Nomura Holdings, Inc. · TSE:8604

Nomura — Technical Presentation (May 2010)

31 slides from Nomura's technical presentation, May 2010

1. Slide 1: Characterising Investment Styles in Fixed Income Markets

   Characterising Investment Styles in Fixed Income Markets Vasant Naik Head of FI Quantitative Strategies May 2010 STRICTLY PRIVATE AND CONFIDENTIAL ©

2. Slide 2: Research team

   Research team Fixed Income Quantitative Strategies  Vasant Naik vasant.naik@nomura.com  Srivaths Balakrishnan srivaths.balakrishnan@nomura.com  Mukundan Devarajan mukundan.devarajan@nomura.com  Tom Andrews thomas.andrews@nomura.com Page 2

3. Slide 3: Overview

   Overview  Top-down investment styles in Fixed Income markets  Long sample unconditional performance of investment styles  Macro properties of returns of investment styles  Comparison of Fixed Income Styles with those in Equity markets Page 3

4. Slide 4: Top-down investment styles in Fixed Income Markets

   Top-down investment styles in Fixed Income Markets © Page 4

5. Slide 5: Classification of Top-down Investment Styles in Fixed Income Markets

   Classification of Top-down Investment Styles in Fixed Income Markets Top-down Investment Styles Price Momentum Return continuation Value Carry Mean reversion from extremes Macro Momentum Random walk in asset prices in asset prices Persistence of macro regimes Fixed income asset classes Interest rate

6. Slide 6: Top-down Investment Styles in Fixed Income (contd.)

   Top-down Investment Styles in Fixed Income (contd.)  Price Momentum:  Buy assets with strong returns against those with weak returns  Macro Momentum:  Buy risky assets in periods of economic strength and less risky ones in periods of economic weakness  Carry:  Rates: Buy bonds when yield curve

7. Slide 7: The Performance of Momentum and Carry-based Strategies is Stronger than that of Value

   The Performance of Momentum and Carry-based Strategies is Stronger than that of Value Performance of investment styles: 1976 – 2010 Momentum Carry Value 1976-2010 Average annual excess returns (%) 3.3 1.4 0.5 Annualised information ratio 1.47 0.77 0.26 Skew 1.4 -0.4 -1.5 Hit Ratio(1) 72% 63% 57% 199

8. Slide 8: Correlation between Style-based Strategies is not Markedly High

   Correlation between Style-based Strategies is not Markedly High... Correlations between style-based strategies Momentum and Carry Momentum and Value Carry and Value Full Sample Correlation 7% -18% 41% (1976-2010) Median of rolling 5-year correlations 1981-2010 3% -25% 45% 1990-2010 3% -31% 53% 1999-

9. Slide 9: Application as a Portfolio of Style-based Investments

   ...which Prompts their Application as a Portfolio of Style-based Investments 1976-2010 Annual performance profile(1) Avg. ex. returns (% pa) 2.1 6% 5% Ann. information ratio 1.60 4% Skew 1.4 3% Hit Ratio 71% 2% 1990-2010 1% Avg. ex. returns (% pa) 2.1 0% Ann. information ratio 1.59 -1% 76 79 82 85 8

10. Slide 10: Returns of Style-based Strategies Also Help Attribute Risk Exposures of Portfolios

    Returns of Style-based Strategies Also Help Attribute Risk Exposures of Portfolios rt Portfolio     M rt Mmtm   C rtCarry  V rtValue   t Regression of Hedge Fund Index excess returns on those of style-based portfolios (1990-2010) Momentum (  M ) Carry (  C ) Value ( V ) R2 HFRI Fund of

11. Slide 11: Macro properties of style-based investment strategies

    Macro properties of style-based investment strategies © Page 11

12. Slide 12: Momentum and Carry Trades Perform well in Economic Expansions

    Momentum and Carry Trades Perform well in Economic Expansions... Annualised information ratios of style-based portfolios in Expansions 1976-2010 Momentum Carry Value Full Sample unconditional 1.47 0.77 0.26 Expansion periods 1.60 0.79 0.18 Early expansions 1.64 0.90 0.31 Late expansions 1.58 0.70 0.

13. Slide 13: Performance of Value Trades Largely Restricted to Periods of Economic Weakness

    ...while the Performance of Value Trades is Largely Restricted to Periods of Economic Weakness Annualised information ratios of style-based portfolios in Recessions 1976-2010 Momentum Carry Value Full Sample unconditional 1.47 0.77 0.26 Recession periods 1.36 0.65 0.68 Early recessions 2.13 1.61 0.8

14. Slide 14: The Underperformance of Momentum in Late Recessions is Broad-based

    The Underperformance of Momentum in Late Recessions is Broad-based... Annualised information ratios of Momentum portfolios by sub-style and by asset class Momentum by Sub-style Momentum by Asset Class 1976-2010 Price Macro Interest Rates Credit Currencies Commodities Full Sample 1.15 0.98 1.14 0.42

15. Slide 15: Carry in Late Recessions Attributable to Asset Classes Other than Currencies

    ...while that of Carry in Late Recessions is Attributable to Asset Classes Other than Currencies Annualised information ratios of Carry portfolios by asset class Carry by Asset Class 1976-2010 Interest Rates Credit Currencies Commodities Full Sample 0.43 0.38 0.36 0.50 Expansion periods 0.59 0.36 0.

