truscott giff special address slides2

1

Islamic Asset Management: A Global Opportunity William F. “Ted” Trusco3

CEO, Global Asset Management, Ameriprise Financial

This presentaAon is for informaAonal purposes only and should not be considered an offer of any product or service. Columbia Management Investment Advisers, LLC is an investment adviser registered with the U.S. SecuriAes and Exchange Commission. Threadneedle InternaAonal Limited is an FCA-‐ and a U.S. SecuriAes and Exchange Commission registered investment adviser based in the UK and an affiliate of Columbia Management Investment Advisers, LLC. These companies are part of Ameriprise Financial, Inc.

For institutional use only. 998424

What is the current state of the Islamic Asset Management Industry?

2 For institutional use only.

0.9 0.9

1.1

1.3

1.6

1.8

2008 2009 2010 2011 2012 2013

Islamic Banking 80%

Sukuk 15%

Takaful 1%

Islamic Funds 4%

Global Islamic Finance has seen strong growth. Currently ~$1.8T assets, 80% of which is in Islamic Banking

Source: UKIFS, The Banker, Ernst & Young

Global Islamic Finance Assets ComposiOon (2013) Global Islamic Finance Assets Growth ($T)

16% CAGR

Source: UKIFS, The Banker, Ernst & Young


The Islamic asset management industry is ~$70B. It has grown significantly but is small by global standards

47

56 61 62

67 73

2008 2009 2010 2011 2012 2013

Global Islamic Asset Management AuM Trend ($B)

9% CAGR

Source: Bloomberg, Eurekahedge, KFHR

Global AuM* $63T

Islamic AM Market share

<1%

* As of 2012; Source: BCG

Global Islamic AM Market Share


Despite a challenging macro backdrop, the volume of Islamic fund launches has increased

Source: Lipper Thompson Reuters – Global Islamic Asset Management Report 2014

Number of Global Islamic Funds

59 53 77 62 54 94

645 702

795

878

971

1,065

0

200

400

600

800

1000

1200

2008 2009 2010 2011 2012 2013

New Mutual Funds Launched Total Number of Funds

Global Financial

Crisis

Dubai Financial

Crisis

Arab Spring

Euro Zone Crisis


Investor base is primarily retail and shows a preference for local equity, as is common with newer markets

Global Islamic Funds AuM Domicile (2013)

Source: Bloomberg, Eurekahedge, KFHR

Retail dominated Primarily for local consumpOon

Equity dominated

Global Islamic AuM (2013)

Retail 80%

InsOtuOonal 20%

Saudi Arabia 37%

Malaysia 22%

Other local jurisdicOons

24%

Offshore 17%

EquiOes 54%

Money Market 12%

CommodiOes 3%

Real Estate 2%

Mixed AllocaOon

13%

Other 1% Sukuk Funds

15%

Global Islamic Funds by Asset Class (2013)




Sharia funds have navigated the Global Financial Crisis but recent performance has been lackluster

*Source: Lipper Thompson Reuters – Global Islamic Asset Management Report 2014

  Sharia equiAes navigated the Global Financial Crisis.

Equity Funds Average Performance*

Sukuk Funds Average Performance

Money Market Funds Average Performance

  Were able to deliver alpha returns over the benchmarks

  Recent performance has been lackluster

  Outperformed benchmarks post financial crisis.

  Recent performance has been lackluster

Comments*


Foreign asset manager engagement is commensurate with the current scope and scale of the industry

Primarily InsOtuOonal Mandates

Retail Products (Limited Sharia

Funds)

Retail Products (Some Sharia Funds)

Dedicated Retail (Deep Sharia Line)

  Interested in managing Sharia poreolios for high net worth or occasionally insAtuAonal clients

INCREA

SING LEV

EL OF EN

GAGEM

ENT

  Offer Islamic cerAficates and structure products via local banks (minority interest)

