1. The case for active management in a fee conscious market
Ray King IOOF Portfolio Manager, Alternatives

2. Disclaimer
This document is for financial adviser use only - it is not to be distributed to clients.
Issued by IOOF Investment Management Limited (IIML), ABN , AFSL Client services team Website ( IIML is a company within the IOOF Group of companies, consisting of IOOF Holdings Limited ABN and its related bodies corporate.
To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Neither IIML nor any company in the IOOF group guarantees the performance of any trust or the return of an investor’s capital.
Past performance is not indicative of future performance.

3. Agenda 1. Low fees products dominating – why? 2. What do clients want?
3. Low return environment - implications
4. How has the industry responded?
5. Case study

4. Agenda 1. Low fees products dominating – why? 2. What do clients want?
3. Low return environment - implications
4. How has the industry responded?
5. Case study

5. Growth has been in passive
Global trends behind the growth: the increase in passive management
US fund flows since the GFC
Active Passive
-US$340 billion + US$505billion
Source: Morningstar, FactSet to 2016
Passive has been picking up higher amount of total equity inflows
Source: BoFA Merrill Lynch Global Investment Strategy, EPFR Global based on EPFR Global’s monthly dataset (comprehensive coverage)

6. Costs of a diversified portfolio
Low Fee = Index Based Investment Strategy
ICR Median ~47 bps*
Standard Fee = Active Investment Strategy
ICR Median ~95 bps**
High Fee = Absolute Return / Alts
ICR Median ~158 bps***
* Median ICR Lonsec 61-80% Growth Low Cost Multi-Sector
** Median ICR Lonsec 61-80% Growth Multi-Sector
*** Median ICR Lonsec Growth Alternatives (High) Sector
Source: Lonsec, May 2017

7. Growth has been in passive
Percentage of flows into passive equity
Passive has been picking up higher amount of total equity inflows
Source: Morningstar Direct Asset Flows

8. Why has passive seen growth?
Increased Fee Awareness
Industry Funds
Simplicity
Low Return environment
My Super pressure
Returns to active?

9. Agenda 1. Low fees products dominating – why? 2. What do clients want?
3. Low return environment - implications
4. How has the industry responded?
5. Case study

10. How do clients define a successful plan
Survey of clients using financial advisors
Low fees not an objective, potentially a means to an end
Source: IOOF

11. But watch your back pocket

12. Recent history – low / full cost net returns a wash
Source: Lonsec

13. Agenda 1. Low fees products dominating – why? 2. What do clients want?
3. Low return environment - implications
4. How has the industry responded?
5. Case study

14. Low return environment
Consultant ten year assumptions
Asset class returns ten years ending May 2017
Asset class returns twenty years ending May 2017
Jun 2015
Dec 2016
Australian Equity
8.7
7.5
3.4
8.4
International Equity Unhedged
8.1
7.7
5.0
5.8
International Equity Hedged
6.6
6.7
4.3
5.7
Property
6.9
7.1
-0.1
7.6
Diversified Fixed Interest
3.6
3.1
Cash
3.2
3.9
4.7
Implied 70/30 portfolio return
6.5
6.1
70/30 portfolio comprises 30% Aus Equity, 15% Intl Equity Unhedged, 15% Intl Equity Hedged, 10% Property, 20% Diversified Fixed Interest, 10% Cash
Source: IOOF, Russell Investments, Bloomberg

15. Low return environment
Source: Bloomberg

16. Low return environment
Source: Bloomberg

17. Low return environment
Source: Mercer

18. What’s important In a low return environment to achieve goals or
Excess return becomes more important
Cost becomes more important

19. Active manager excess return above index
Some definitions
Traditional active: .
Active manager excess return above index +
Stock specific return
Factor returns
True alpha
Value
Growth
Size
Quality
Yield
Momentum
Industry
Volatility
Uncorrelated returns willing to pay
Commoditised
Not willing to pay
+ many more

20. Active excess return seems to exist pre fees
Median Australian equity manager
Rolling 5 year excess returns before fees
Median international equity manager
Median diversified fixed interest manager
Source: MercerInsight

21. Agenda 1. Low fees products dominating – why? 2. What do clients want?
3. Low return environment - implications
4. How has the industry responded?
5. Case study

22. Regulators call for change!
Source: Financial News

23. Return being broken down into component parts
Pre 90’s
90’s and 80’s
Today
Higher costs
Lower costs
Higher costs
Lower costs
Alpha
Manager Excess Returns
(Alpha)
Smart Beta
(Factor Capture)
Manager Returns
High costs
Market Returns
(Beta)
Beta
Source: State Street

24. What are factor strategies
Active managers have relied on factors for years:
Growth
Value
Small Cap Size
Quality
Yield
Manage Factor Implementation
ACTIVE Managers
Manage Factor Exposure

25. How have fund managers responded?
Passive fund managers
Active fund managers
Smart beta
or factor products
Traditional passive
Higher “alpha” products
Lower existing fees
Smart Beta
or Factor Products
Absolute return
Lower fees
Higher fees

