their investment decisions. Morningstar Associates makes no warranties, expressed or implied, as to results to be obtained from use of information it provides. Morningstar Associates is not responsible for the presentation of fund performance statistics and other fund data.

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10

Funds Select List

Asia Pacific Equities(ex Japan)

Launch Date1

(D/M/Y)Fund Size1

(Million)

Performance1 (%) 3yr AnnVolatility2

(%)

3yrSharpeRatio3

MorningstarOverallRating4

RiskLevel5

3 Mths

6 Mths

1 Yr

3 Yrs

5 Yrs

Aberdeen SP Pacific Eq SGD 05/12/1997 1,298.70 2.28 11.06 22.90 10.95 5.86 11.24 0.92 ««««« P4

DWS Asia Premier Trust 23/09/1994 92.17 0.40 8.95 20.97 6.08 1.26 14.97 0.45 «««« P4

Fidelity South East Asia A-SGD 15/05/2006 6,811.42 1.30 7.33 14.88 4.45 1.61 14.59 0.33 «««« P4

First State Asian Growth 10/10/1984 69.80 0.57 3.85 17.91 9.53 4.13 10.69 0.90 ««««« P4

First State Dividend Advantage 20/12/2004 1,405.30 3.00 9.33 23.43 10.40 5.43 9.68 0.97 ««««« P4

Schroder Asian Equity Yield 14/02/2005 504.56 1.76 9.54 23.87 12.24 3.17 11.42 1.04 «««« P4

Schroder Asian Growth SGD 08/05/1991 295.09 2.20 10.64 20.55 11.63 5.85 12.83 0.88 ««««« P4

Templeton Asian Growth Acc SGD 25/10/2007 22,004.23 -4.36 7.21 12.42 5.42 2.65 15.11 0.52 ««« P4

Nikko AM Shenton Hrzn S’pore Div Eq 02/08/1999 113.62 4.90 15.77 37.88 15.39 4.63 12.57 1.12 «««« P4

Schroder S’pore Trust A 01/02/1993 966.62 3.08 9.41 21.35 8.42 3.49 14.13 0.57 ««« P4

China Equities Launch Date1

(D/M/Y)Fund Size1

(Million)


(%)

3yrSharpeRatio3


RiskLevel5

3 Mths

6 Mths

1 Yr

3 Yrs

5 Yrs

DWS China Equity A 29/12/2004 451.63 0.46 7.53 12.16 -1.50 -2.08 16.10 -0.05 «««« P4

First State Regional China 01/11/1993 535.50 3.88 10.77 19.79 7.76 3.46 10.59 0.63 ««««« P4

Schroder ISF China Opportunities SGD 31/01/2011 80.13 0.98 6.92 12.50 N/A N/A N/A -0.29 – P4

Templeton China A Acc SGD 25/10/2007 2,367.82 -4.22 1.88 4.76 -0.70 -1.52 15.41 0.10 ««« P4

Japan Equities Launch Date1

(D/M/Y)Fund Size1

(Million)


(%)

3yrSharpeRatio3


RiskLevel5

3 Mths

6 Mths

1 Yr

3 Yrs

5 Yrs

Schroder ISF Japanese Eq Alpha A 27/02/2004 107.65 3.59 15.05 6.98 -0.89 -4.08 14.67 -0.11 «« P4

US Equities Launch Date1

(D/M/Y)Fund Size1

(Million)


(%)

3yrSharpeRatio3


RiskLevel5

3 Mths

6 Mths

1 Yr

3 Yrs

5 Yrs

Allianz RCM US Eq Fund AT SGD 11/08/2009 402.56 8.44 16.31 17.15 7.09 N/A 12.86 0.38 « P4

Franklin Mutual Beacon A Acc SGD 25/10/2007 1,089.79 9.73 19.76 24.79 7.91 0.78 10.48 0.48 ««« P4

Franklin US Opportunities A Acc SGD 25/10/2007 3,479.08 9.29 20.05 18.92 10.60 2.63 14.07 0.58 ««« P4

Europe Equities Launch Date1

(D/M/Y)Fund Size1

(Million)


(%)

