Austrian Economics Golden Opportunities Fund Prepared for Inflation And Deflation Ronald-Peter Stöferle & Mark J. Valek Executive Summary I Quo Vadis… The Fund and its Objectives ► Real (inflation-adjusted) growth in uncertain times ► Active protection against Inflation/Deflation ► Absolute Return, Global Macro approach ► Target return 8% p.a. ► Modest Drawdown-Risk (Ø Volatility between 10 and 12%) ► Diversification to traditional bond and equity portfolios …Inflation or Deflation? Our Investment Approach ► Identifying the respective inflation momentum utilizing the „Incrementum-Inflation-Signal“. ► Strategies are implemented based on our know-how in the Inflation/Deflation portfolio via precious metals, equities and commodities. ► Budget for tactical opportunities for other themes using Austrian School perspective. Sources: Societe Generale, Incrementum AG 2 Executive Summary II Austrian Economics for Investors Our Investment Philosophy ► Insights of the Austrian School of Economics are the intellectual foundation of our macro-analyses. ► In contrast to traditional tenets the Austrian School recognizes the “fiat money” and fractional reserve banking system as the major cause of the ongoing crisis. Conservative Risk Profile Characteristics of the Fund ► No benchmark, Absolute Return approach ► Active asset allocation for Inflation or Deflation by means of diversified basket of securities ► Significantly lower volatility (between 10-12%) compared to mining stocks (about 50%) and silver (about 35%) ► UCITS IV Funds Sources: Societe Generale, Fed St. Louis, Incrementum AG 3 The Path Out Of Over-indebtedness The higher the national debt, the higher the interest in (Price-)inflation „Inflation or deflation are just two foreign words for bankruptcy“ Carl Fürstenberg Source: Societe Generale, Incrementum AG 4 Deflation Or Inflation? 5 The Tug Of War Team Blue: Deflationary Forces Team Red: Inflationary Forces ► Balance Sheet Deleveraging: Undercapitalized banks ► Zero interest rate policy recovering from the crisis are reluctant to lend ► Communications Policy (forward guidance) ► Deleveraging: Over-indebted consumers are reluctant to ► Operation Twist borrow ► Quantitative Easing ► Regulation: Basel III ► Currency Devaluation (Currency Wars) ► High Demand to hold Money (low inflation exp.)* ► Eligibility Criteria for Collateral (ECB) ► Productivity gains ► Defaults and Bail-ins (Greece, Cyprus) *Low velocity according to the Monetarist Paradigm 6 Deflating Credit vs. Inflating Monetary Base 8000 4000 7500 3500 7000 3000 6500 ) USD) 2500 6000 M0 (bn M0 (bn 2000 5500 M0 (bn USD M2 minus M2 minus 1500 5000 4500 1000 4000 500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 M2 minus Monetary Base Monetary Base Sources: Federal Reserve St. Louis, Incrementum AG 7 Inflation vs. Deflation: Monetary Tectonics The interplay between Inflation and Deflation can be compared to the permanent reciprocal pressure of two tectonic plates ► Systematic indebtedness is potentially highly deflationary ► Central bankers want to avoid deflation at all costs ► Balancing act between credit- deflation and central bank- inflation poses significant dangers ► Investors should prepare for both scenarios: inflationary AND deflationary periods Increasing pressure of two tectonic plates: Beneath a calm surface, pressure increases gradually and finally erupts into sudden thrusts on the surface. 8 The Fund “The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy. Ludwig von Mises 9 Our Investment Approach Inflation/Deflation- Tactical Opportunities strategy 0%-25 % 0%-100% Risk Contribution 1 Risk Contribution 2 Portfolio Volatility on average: 10-12% Risk Management / Compliance Control 10 1. Inflation/Deflation-Strategy Prepared For Inflation And Deflation Monetary Seismograph ► In the long run, price inflation is a monetary phenomenon. Due to the phenomena of monetary tectonics, inflationary and deflationary phases may alternate. ► To measure how much monetary inflation is spilling into the real economy, we use a number of market-based indicators. Indikator 1 Indikator 2 Signal aktuell: short -0,25 Signal aktuell: short -0,25 ► Our proprietary method of measurement can be 2,00 0,80 1,90 0,70 1,80 compared to a “monetary seismograph”. Its 0,60 1,70 1,60 0,50 1,50 0,40 measurement results in the “Incrementum Inflation 1,40 0,30 1,30 0,20 1,20 Signal” , which indicates the prevailing inflation 1,10 0,10 1,00 0,00 trend. info: Momentum kurz 65 info: Momentum lang 150 Signal Möglichkeit 75% -25% Signal Möglichkeit 50% -25% Indikator 3 Indikator 4 Signal aktuell: short -0,25 Signal aktuell: short -0,25 5,00 4,60 ► According to the respective signal, positions for 4,40 4,50 4,20 4,00 rising, neutral or falling inflation will be taken. 