  Limited, if at all, Sharia funds

  On ground presence, typically Islamic Bank subsidiary of parent

  Some third party distribuAon

INVESTMENT MGMT. DISTRIBUTION

  Limited distribuAon presence on ground

  Distributed by local insAtuAons

  A few Sharia funds, primarily around Developed market or Global Equity

  Deep Sharia product line (mostly local players)

  On ground presence, typically proprietary distribuAon force

  Invesco

  UBS   Abn Amro   BNP Paribas   Societe

Generale

EXAMPLE

  HSBC   DeAWM   Franklin

Templeton

  CIMB Principal   Public Mutual

Source: Cerulli, company web sites Companies listed above are not affiliates of Columbia Management or Threadneedle Investments


Scale, DistribuOon and Product challenges have held back the Islamic fund industry from reaching its growth potenOal

Global CAGR 2008-‐13

Source: Central Banks, CEIC, World Islamic Insurance Directory, E&Y, Thomson Reuters, Zawya, Bloomberg, Eurekahedge, KFHR

Scale   Till date demand has been retail led   Sizeable money pools i.e. SWFs/ Pensions

haven’t allocated meaningfully yet

DistribuOon

  DistribuAon is closed architecture   Foreign asset managers are reluctant to build

proprietary distribuAon before they see scale and flows

Product ProposiOon

  Product development has been challenging due to:

•  Constraints in investable universe e.g. exclusion of financials

•  Limited risk management tools •  Divergent views on Sharia compliance •  Talent shortage •  Regulatory framework (PassporAng)

1

2

3

Key Challenges

20%

19%

9%

Takaful

Islamic Banking

Islamic Asset Management


Future outlook for the Global Islamic Asset Management Industry


Long term retail demand outlook is posiOve given projected growth of affluent Muslims

Muslim populaOon and share is expected to grow Muslim affluence is expected to grow

* Source: Pew Research

World Muslim PopulaOon (B)

1.3 1.6 1.9 2.2

4.8 5.3

5.8 6.1

2000 2010 2020 2030

Muslim Non Muslim

20% 26%

Source: CapGemini

HNWI Investable Wealth

9.8%

6.8%

6.2%

5.7%

3.4%

3.1%

Asia Pacific

Middle East

Europe

North America

Africa

LaAn America

2012-‐15F CAGR

2012 ($T)

15.9

2.2

13.1

15.0

1.4

8.3

Scale

CHALLENGE


InsOtuOonal engagement in OIC countries is essenOal in scaling the market up — some encouraging signs…

* Source: E&Y, 2013

  Malaysia: Government related enAAes outsource Islamic mandates

  Brunei: Recognizes Malaysia InternaAonal Islamic Financial Center success and is encouraging govt.-‐related enAAes to increase outsourcing

  Gulf CooperaOon Council: Largest asset pool and currently not seeking Sharia funds. Policy shiq could happen as Islamic asset management matures

SWFs/ Central Banks

  Could add between $160B -‐ $190B* to the sector, if policy changes are allowed

  Turkey: $175M in Islamic assets. Predicted to reach 15 % market share by 2023 from 1.5% current

  Malaysia: Launched in 2013, PRS has 17 Islamic funds out of 44. AddiAonal incenAves via tax breaks of government co-‐ contribuAons are being considered. Expected to grow to $10B in 10 yrs.

  Pakistan: Voluntary Pension Scheme holds $32M

  UK, Australia Have Islamic funds in pension plans

  More allocaAons expected from Takaful markets as they grow ($20B gross contribuAon as of 2013) and seek Sharia compliant investments

Public Pension Funds

Private Pension Funds Takaful

12

Scale

CHALLENGE

For institutional use only.