3yrSharpeRatio3


RiskLevel5

3 Mths

6 Mths

1 Yr

3 Yrs

5 Yrs

Schroder European Eq Alpha SGD 25/04/2005 37.23 9.20 16.57 35.12 6.78 -4.50 17.71 0.28 «« P4

Templeton European A Acc SGD 25/10/2007 212.70 9.94 19.51 42.62 8.44 -3.81 18.09 0.36 «««« P4

Global Bonds Launch Date1

(D/M/Y)Fund Size1

(Million)


(%)

3yrSharpeRatio3


RiskLevel5

3 Mths

6 Mths

1 Yr

3 Yrs

5 Yrs

Schroder Strategic Bond 15/08/2007 8.63 1.67 3.60 7.61 4.49 4.12 3.34 1.13 «« P2

Templeton Global Total Ret A SGD 25/10/2007 51,589.45 2.32 7.78 17.95 6.43 10.15 4.63 1.18 ««««« P3

Templeton Global Bond A SGD 25/10/2007 62,175.05 1.68 6.07 13.55 3.39 7.64 4.22 0.62 ««««« P2

Emerging Market Equities Launch Date1

(D/M/Y)Fund Size1

(Million)


(%)

3yrSharpeRatio3


RiskLevel5

3 Mths

6 Mths

1 Yr

3 Yrs

5 Yrs

Schroder BRIC 09/01/2006 167.02 -0.54 4.68 10.37 -2.92 -7.68 15.67 -0.13 «««« P4

Schroder ISF Emerging Mkt A Acc 17/01/2000 3,421.57 -0.80 5.24 12.11 1.99 -3.40 14.31 0.21 «««« P4

Templeton Latin America A Acc SGD 25/10/2007 3,074.01 -8.93 -0.90 -0.90 -4.26 -6.65 16.99 -0.02 «« P4

emerging

11

Notes:1. Fund launch dates, performance and fund sizes are sourced from the Morningstar Workstation. 3-month, 6-month and 1-year performance returns are cumulative, while

3-year and 5-year performance returns are annualized. All data presented are as of 31 May 2013. Fund size, cumulative and annualized performance data are bid-to-bid, in SGD terms.

2. Volatility is a statistical measure of risk. 3 year Annual Volatility is calculated here by using the annualised standard deviation of the previous 36 monthly returns. The higher the standard deviation, the greater the volatility, therefore, the risk is higher. Approximately 68% of the annual total return of the fund is expected to range between +1 and –1 standard deviation from the annual average return, assuming a fund’s return falls in a standard normal distribution.

3. The Sharpe ratio is calculated for the past 36-month period by dividing a fund’s monthly annualized excess returns (measured by a fund’s performance in excess of the 3-month SIBOR rate) by the standard deviation of a fund’s monthly annualized excess returns. The higher the positive ratio, the higher is the historical risk-adjusted performance of the fund. The risk free rate in the Sharpe ratio calculation is the 3-month SIBOR of 0.38% p.a. (as of 31 May 2013).

4. The rating is assigned by Morningstar Asia Limited in accordance with the principle of NAV-to-NAV or bid-to-bid, based on the NAV or Bid price of the relevant fund captured by it on 31 May 2013. No rating will be assigned for the funds which have been established for less than three years or with performance data less than three years; for investment market sector with less than five funds, no rating will be assigned to the funds in such group. Within each investment market sector, five stars will be assigned to the top 10% of the funds in such sector, the next 22.5% of the funds will be assigned four stars, the next 35% of the funds will be assigned three stars, the next 22.5% of the funds will be assigned two stars, and the remaining 10% of the funds will be assigned one star. A fund with high rating does not mean that it is suitable for all investors, nor does it suggest that it will continue to provide good performance as it has in the past.

The Morningstar Overall Rating attempts to provide investors with a tool for a simplified screening process for fund selection and should not be considered as recommendations to buy or sell the relevant funds.

5. The risk level is assigned to a fund by DBS Bank Limited based on its assessment of the risk level of the respective fund, data as of 31 May 2013 and is for information and reference only. DBS Bank Limited may revise the risk level assigned to a fund from time to time without prior notice. P1 refers to the lowest risk rating while P5 is the highest.