26. Blending the three schools of management
Active
Factor
Passive
Core / Satellite
Efficient Alpha
Enhanced Passive
Blending three approaches – best use of fee budget:
Use passive: Asset sectors where alpha scarce Beta of sector a diversifier / attractive
Use factors: Systematic factors identifiable Cost effective vehicle available
Combine factors to reduce volatility
Use active: Asset sectors high stock specific alpha
Fundamental active managers at low fee
= IOOF MultiSeries

27. How factor captured is critical
How a factor is captured makes a big difference:
Definition: What measure used to capture factor systematically
eg Value = P/E, P/BV, P/CF …..
Combination: Enhancing risk return by “filtering” factors
eg Momentum = invest in only quality momentum stocks
Implementation: Can factor return be captured systematically
eg Impact transaction costs on high turnover strategies
eg Size factor – small caps have high stock specific risk
Growth in factor investing = pushing decisions back to advisors

28. How factor captured is critical
Value Implementation Method (Australian Equity)
5 year return
pre fees (%pa)
Fundamental Value Manager 1
13.7
Fundamental Value Manager 2
13.0
Fundamental Value Manager 3
14.7
Fundamental Value Manager 4
12.5
Fundamental Value Manager 5
14.3
A factor can have many flavours
Systematic Value Manager
11.2
Value ETF
12.1
Return variation can be high
S&P Australia BMI Value
13.4
S&P Australia SmallCap Value
8.4
S&P Australia LargeMidCap Value
14.2
S&P/ASX 300 Index
11.7

29. Agenda 1. Low fees products dominating – why? 2. What do clients want?
3. Low return environment - implications
4. How has the industry responded?
5. Case study

30. Blending the three schools of management
Active
Factor
Passive
Core / Satellite
Efficient Alpha
Enhanced Passive
Blending three approaches – best use of fee budget:
Use Passive: Asset sectors where alpha scarce Beta of sector a diversifier / attractive
Use Factors: Systematic factors identifiable Cost effective vehicle available
Combine factors to reduce volatility
Use Active: Asset sectors high stock specific alpha
Fundamental active managers at low fee

31. IOOF MultiSeries Combining passive, factor & active
 Asset class
Investment managers
Factor / Strategy
Strategy
allocation
Australian Equities
State Street Global Advisors
IOOF QuantPlus
Henderson Global Investors (Australia)
Platypus Asset Management
UBS Global Asset Management (Australia)
Acadian Asset Management (Australia)
Invesco Australia
Diversified Multi Factor
Value
Mid Cap Fundamental
Momentum (Quality)
Contrarian Value fundamental active
Small (Managed Volatility)
Quantitative long/short
20%
18%
12%
21%
15%
11% 3%
International
Equities
Challenger
Goldman Sachs International
TT International
Neuberger Berman Australia
TT Emerging
Index Developed Markets
Index Plus
Multi Factor
Low Volatility (Managed Vol)
Global equity fundamental active
Emerging Market fundamental active
28%
10% 5%
Passive
Factor
Active
Passive Factor Active

32. IOOF MultiSeries Combining passive, factor & active
 Asset class
Investment managers
Factor / Strategy
Strategy
allocation
Property
Macquarie Investment Management
IOOF Investment Management
Index Australian Listed property
Index Global Listed Property
Australian Direct Property active
20%
30%
50%
Alternatives
Invesco Australia
Metrics Credit Partners
Index Global Listed Infrastructure
Multi Strategy Active
Australian Private Debt Active
40%
Diversified fixed interest
Brandywine Global Investment Management
Western Asset Management Company
Metrics Credit Partners Pty
Henderson Global Investors (Australia)
Global Fixed Interest Unconstrained Active
Global Fixed Interest Active
Australian Fixed Interest Active
Australian senior Loan Active
Australian Short term credit active
25% 5%
Passive
Factor
Active
Passive Factor Active

33. Is low-cost killing active management?
No:
Targeted use of active in cost controlled portfolio
True active management = stock specific return
Active managers are evolving
Higher active share products
Factor products
Active managers adjusting fees

34. Multi-manager – value for you and your clients
Value add for the investor:
Professionally managed by experienced team.
Diversification.
Effective use of asset consultant.
Investment specialist team.
Consistent investment outcomes.
Implemented solution: value of advice.
Automatic rebalancing of portfolios.
Removes the burden of paperwork.
Access to tools and support.
Value add for the adviser:
Provides a professionally managed investment solution.
Available for all risk profiles.
Access to performance data, fund profiles and other supporting collateral via IOOF Investment Central.
Auto rebalancing.
Manager changes implemented for you – no ROA.
Saves you and your business time/efficient solution.
Reduced risk “sleep and night”.

35. Transparency through Investment Central
Your online hub

36. IOOF MultiSeries More investment styles More managers
A true low-cost multi-manager solution
IOOF MultiSeries Compared to the index/passive low-cost funds, IOOF offers you so much more…
More investment styles
More managers
More risk management
More performance

37. Ray King IOOF Portfolio Manager, Alternatives
The case for active management in a fee conscious market