Islamic finance is taking roots in non-‐OIC countries. As markets develop, global asset managers will engage

U.S. Banking: 15 insAtuAons Sukuk: >$1.5B corporate issuances Takaful: Nascent Funds: Indices development, some funds

Source: GIFF 2012, Lipper 2014

UK Banking: 5 Islamic banks, 17 Islamic windows Sukuk: ~$1B corporate, Maiden sovereign issue Takaful: Nascent Funds: Islamic pension trust introduced Sharia funds

ConOnental Europe Banking: Germany, France tesAng waters Sukuk: ~$0.9B corporate Germany, France,

Lux, Switzerland Takaful: Nascent Funds: Ireland, Lux as convenAonal offshore

centers Asia Banking: Singapore, HK Sukuk: >$1.2B corporate issuance from Singapore, Japan

HK Sovereign issue in pipeline Takaful: Nascent Funds: India, Singapore, Australian presence

13

Scale

CHALLENGE


DistribuOon challenges are expected to persist. Growth of Islamic banks could be a game-‐changer

Can Islamic Banks become a meaningful distribuAon vehicle?

Islamic Bank Market Share of Assets (1H13)

Source: Annual reports, Central Banks, KFHR

24%

49%

18%

45%

23%

15%

Malaysia

Saudi Arabia

UAE

Kuwait

Qatar

Bahrain

Middle East

  Retail distribuAon of Sharia funds is primarily handled by local banks

•  ConvenAonal banks are closed architecture

•  Islamic banks are sAll establishing themselves on tradiAonal S&L businesses

Malaysia

  Direct channel (Aed agency) and banks are key method of distribuAon

  However local Islamic banks are expected to gain prominence over Ame

DistribuOon

CHALLENGE


21 28

45

85

131

120

2008 2009 2010 2011 2012 2013

We are encouraged by the growth of the Sukuk market, which bodes well for further product innovaOon

Issuance

  Issuance has grown 42% CAGR from 2008-‐13   Malaysia, Indonesia, Qatar and Turkey are

frequent sovereign issuers   UK sovereign issue could catalyze other Western

countries to tap market

Performance   Global Sukuk has outperformed global

convenAonal bonds for 3, 5 year Ame periods* with less volaAlity

Pricing   Gap in issuance costs between Sukuk and

convenAonal bonds have reduced

Currency   Ringgit, USD dominate   More local currency Sukuk are expected that will

help diversificaAon and improve pricing

Liquidity   Considerably improved but demand conAnues to exceed supply

Global Sukuk Issuance Growth ($B)

42% CAGR

*Bloomberg as at 30 Jun 2014– Global sukuk are represented by Dow Jones Sukuk Total Return Index. Global Bonds are represented by JPM Global Aggregate Bond Index – Total Return Unhedged USD Past performance does not guarantee future results

15

Products

CHALLENGE


  Islamic fixed income funds to increase as Sukuk markets grow and liquidity improves

  More global equity offerings compared to single-‐country / regional as foreign managers bring their value add

12% 15%

2010 2013

Islamic Fixed Income Funds AuM Marketshare*

13% 21%

2010 2013

% of Global Funds Launched*

*Source: Lipper Thompson Reuters

Global Equity

Sukuk Funds

AlternaOves   Rise of AlternaAves

•  Real Estate (natural fit with Sharia) •  Infrastructure (Key market needs) •  Hedge Funds (?)

More product innovaOon is expected as Islamic capital markets develop and global asset managers engage

16

CHALLENGE

Products


There is a strong philosophical convergence between Socially Responsible InvesOng & Islamic Finance

Socially Responsible InvesOng   Explicitly acknowledges the relevance of

environmental, social and governance factors   Double bo3om line -‐ Social good and Economic Profit

approach to invesAng   Avoids excessive debt

Islamic Finance   Economic development and growth along with social

jusAce to all   Avoids usury & excessive debt

17

CHALLENGE

Products


SRI industry is at global scale and is poised to grow as more investors sign the UN-‐PRI iniOaOve

SRI AuM by region ($B, 2012)

Source: Global Sustainable Investment Review 2012, GSIA, KPMG

Africa $229B

Asia $74B

Australia $178B

Europe $8,758B

US $3,740B

Canada $589B

Global $13,568B

$6.5T

$45T

100

1260

0

200

400

600

800

1000

1200

1400

0

10

20

30

40

50

2006 2014

AUM Signatories

UN PRI Signatories & AuM

Source: UN PRI Org

18

CHALLENGE

Products


The iniOal focus for SRI and Islamic funds has been on exclusionary screening — impact invesOng will follow

Exclusionary Screening

Impact InvesOng

  Exclude prohibited sectors i.e. gambling, tobacco, alcohol etc.