Disclaimers and Important NoticeThe information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only. This publication is intended for DBS Bank and its clients to whom it has been delivered and may not be reproduced, transmitted or communicated to any other person without the prior written permission of DBS Bank.

This publication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into, for cash or other consideration, any transaction, and should not be viewed as such. This publication is not intended to provide, and should not be relied upon for accounting, legal or tax advice or investment recommendations and is not to be taken in substitution for the exercise of judgment by the reader, who should obtain separate legal or financial advice. DBS Bank does not act as an adviser and assumes no fiduciary responsibility or liability for any consequences financial or otherwise.

This publication does not have regard to the specific investment objectives, financial situation or particular needs of any specific person. Before entering into any transaction or making a commitment to purchase any product mentioned in this publication, the reader should take steps to ensure that the reader understands the transaction and has made an independent assessment of the appropriateness of the transaction in the light of the reader’s own objectives and circumstances. In particular, the reader should read all relevant documentation pertaining to the product (including but not limited to product sheets, prospectuses or other similar or equivalent offer or issue documents, as the case may be) and may wish to seek advice from a financial or other professional adviser or make such independent investigations as the reader considers necessary or appropriate for such purposes. If the reader chooses not to do so, the reader should consider carefully whether any product mentioned in this publication is suitable for him.

The information and opinions contained in this publication has been obtained from sources believed to be reliable but neither DBS Bank nor any of its related companies or affiliates (collectively “DBS”) makes any representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose. Opinions and estimates are subject to change without notice. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment. There is no assurance that the credit ratings of any securities mentioned in this publication will remain in effect for any given period of time or that such ratings will not be revised, suspended or withdrawn in the future if, in the relevant credit rating agency’s judgment, the circumstances so warrant. The value of any product and any income accruing to such product may rise as well as fall. DBS accepts no liability whatsoever for any direct indirect or consequential losses or damages arising from or in connection with the use or reliance of this publication or its contents.

DBS Bank, its related companies, their directors and/or employees may have positions or other interests in, and may effect transactions in the product(s) mentioned in this publication. DBS Bank may have alliances or other contractual agreements with the provider(s) of the product(s) to market or sell its product(s). Where DBS Bank’s related company is the product provider, such related company may be receiving fees from investors. In addition, DBS Bank, its related companies, their directors and/or employees may also perform or seek to perform broking, investment banking and other banking or financial services for these product providers.

The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.

If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this publication, which may arise as a result of electronic transmission. If verification is required, please request for a hard-copy version.

Singapore: This report is distributed in Singapore by DBS Bank Ltd.

Asia Pacific Bonds(ex Japan)

Launch Date1

(D/M/Y)Fund Size1

(Million)


(%)

3yrSharpeRatio3


RiskLevel5

3 Mths

6 Mths

1 Yr

3 Yrs

5 Yrs

Fidelity Asian High Yield USD A 02/04/2007 3,210.27 2.34 6.27 11.25 4.78 5.40 7.49 0.53 – P3

Nikko AM Shenton Asia Bond SGD A 01/08/2005 88.45 0.87 3.46 5.42 3.76 2.19 1.95 1.63 «« P3

Nikko AM Shenton Income SGD 31/01/1989 492.39 1.72 5.04 10.10 5.83 2.30 3.00 1.67 ««« P2

AlternativeInvestments

Launch Date1

(D/M/Y)Fund Size1

(Million)


(%)

3yrSharpeRatio3


RiskLevel5

3 Mths

6 Mths

1 Yr

3 Yrs

5 Yrs

Nikko AM Shenton Global Property Sec SGD

11/04/2005 27.50 3.25 11.25 17.05 11.50 0.20 11.54 0.97 ««« P4

Money Market Fund Launch Date1

(D/M/Y)Fund Size1

(Million)


(%)

3yrSharpeRatio3


RiskLevel5

3 Mths

6 Mths

1 Yr

3 Yrs

5 Yrs

Nikko AM Shenton Short Term Bond SGD 29/09/2000 260.22 0.75 1.68 4.26 3.01 2.35 0.68 3.68 ««« P2

DBS

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July

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Living, Breathing Asia

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