InschQuantrend Ltd

Corso Elvezia 14
6900 Lugano
SWITZERLAND
Tel: +41 (0)91 921 0168
Fax: +41 (0)91 921 4078
www.inschinvest.com

SAMPLE R2R REPORT

LGT
We provide the practical example of LGT, one of Overhead Cost 70%* $17,200,568
the largest traditional asset management
businesses in Switzerland. The performance of Estimated Net
LGT traditional funds is not the worst in our 30%** $7,371,672
Revenue
sample of traditional asset managers. In fact,
some other managers in our sample show far Front End Load 5%* $126,593,376
more dismal numbers.
Number of Funds 15
The R2R is “kind” to fund managers as it does not
take into account the funds that have become * According to assumptions
“inactive” over time. This gives a very substantial ** Remainder revenue after subtracting the
“survivor bias” to the manager. We cannot provide Overhead Cost
an exact number of LGT’s inactive funds.
However, a quick fund search for “LGT” on The assets included in these funds add up to no
Bloomberg reveals 426 funds, of which 303 are less than USD 2.5 billion. 6 of the 15 funds in the
classified as “Active” and 123 as “Inactive”. By this sample are Fixed Income funds, covering
measure, more than 25% of the funds appear to approximately USD 1.05 billion assets (almost half
have been liquidated. of the assets in the sample) at the end of
December 2011.
1. Current Situation
The user is able to see the current performance of
For this example, we run the Interactive Time
Fixed Income funds and Equity funds separately.
Range R2R report, for the time range between
This report is produced by the Interactive Number
end of December 2006 and end of December
of Funds R2R module. We leave this exercise to
2011, that is, five full years of monthly data.
the reader.
We also select the following default values for the
parameters: FUNDS VS INSCH INDEX (AFTER FEL)

Insch Index: 5%
Overhead cost: 70%
Front-End Load: 5%
These values seem reasonable to us, but we
encourage the readers to try their own values.
The results are:
LGT Summary 87% of the funds do not beat the Insch Index
(here, 5%). In other words, only 13% of the LGT
Total Current AUM 100% $2,531,867,510 traditional funds provided the clients with net
returns in excess of 5% per annum over the
Management Fee selected period.
0.97% $24,572,240
Asset-weighted

InschQuantrend Ltd January 2012 Page 1

The front-end load (FEL) consumes a significant
portion of the client performance. That is why we FUNDS' CURRENT STATUS (BEFORE FEL)
present performance in two versions: before FEL
and after FEL.

Next, because we wish to avoid the impact of

entry/exit point timing (return results can be
manipulated by market timing), we show average
1 year holding period returns (1yHPR). There are
49 one year holding periods in a 5 year time-
frame. The 1y HPR averages the returns of these 67% of the surviving funds achieve positive P&L
periods, thus removing the time-frame selection over the whole period absent a front-end load.
effect.

The 1 year holding period returns are calculated FUNDS' CURRENT STATUS (AFTER FEL)
before FEL, therefore favorable to the asset
managers.

FUNDS VS INSCH RATIO - 1YEAR HPR

(BEFORE FEL)

When a 5% FEL is paid, the proportion of positive

performance funds falls to 47%.

FUNDS' HISTORICAL MAX DD

Only 67% of the funds provided the clients with an

average 1 year holding period return in excess of
the management fee.

Regarding total period returns, it makes sense to

present them net of FEL.

FUNDS VS INSCH RATIO - TOTAL PERIOD

RETURN (AFTER FEL)

Interpretation of the Maximum Drawdown graph:

- All of the funds have suffered drawdowns

Only 47% of the funds provided the clients with a
total period net return in excess of the total period
management fee.
in the past (nothing to worry about)
- 80% of the funds have had at least a
drawdown in excess of 5% (still nothing to
worry)
- 67% of the funds have had at least a
drawdown in excess of 10%
- 60% of the funds have had at least a
drawdown in excess of 20%
- 60% of the funds have had at least a
drawdown in excess of 30% (now you
should start worrying)
- 53% of the funds have had at least a
drawdown in excess of 50% (this is
outright scary).

InschQuantrend Ltd Page 2

 FUNDS' CURRENT DD
CLIENT PERFORMANCE FOR TOTAL
CHOSEN PERIOD (AFTER FEL)

Interpretation:

- 75% of the funds are currently in a

drawdown
- for 50% of them, the current drawdown is
larger than 10%
- quarter of the funds are in a larger than
30% drawdown
- 8% of the funds are currently in a 50%
drawdown, so they need to double their
NAV in order to arrive back at peak.
Client return for the whole period is however
negative. After subtracting the FEL, the client is
left with an appalling -3.87%, while the total fees
charged add up to 10.4%.
This explains the low percentage of funds that
beat the Insch ratio, as shown on the previous
page.