  Current demand, expected to grow   Suited to public equity   Limited cross-‐over appeal

ISLAMIC NON-‐ ISLAMIC

SOCIA

LLY R

ESPONSIBLE INVES

TING

Community InvesOng   Investments toward social good e.g. affordable housing, healthcare, job creaAon etc.

  Future demand   Suited to private equity/ debt   Has cross-‐over potenAal

Guidestone Funds  US Market  Southern BapAst faith driven  31 funds: Equity & FI  Largest faith based fund -‐ $15B in AuM*

Amana  US market  3 equity funds  401(K), IRA plaeorms  $3.5B in AuM*

PosiOve Screening   Seek areas i.e. environmental, ecological, carbon, sustainable forestry etc.

  Future demand   Suited to public/ private debt/ equity   Has cross-‐over potenAal

Arabesque  UK market  Barclays roots  Equity focused

Norway Pension Fund  Plans to invest more in renewable energy

QIA  Agri Supply chain infrastructure investments in east Africa

ISLAMIC NON-‐ ISLAMIC

Thrivent Financial for Lutherans  US Market  Donates porAon of profit to charitable causes

 $17B in AuM*

*Source: Morningstar as-‐of Aug 5 2014

Green Sukuk Working Group  Sukuk that meet InternaAonal Climate Bond criteria

 Green Sukuk market size est. $10-‐$15B

Islamic Development Bank  Sukuk to fund economic development in poorer Islamic majority countries

19

CHALLENGE

Products


  To invest with a clear focus of achieving and supporAng posiAve outcomes for individuals, communiAes or society as a whole.

Social ObjecOve

  To achieve a total return (by way of income and capital appreciaAon) through investments that are deemed to be supporAng and funding socially beneficial acAviAes and development, primarily in the UK.

Investment ObjecOve

Threadneedle Investments has launched a UK pooled vehicle that seeks to achieve both social and financial returns

20

CHALLENGE

Products


Why we should consider Socially Responsible InvesOng

1

2

3

Helps evolve from the “form” to the “core” of Islamic finance – economic development with social jusAce.

Has real crossover appeal, and can open doors in Western markets, which is necessary to gain global scale

Could get the more progressive Middle Eastern and Asian insAtuAons to invest, when focus shiqs from pure exclusionary screening to impact invesAng

21

CHALLENGE

Products


In Conclusion…

  We remain opAmisAc about the long term growth potenAal of the industry given the inherent demand

  The development of the Sukuk market could usher stronger Islamic fund proposiAon that a3racts more retail and insAtuAonal investors, in Muslim and non-‐Muslim markets

  Global managers will increasingly engage as the market scales up and distribuAon channels develop further


23

Global Economic and Market Outlook: OpportuniOes across the Globe

William F. “Ted” Trusco3

CEO, Global Asset Management, Ameriprise Financial


Global economies in transiOon.. Capital markets head in different direcOons


U.S. growth expected to pick up in second half of 2014  GDP trends will benefit this year from reduced fiscal drag, stronger business demand and improved energy exports. Some factors that impeded growth have reversed, including weather and an inventory correcAon. Preliminary esAmates showed the U.S. economy expanded at a real rate of 4.0% in Q2. Longer-‐term trend GDP growth sAll remains near 2.5%.

GDP trends

Sources: Haver AnalyAcs, Bureau of Economic Analysis, 07/14. Shaded tan area = recession 25 For institutional use only.