4,00 3,50 3,80 3,60 3,00 3,40 2,50 3,20 2,00 3,00 info: Momentum lang 150 info: Momentum mittel 100 Signal Möglichkeit 50% -25% Signal Möglichkeit 50% -25% Incrementum Inflation Signal Overall Signal short -50% 11 Market-based Indicators Gauge The Inflation Momentum 12 10 8 6 Uncovered Money Substitute Base Money 4 Trillion Trillion USD 2 0 Increasing inflation tendency Neutral inflation tendency Decreasing inflation tendency Sources: Fed St. Louis, Incrementum AG 12 Our “Monetary Seismograph” Incrementum Inflation Signal: Disinflation Deflation Deflation Disinflation late 1990s scare 2001 2008, 2009 Late 2011- Sooner or later current monetary 2009 -2011 Commodity Boom 1999 - 2008 Inflation will hit Reflation the road… 2,5 2 1,5 1 Increasing Increasing Inflation 0,5 0 Currently, still no green light -0,5 for inflation- sensitive asset -1 classes!! -1,5 0,75 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Decreasing Decreasing inflation Incrementum Inflation Signal DJ UBS Commodity Index Spot Sources: Bloomberg, Incrementum AG 13 During Rising Inflation: Only commodities and commodity stocks rally Performance of Asset Classes during different Inflation Regimes 30% 25% 20% 15% 10% 5% 0% Average Return Average -5% -10% -15% Falling Inflation Stable Inflation Rising Inflation Equities Fixed Income US TIPS Global REITs Energy Equities Mining Equities Precious Metals Commodities Return characteristics of the Fund – indicative values Sources: Wellington Asset Management, Incrementum AG 14 Inflation Signal Disciplines Positioning: ► Incrementum Inflation Signal captures the medium to long term inflation Momentum. ► The inflation portfolio of the strategy is a diversified portfolio of energy stocks, mining stocks and commodities. ► The signal does not unconditionally trigger a positioning of the portfolio. ► A position in opposition to the signal is forbidden ► The Signal may only be overruled for reduction of risk. 15 2. Tactical Opportunities-Portfolio (0 – 25%) ► In addition to the inflation / deflation strategy, we have defined investment themes, which in our opinion, provide exceptional opportunities for tactical positioning. Cornerstone of the tactical opportunities-portfolio: ► Investment themes are identified on the basis of Austrian Economics. ► Austrian Business Cycle Theory is used in combination with technical timing signals. ► Each tactical position has a strict risk budget. ► In concrete terms, we track the impact of the aggressive reflationary policies of the Bank of Japan. In this context, we expect sooner or later a strong reaction in the bond and currency markets. ► Strong currency depreciation in Japan (USD/JPY, XAU/JPY) ► Inflation in Japan (rising yields of JGB‘S) ► Rising volatility/turbulence in the stock market ► Sharp stock market correction as a result of tapering (S&P and Nasdaq short) “There is no security in life, only opportunity” Mark Twain 16 The Consequence Of Printing Money From The Liquidity Trap To Price Inflation Debt level in % of GDP Development of average interest rates Sources: Incrementum AG, Federal Reserve St. Louis 17 Risk Measurement Integral To The Process Volatility of the Fund Target Volatility of Fund ► UCITS IV compliant Fund ► Value at Risk and volatility is US Treasury Future (10Y) controlled by independent units. Internal VaR Limit ► Fund management / Risk manager ► Independent risk management of VaR Limit as of Prospect the fund administrator DJUBS Commodity Index ► Target volatility of the fund is 10% to Gold in USD 12% p.a. ► Risk reduction through a balanced S&P 500 portfolio. Silver in USD ► Order compliance is carried out by the administrator. Gold Mining Equities -60% -40% -20% 0% 20% 40% 60% max. VaR (99%/20d) average Volatility p.a. Calculation: max. VaR of rolling daily 260 periods, data from 1995 to 2013 Sources: Bloomberg, Incrementum AG 18 The Fund As Part Of A Balanced Portfolio Allocation According Inflation Expectations Stable Inflation Expectations High Probability of unstable Inflation Expectation 5% 15% 25% 30% Equities Fixed Income Fund 65% 60% Sources: Incrementum AG, Indicative Values 19 Opportunities And Risks Of The Fund Opportunities ► Participation in an actively managed portfolio, which can profit from rising and falling prices. ► The fund may achieve above average returns especially in pronounced inflationary or deflationary periods. ► The fund allows participation in different asset classes (equities, commodity-linked securities, currencies, derivatives, bonds). ► Capital preservation is top priority. Risks ► Risks associated with bonds (rising yields, country