R2R provides further details on which funds are

CLIENT PERFORMANCE 1 YEAR HOLDING responsible for the poor fund averages, through a
PERIOD RETURN (BEFORE FEL) complete list of funds and their performance
indicators:

Fund Name According to Bloomberg

AUM [MIO According to Bloomberg
USD$]
Management According to Bloomberg
Fee [%]
Open Price As of the beginning of the
selected period
High Price Over the selected period
Low Price Over the selected period
Last Price As of the end of the selected
period
In DD? A “Yes” indicates that Last
Price is currently below High
Price
Equally weighted 1 year holding period return is Max DD The largest loss from peak to
1.79% before FEL, which is higher than the trough for the chosen period
management fee p.a. of 1.08%. Total Return (Last Price)/(Open Price) – 1
This Period
Before FEL
[%]
Up/Down Up if Total Return before FEL
Before FEL exceeds 1% p.a.
Down if Total Return before
FEL is negative
Flat otherwise
Total Return (Last Price)*(1-FEL)/(Open
This Period Price) – 1
After FEL [%]
Up/Down After Up if Total Return net of FEL

InschQuantrend Ltd Page 3

 FEL exceeds 1% p.a. We look next at the potential impact of this risk
Down if Total Return net of scenario on manager revenues and client
FEL is negative performance through the R2R tool. The
Flat otherwise magnitude of the potential losses may seem
Total Return Annualized Total Return net surprising. However, loses such as the ones
p.a This of FEL implied by this risk scenario have happened twice
Period After in the last twelve years, and may well happen
FEL [%] again.
Avg 1 year Average 1 year holding
HPR [%] period return for the chosen We begin by selecting model parameter values:
period
Beats Index Indicates if Total Return p.a Insch Index: 5%
After FEL? net of FEL exceeds the
chosen Insch Index Overhead cost: 70%
Beats Ratio 1 Indicates if client's average 1 Front-End Load: 5%
Year HPR? year holding period return
before FEL exceeds fund Change in Bond Yields : +5%
management fee p.a. % Change in Market Index : -50%
Beats Ratio Indicates if client's Total
Total Period ? Return net of FEL exceeds These values seem reasonable to us, but again
total fund management fee we encourage the readers to input their own
paid over the selected period estimated or expected values.

“Worst Case % Δ Stock

Δ Bond Yield
2. Risk Scenarios Scenario” Index

Traditional fund investors are exposed to risk in Market Risk

the form of future drawdowns and capital loss. +5% -50%
Factor:

Traditional managers themselves are exposed to

the risk of losing assets, and consequently losing Portfolio Impact: -29.1% -48.3%
revenues coming from management fees.

The “Risk to Revenue” model enables the

estimation of potential losses by client
See how the performance summary changes:
performance in unfavorable market conditions, as
well as of revenue loss by asset managers. This
LGT Summary
estimation can be performed in a continuum of
market scenarios, through the Interactive Market
Total Current AUM 100% $1,498,317,574
Scenario R2R module.

In the following we show an example of such Management Fee 0.97% $14,530,761

scenario analysis. Based on the financial market Asset-weighted
recent experience, a 50% loss in stock indices
coupled with a 20% loss in bond portfolios is an Current Overhead 70% $17,200,568*
extreme but possible scenario. These losses Cost
almost form a historical worst case scenario.
Estimated 118%** $17,200,568*
Overhead Cost