U.S. economy expanding at solid pace

Columbia Management US AcOvity Indicator (% annualized growth)

0.0

1.0

2.0

3.0

4.0

Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Source: Columbia Management.

3 mo. average

Past performance does not guarantee future results. Note: Data as of July 7, 2014


3

4

5

6

7

8

9

10

11

Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

%

Source: Haver AnalyAcs, BLS, Federal Reserve.

5%pt gap

0.75%pt gap

Old Fed structural rate New Fed structural rate

Unemployment rate implies only limited slack

Unemployment rate



Labor markets and fading unemployment   Payroll gains averaging over 200K/month now have pushed the unemployment rate down to 6.1%, edging closer to noAons of full employment. However, job gains are sAll focused in low-‐wage industries, wage growth is scant and parAcipaAon rates remain weak.

Payroll gains vs. unemployment rate

Sources: Haver AnalyAcs, Bureau of Labor StaAsAcs, 6/14

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

-1000

-800

-600

-400

-200

0

200

400

600

Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

Total Nonfarm Payrolls (SA; LHS) Unemployment Rate (RHS)


U.S. consumers have been aided by a rising stock market   Net worth touched record highs in the first quarter, with the gains concentrated in financial assets

versus a rebuild in lost homeowner equity. While consumer debt conAnues to be reduced, a revival in revolving credit and spending awaits improved wage and job growth.

Sources: Haver AnalyAcs, Federal Reserve, 03/14


Look for an iniOal rate increase within the next year — most likely early summer 2015   Stable growth and a bo3oming in inflaAon should allow the Fed to reduce and end large-‐scale asset purchases and normalize monetary policy. With stock market and Fed correlaAons high, will the markets noAce this building absence?

The Fed and the markets

Source: Bloomberg, 07/02/14

1000

1100

1200

1300

1400

1500

1600

1700

1800

1900

2000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000 Ja

n-10

M

ar-1

0 M

ay-1

0 Ju

l-10

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

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Jul-1

1 S

ep-1

1 N

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1 Ja

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ay-1

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l-12

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3 S

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S&P

500

Inde

x

Fede

ral R

eser

ve B

alan

ce S

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- To

tal A

sset

s ($

,mln

s)

Total Assets Federal Reserve Fed Actions S&P 500

QE3 Begins Twist 2 Operation Twist Begins

QE2 Begins Jackson Hole Speech on QE2


Large decline in long-‐end rates this year

U.S. Treasury 1yr Forward Rate Curve (%)

Past performance does not guarantee future results.

0

1

2

3

4

5

6

0 1 2 3 4 5 6 7 8 9

Year end

Today

Normal yield curve

%

Source: Columbia Management. Number of years forward

Note: Data as of July 7, 2014


Large decline in long-‐end rates this year

CumulaOve change in 5y5y yields since December 2012


-100

-50

0

50

100

150

200

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14

AUD

CAD

CHF

CZK

DEM

GBP

KRW

MYR

NOK

NZD

PLN

SEK

USD

basis points

Source: Bloomberg, Columbia Management.


-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2010 2011 2012 2013 2014

Headline Consumer Price Index Core Consumer Price Index Personal consumption expenditures deflator Core personal consumption expenditures deflator

Latest reads: Headline Consumer Price Index 2.13% (May) Core Consumer Price Index 1.96% (May) Personal consumption expenditures deflator 1.77% (May) Core personal consumption expenditures deflator 1.49% (May)

  Stable growth and a bo3oming in inflaAon will allow the Fed to reduce and end large-‐scale asset purchases and start the process to normalize monetary policy. With stock market and Fed correlaAons high, will the markets noAce this building absence?

U.S. inflaOon measures trending higher

Source: Haver AnalyAcs, 05/14


34

U.S. profitability and share buybacks   Share buybacks have helped propel stocks higher but recently announced share buybacks have

slipped somewhat. If companies can maintain their healthy margins and profitability then expect share buybacks, and dividend increases, to remain for the most fit companies.

