Nikko AM Pulse

July 2012
Welcome to the second issue of Nikko AM Pulse, a monthly comment from the investment team of Nikko AM’s World Series Fund Platform®.

June was a month of two halves, with the first half characterised by a waiting game in the run-up to the mid-month Greek elections. Investors expected a binary result and were content to watch from the sidelines, until the emergence of a pro-bailout majority led to a small sigh of relief. In the second half of the month, markets picked up some steam and the first half of the year ended with a resounding rally on the last day. Whilst this boosted mainstream indices into comfortably positive territory (S&P 500 +3.96%, Russell 2000 +4.8%, with the FTSE 100, DJStoxx, Hang Seng and Nikkei all up around 5%, whilst the Shanghai Composite lost the same amount), peripheral European markets skyrocketed. The Greek Athex ended the month up 18%, whilst Spain’s IBEX was up 16.7%, although both are still down by double digits year to date (Figure 1). Key losers for the period were Commodities and other riskier assets, as the tap was turned off for more liquidity and weaker growth was forecasted on a global scale.

European macro woes, with their shifting actors and ongoing twists in the tale are starting to resemble a comic book, with a vast permutation of different endings. The joke, however, is lost on many.

The “lemon” of heightened regulation . . . and who’s making lemonade
Whilst financial institutions and hedge funds have been subjected to heightened regulatory scrutiny for many years, the level of intervention continues to mount. In June, UK banks became the focus of LIBOR fixing allegations, whilst in the US, expectations of heightened trading losses at JP Morgan fuelled fears that more revelations were yet to come. Until this point, financial stocks had been the lead performers of the month (Figure 2), particularly in Europe (the DJStoxx 600 Banks was up 10%, compared to the general index (+5%)). However, the high incidence of eye-popping figures - whether in fines or announced trading losses – are bound to start tongues wagging about whether certain institutions are in fact “too big to fail” or instead “too big to function”. Of course, distress in this sector may be a boon for private equity funds and hedge funds, who continue to circle insurance companies, asset managers and other institutions in a state of flux. Two private equity deals have just been announced in the first days of July – Blackrock purchasing Swiss Re’s private equity business and Harbourvest purchasing the listed portfolio of Conversus.
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FTSE 100 DJ Stoxx 600 SHCOMP Index

S&P 500 HSI Index ASE Index

Russell 2000 NKY Index IBEX Index

Figure 1. June Performance. Source: Bloomberg as at 30 June 2012. Figures rebased to zero.

Failure to launch
These ongoing crosscurrents, as bursts of activity alternated with paralysis, created more strain for active managers and performance in June was generally lack lustre. This was not enough, however, to lift spirits following a disastrous May and at the halfway mark, 2012 continues to be limping. Although the year started with a surge of optimism and appetite for risk, this was quickly tinged with regret and eroded, perfectly in line with the “shorter business cycle” playbook.
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1 0/06/1 2 DJ STOXX 600

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DJ STOXX 600 Banks

Figure 2. DJ STOXX 600 against the DJ STOXX 600 Banks. Source: Bloomberg as at 30 June 2012. Figures rebased to zero.

Both evidence the trend towards consolidation in the private equity sector; the appeal of infrastructure

The Investment Team Nikko AM World Series Fund Platform® July 2012 It is about time… However. E: worldseriesfundplatform-distributors@nikkoam. for a personal loan taken from the fund in the amount of over $100mn. the expense of fixed income allocations. competition is fierce and medals are few. European equities. Now. Wide and persistent share-price discounts in these listed vehicles have forced companies to offload assets and return cash to shareholders. There was another blast from the past in June as KKR announced the acquisition of Prisma. In both fields the stakes are high. as a high profile manager was charged with civil fraud by the SEC. As always we welcome your feedback. The single day spike in equity markets on the last trading day was in response to better than expected news from the European summit – a suggestion of how low expectations had been set perhaps. Nikko WSFP09072012 . If surprises err on the positive side. as the same liquidity shortage that we mentioned earlier continues to plague their business model. on the basis of publicly available information. discipline. announced the closure of three of its hedge funds. please contact us – we may be interested in appointing you as sub-advisor to a new product launch for our 300 intermediaries across Asia. questions and comments.Nikko AM Pulse July 2012 investing. officer nor employee thereof. visit http://en. or what used to be known as “balanced” dressed up in a new shiny suit with some additional bells and whistles. internally developed data and other sources believed to be reliable. This information is for professional investors only. London. In making any investment decision. a long-time multi-strategy manager based outside Milwaukee. such has been the malaise during the year that we are beginning to see murmurs of a change in approach by institutional investors. reflecting a strong demand for yield. Any opinions expressed in this document may be subject to change without notice. nor any director. a hedge fund of funds manager with close to $8bn in institutional assets. Other hedge funds fell under the regulatory strong arm. 1803699. This document should not be regarded as investment advice. in the case of the Blackrock transaction and the challenges facing listed private equity funds in the case of Conversus. E: Important Information This document is for information purposes only and is not intended to be an offer. Multi-asset mandates. as in investment. as we enter July… As we enter the second half of the year. a delightful summer of sport continues and the world will be gripped by scenes of triumph and loss – and the interplay of persistence. having been a “no go” zone for months. We have also seen an increase in searches for emerging markets and global equities at Further Information Fund Managers If you are a fund manager that can add value with specialist expertise in strategies which Nikko AM doesn’t have in-house. prospective investors must rely on their own examination of the merits and risks involved. to buy or sell any investments. EC2Y 5AD. Whilst it has been some time since we have seen such a bold move by a private equity firm. are seeing real Distributors If you are a distributor and are looking for a specialist investment solution for your clients. Not for redistribution. more funds are likely to look to gain exposure. This document has been prepared and issued by Nikko Asset Management Europe (Nikko AME). Not all winners are deserving and not all finely tuned champions will prevail – in sport. Registered address: 1 London Wall. please contact us about our worldwide third-party fund manager research. or a solicitation of an offer.nikkoam. While reasonable care has been taken to ensure that the information is accurate and any assumptions made or simulations used are fair and reasonable. It was also reported that Stark. shall in any way make guarantee. surprise and simple luck. it reflects the ongoing dynamic shape of asset management. are starting to look irresistible to some. Nikko AME is authorised and regulated by the Financial Services Authority and is registered in England No. representation or warranty of and be responsible for the accuracy or completeness of this document. For more information. whilst REITs have performed strongly over recent months.

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