Estimated Net -18% -$2,669,806

Revenue

Change in Net -136.22% -$10,041,478***

Revenue

Front End Load 5% $74,915,879

Number of Funds 15

* Fixed in the short term

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** The fixed overhead costs make up a higher
proportion of management fees, due to the fall in
assets.
*** Remainder revenue after subtracting the
Overhead Cost has become negative.
Overall portfolio impact is -40.8%, entirely
reflected in the falling assets under management.
The interactive risk scenario does not model (at
this stage) asset flows.
Nevertheless, due to “stickiness” in overhead
costs, the impact of this potential loss on net
revenues is substantial. In this scenario, the
traditional asset management business is no
longer profitable, but performed by the asset
manager at a loss.
FUNDS VS INSCH INDEX (AFTER FEL)
In this scenario, none of the funds beats the 5%
Insch Index.
FUNDS VS INSCH RATIO - 1YEAR HPR
(BEFORE FEL)
The potential loss implied by the risk scenario has
no significant impact in the 1yHPR.
FUNDS VS INSCH RATIO - TOTAL PERIOD
RETURN (AFTER FEL)
InschQuantrend Ltd
Total return however falls dramatically. None of
the funds provided the clients with a total period
net return in excess of the total period
management fee under this scenario.
FUNDS' CURRENT STATUS (BEFORE FEL)
None of the surviving funds achieve a positive
P&L over the whole period absent a front-end
load.
FUNDS' CURRENT STATUS (AFTER FEL)
After 5% FEL is paid, none of the surviving funds
achieve a positive P&L.
FUNDS' HISTORICAL MAX DD
There is also a visible change in the number of
funds having suffered certain Maximum
Drawdown thresholds:
- All of the funds would have suffered
drawdowns (as implied by the risk
scenario)
- 100% of the funds would have had at
least a drawdown in excess of 5% (still
nothing to worry)
- 100% of the funds would have had at
least a drawdown in excess of 10%
Page 5
 - 93% of the funds would have had at least
a drawdown in excess of 20%
- 80% of the funds would have had at least
a drawdown in excess of 30%
- 60% of the funds would have had at least
a drawdown in excess of 50% (this is
indeed scary)
FUNDS' CURRENT DD
Interpretation:
- 100% of the funds are in a drawdown in
this risk scenario
- for 100% of them, the current drawdown
is larger than 10%
- 80% of the funds are in a larger than 30%
drawdown
- 60% of the funds are currently in a 50%
drawdown, compared to only 9% currently
- for 20% of the funds, the potential
drawdown exceeds 70%.
CLIENT PERFORMANCE 1 YEAR HOLDING
PERIOD RETURN (BEFORE FEL)
InschQuantrend Ltd
There is only 0.75% in the equally weighted one
year holding period return. Over a long period, the
effect of one catastrophic month is moderated by
the 1 year average holding period return measure.
CLIENT PERFORMANCE FOR TOTAL
CHOSEN PERIOD (AFTER FEL)
Client return for the whole period has however
dramatically worsened. After subtracting the FEL,
the client is left with an horrendous -42.33%, while
the total fees charged still add up to 10.4%.
In addition, the analysis provides fund details of
performance under stress. Based on these, the
user can form an own opinion regarding which
funds are prone to losses or to liquidation.
Page 6
Global Disclaimer

This report has been prepared by InschQuantrend Limited, an affiliate of Insch Capital Management AG.
Insch Capital Management AG, its subsidiaries, branches and affiliates are referred to herein as “Insch”.

The figures contained in performance charts refer to the past; past performance is not a reliable indicator of
future results. Additional information will be made available upon request.

This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing
in this report constitutes a representation that any investment strategy or recommendation contained herein
is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal
recommendation. It is published solely for information purposes, it does not constitute an advertisement and
is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments
in any jurisdiction. No representation or warranty, either express or implied, is provided in relation to the
accuracy, completeness or reliability of the information contained herein, except with respect to information
concerning Insch, its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of
the securities, markets or developments referred to in the report.

Insch does not undertake that investors will obtain profits, nor will it share with investors any investment
profits nor accept any liability for any investment losses.

Investments involve risks and investors should exercise prudence in making their investment decisions. The
report should not be regarded by recipients as a substitute for the exercise of their own judgment. Past
performance is not necessarily a guide to future performance. The value of any investment or income may
go down as well as up and you may not get back the full amount invested. Any opinions expressed in this
report are subject to change without notice and may differ or be contrary to opinions expressed by other
business areas or groups of Insch as a result of using different assumptions and criteria. Research will
initiate, update and cease coverage solely at the discretion of Insch. The analysis contained herein is based
on numerous assumptions. Different assumptions could result in materially different results. The analyst(s)
responsible for the preparation of this report may interact with trading desk personnel, sales personnel and
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analyst who prepared this report is determined exclusively by research management and senior
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The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of
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Any prices stated in this report are for information purposes only and do not represent valuations for
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been effected at those prices or theoretical model-based valuations and may be based on certain
assumptions. Different assumptions, by Insch or any other source, may yield substantially different results.

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Insch specifically prohibits the redistribution of this material in whole or in part without the written permission
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