Source: Columbia Management, Bank Credit Analyst. Bloomberg, July 2014.


35

Employment growth may augur Fed policy change   The Fed is paying close a3enAon to more than simple employment measures, however it appears

as though policy normalizaAon may be closer than some market parAcipants think. A key quesAon is how fast does the FOMC proceed, and what impact do higher rates have on the consumer,

Source: Columbia Management, Bank Credit Analyst. June 2014.


36

Global growth has stabilized but remains in slow speed   Aqer weakening early in the year, global economic data has steadied. However, the United

States, Eurozone and emerging markets conAnue to modestly disappoint growth expectaAons. Global central banks (ex-‐U.S.) will provide more sAmulus to support demand and avoid deflaAon.

Source: Bloomberg, 07/08/14. Columbia Management.


37

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

10 11 12 13 14 Consumption Government Investment Inventories Net Exports GDP

Eurozone Growth Contributions % QoQ

Euro Area growth outlook remains subdued

Source: Threadneedle, Reuters Ecowin June 2014.

  DomesAc demand returned in late 2013, but the export boost waned in early 2014.

  France and Italy conAnue to lag although Italian PMI’s suggest improvement is imminent.

  Germany and Spain to conAnue to lead the way.


Will the Eurozone muddle along?   Forward-‐looking euro-‐area economic indicators have improved steadily although manufacturing has come down some in recent months.

Europe PMIs

Sources: Markit, Bloomberg, 6/31/14

30

35

40

45

50

55

60

65

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Manufacturing Services


-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0% Ja

n-00

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Euro area inflaOon (year over year)

Headline Core European Central Bank target inflation

Forecast

  InflaAon in the Eurozone has declined of recent, prompAng the ECB to announce new policy measures in June. The ECB president announced new Targeted Longer-‐Term Refinancing OperaAons (TLTROs) to counter the threat of deflaAon.

Sources: Haver, Columbia Management, 06/30/14

InflaOon in Europe running well below ECB target


40

Japan, Ome for Capex to break out of its slumber?

Source: Bloomberg, June 2014.


41

Emerging Markets: growth expectaOons conOnue to decline

Source: Threadneedle, IMF, April 2014.

  ExpectaAons for developed market growth are greater than previous years.

  Emerging Market growth expectaAons were lowered as expectaAons in China, Brazil and Russia were challenged. However, more recently we are seeing signs of stabilizaAon in the emerging world.


  Asset market volaAlity declined from already low levels. This was not just a U.S. market phenomenon. VolaAlity has moved lower across global capital markets and different asset classes.

40

50

60

70

80

90

100

110

120

130

140

Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14

Volatility Indexed Rebased to starting date 6/28/2013 = 100)

Equity Currency

Commodities Treasuries

The drop in volaOlity has been striking

Sources: Bloomberg, Columbia Management, 06/30/14 Indices: Equity: CBOE S&P 500 VolaAlity Index (VIX); Currency: Deutsche Bank Currency VolaAlity Index; CommodiAes: 50% CBOE Gold VolaAlity Index, 50% CBOE Oil VolaAlity Index; Treasuries: Merrill Lynch Move Index


TacOcal opportuniOes in today’s global equity markets


Asset AllocaOon posiOoning for June 2014*

Source: Columbia Global Asset AllocaAon Team. * Asset allocaAon does not assure a profit or guarantee against a loss.

Max underweight Neutral Max overweight Overall position 5 4 3 2 1

Equities $ $ $ $

Fixed income $ $ $ $ $

Alternatives $ $ $ $ $

Cash $ $ $ $ $Equity $ $ $ $ $

U.S. stocks $ $ $ $

> Large caps $ $ $ $

> Small caps $ $ $ $ $

Developed equities (EAFE) $ $ $ $

> Japan $ $ $ $

> UK $ $ $ $ $

> Eurozone $ $ $ $ $

Emerging market equities $ $ $ $ $

> Latin America $ $ $ $

> Asia $ $ $ $ $

> EMEA $ $ $ $ $

Fixed income $ $ $ $ $

Investment-grade bonds $ $ $ $

Securitized bonds $ $ $ $ $

Emerging market bonds $ $ $ $ $

Treasuries $ $ $ $ $

TIPS $ $ $ $ $

High-yield bonds $ $ $ $ $

Developed market bonds $ $ $ $ $

Municipal bonds $ $ $ $

Alternatives $ $ $ $ $

Absolute return strategies $ $ $ $ $

Commodities $ $ $ $ $

REITs $ $ $ $ $

Convertible bonds $ $ $ $ $

Cash Cash $

Current allocation (6/17/14) Previous allocation (3/31/14)


45

The case for equity markets

Source: Bloomberg/MSCI, June 2014.

U.S. equity free cash flow yield vs bond yield

The jaws are closing

  Economic recovery is gathering pace

  Corporate earnings growth remains solid

  FCF yield > bond yield

  The risk is how the economy reacts to the first rate rises in this cycle


Global valuaOons: opportuniOes and concerns

Sources: Datastream, MSCI, InsAtuAonal Brokers’ EsAmate System (IBES), Columbia Management, 6/14 For each region we calculate the percent rank of current forward P/E as a percentage of its 10-‐year history. Forward P/E is the current price over 12-‐month forward recurrent earnings. For example, in the United States as of December 31, forward P/E was ranked 83 in comparison with the past 10-‐year history.

  Despite an impressive 30% rise last year, Japanese equiAes remain among the cheapest across different regions in comparison to their potenAal range of valuaAons. EM stocks conAnue to rank towards the cheaper end of the range while U.S. stocks are headed towards the expensive end of the spectrum.


Global equiOes are more atracOve than bonds or yields  Global dividend yields are sAll greater than nominal bond yields.

Global equity versus global bond yields

Sources: Datastream, MSCI, CiAgroup, Columbia Management, 06/30/14

%


  Japan conAnues to offer strong posiAve earnings growth, but market expectaAons of earnings have moderated from loqy levels. If policy reforms evolve into acAonable measures that drive economic growth then Japan may resume its strong total return performance.

Japanese earnings growth expectaOons remain strong


49

Chinese equiOes: ready to advance?   With PMIs recently turning up in China the stage may be set for improved earnings reports coming out of

the region. Chinese equiAes make up nearly 16% of the MSCI Emerging Market Index so any turn here in performance can have meaningful knock-‐on effects.

Source: Columbia Management. Bank Credit Analyst. As of July 2014.


Stock correlaOons have fallen   CorrelaAons among stocks have declined dramaAcally, implying a be3er stock picking

environment for acAve managers. Similarly, cross-‐asset correlaAons are also lower than the past few years, implying be3er opportuniAes for overall poreolio diversificaAon.

Sources: Bloomberg, FactSet, as of 6/14.

* Average cross-‐secAonal stock correlaAon is esAmated as the average pair-‐wise rolling three-‐month daily stock returns’ correlaAons for all S&P 500 Index stocks’ combinaAons.

Average S&P 500 Index stock correlaOon* (Rolling three months)


Source: IBES, MSCI, Factset, CiA Research as at 27 June 2014.

%

Global dividends: yields by region   Equity dividends remain a highly relevant component feeding investor returns. We see structural

tailwinds conAnuing to merit close a3enAon to those dividend growers that show both quality traits, vis-‐à-‐vis strong balance sheets, mixed with a3racAve growth in operaAng results.

Global Equity Market Dividend Rates


52

  EquiAes no longer cheap but corporate profits are growing

  Policy accommodaAon is ending but may take some Ame to normalise

  Companies remain in good financial health and profit and dividend growth should allow markets to progress

What does it mean for equiOes the rest of the year?


-2%

0%

2%

4%

6%

8%

10%

12%

Rising Flat/rising Flat/falling Falling

Aver

age

annu

al re

turn

U.S. aggregate U.S. Treasury U.S. government-related U.S. securitized U.S. credit corp

+122 bps +25 bps -26 bps -103 bps Avg. 12-month

change in 10-year Treasury yield

Fixed Income: various rate scenarios   High-‐quality fixed-‐income sectors with at least some credit risk have historically outperformed when

interest rates rise. Investment-‐grade corporate bonds are an a3racAve supplement to an otherwise agg-‐based poreolio because they can increase yield, decrease relaAve rate sensiAvity and are leveraged to the improving economy.

Source: Barclays. Data reflects rolling 12-‐month returns from March 31, 1991 through May 31, 2014. Rate environment is characterized by the change in yield over 12 months of the 10-‐year U.S. Treasury. Rising is characterized by a yield difference of more than +100 basis points (bps). Falling is characterized by a yield difference of more than -‐100 bps. Flat/rising reflects a yield change of less than 50 bps where the ending yield was higher than the beginning yield. Flat/falling reflects a yield change of less than 50 bps where the ending yield was lower than the beginning yield. 53


Fixed Income: spreads have conOnued to Oghten

Source: Bloomberg, as at June 30, 2014.

  Credit spreads have Aghtened in most sectors year-‐to-‐date, approaching all-‐Ame lows in the case of investment-‐grade. Rate hikes historically have not spelled the end of the credit cycle.


55

  Typically, three red indicators consAtute a sell signal

Indication Status Comments

Valuation Not cheap / not stretched

Risk Premia The first factor to have turned, but this can remain red for an extended period before trouble erupts

Corporate Health Strong but deteriorating; on a path to turn red in 12-15 months

Policy/Liquidity Set to turn yellow in 2014 on the heels of Fed tapering

Macro Growth is improving, but sectoral imbalances will now become a headwind

  With no policy mistakes to cloud the picture, the current cycle should extend another 12-‐24 months

Fixed Income: too early to sell, but the credit rally is in the late stages


Disclosures The views expressed in this material are the views of Columbia Management and Threadneedle Investments through the period ended Jul 31st 2014 and are subject to change without noAce at any Ame based upon market and other factors. All informaAon has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representaAon or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such informaAon and it should not be relied on as such. This informaAon may contain certain statements that may be deemed forward-‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objecAves will be achieved or that any parAcular investment will be profitable. Past performance does not guarantee future results. This informaAon is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objecAves, goals, Ame horizon and risk tolerance.

Asset allocaAon and dollar-‐cost averaging do not assure a profit or protect against loss in declining markets.

Product diversificaAon can help protect against certain financial risks, but it does not protect against market losses.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over Ame and issuers may reduce dividends paid on securiAes in the event of a recession or adverse event affecAng a specific industry or issuer.

There are risks associated with fixed income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-‐term securiAes.

Non-‐investment grade securiAes, commonly called “high-‐yield” or “junk” bonds, have more volaAle prices and carry more risk to principal and income than investment grade securiAes.

InternaAonal invesAng involves increased risk and volaAlity due to potenAal poliAcal and economic instability, currency fluctuaAons, and differences in financial reporAng and accounAng standards and oversight. Risks are parAcularly significant in emerging markets due to the dramaAc pace of economic, social, and poliAcal change.


Disclosures The Standard & Poor’s 500 Index (S&P 500 Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distribuAons and changes in market prices, but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.

InformaAon provided by third parAes is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-‐party source.

Columbia Management Investment Advisers, LLC ("Columbia Management" is an SEC-‐registered investment adviser that offers investment products and services under the names Columbia Management Investments, Columbia Management Capital Advisers and Seligman Investments).

Threadneedle InternaAonal Limited is an FCA-‐ and a U.S. SecuriAes and Exchange Commission registered investment adviser based in the UK and an affiliate of Columbia Management Investment Advisers, LLC.

© 2014 Columbia Management Investment Advisers, LLC. All rights reserved.


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