16. Slide 16: Regimes of Monetary Easing are Favourable for Value Investments

    Regimes of Monetary Easing are Favourable for Value Investments 1976-2010 Momentum Carry Value Average quarterly excess return (bp) 92 54 -2 Monetary Tightening regime Annualised information ratio 1.84 1.02 -0.05 Average quarterly excess return (bp) 71 35 49 Monetary Easing regime Annualised informa

17. Slide 17: Correlation with Bond Markets

    These Macro Properties are Reflected in their Correlation with Bond Markets... Correlations between style-based portfolios and US Treasury 1-10yr Index Excess Returns Momentum Carry Value Full Sample Correlation 28% -26% -6% (1976-2010) Median of rolling 5-year correlations 1981-2010 43% -26% -6% 19

18. Slide 18: And with Equity Markets

    ... And with Equity Markets Correlations between style-based portfolios and S&P 500 Excess Returns Momentum Carry Value Full Sample Correlation -28% -2% 11% (1976-2010) Median of rolling 5-year correlations 1981-2010 -20% 6% -1% 1990-2010 15% -23% 11% 1999-2010 -43% 14% 27% 2007-2010 -43% 14% 16% So

19. Slide 19: Heightened Investor Risk Aversion: Momentum Outperforms while Value Underperforms

    In Periods of Heightened Investor Risk Aversion Momentum Outperforms while Value Underperforms 1986-2010 Momentum Carry Value Average quarterly excess return (bp) 29 17 33 Low risk aversion Annualised information ratio 0.61 0.37 0.78 Average quarterly excess return (bp) 117 29 -7 High risk aversion

20. Slide 20: Pattern Observed in Regimes of Tightening Credit Conditions as Well

    This Pattern in Observed in Regimes of Tightening Credit Conditions as Well 1976-2010 Momentum Carry Value Average quarterly excess return (bp) 66 29 24 Credit Easing Annualised information ratio 0.93 0.56 0.54 Average quarterly excess return (bp) 129 34 3 Credit Tightening Annualised information ra

21. Slide 21: How do Styles in Fixed Income Compare with those in Equity Markets?

    How do Styles in Fixed Income Compare with those in Equity Markets? © Page 21

22. Slide 22: Evidence for Persistence Stronger than Reversion to Fair Value in Equity Styles

    The Evidence for Persistence is Stronger than Reversion to ‘Fair’ Value in Equity Styles as well Performance of Equity investment styles: 1976 – 2010 Equity Momentum Equity „Carry‟ Equity „Value‟ 1976-2010 Average annual excess returns (%) 15.5 0.0 3.1 Annualised information ratio 0.74 0.00 0.16 Ske

23. Slide 23: Equity Styles not Highly Correlated with Fixed Income Styles

    Performance of Equity Styles is not Highly Correlated with that of Fixed Income Styles... Correlations between style-based portfolios in Equities and Fixed Income Momentum Carry Value Full Sample Correlation 14% -4% -5% (1976-2010) Median of 5-year rolling correlations 1981-2010 13% -2% -4% 1990-201

24. Slide 24: Macro Properties are Somewhat Similar

    ...but their Macro Properties are Somewhat Similar Annualised information ratios of investment styles in Equities 1976-2010 Equity Momentum Equity „Carry‟ Equity „Value‟ Early recessions 0.77 0.93 0.70 Recession period Late recessions -0.70 -1.53 0.52 Early expansions 0.91 0.36 0.13 Expansion period

25. Slide 25: How have Style-based Investments Performed Recently?

    How have Style-based Investments Performed Recently? © Page 25

26. Slide 26: Equity Momentum Outperformed in 2007-08 while Value did so in 2009

    It is Well-known that Equity Momentum Outperformed in 2007-08 while Value did so in 2009 Recent performance of style-based investment strategies: 2007-2009 (%, p.a.) Equity Momentum Equity „Carry‟ Equity „Value‟ 2007 50.1 -19.8 -48.1 2008 30.5 26.2 7.4 2009 -62.3 -21.2 5.1 Average annual excess retu

27. Slide 27: Fixed Income Styles Exhibited a Similar Pattern During the Recent Crisis

    Fixed Income Styles Exhibited a Similar Pattern During the Recent Crisis Recent performance of style-based investment strategies: 2007-2009 (%, p.a.) Momentum Carry Value 2007 3.3 1.5 -2.8 2008 13.9 2.8 -2.2 2009 -0.7 -0.8 3.2 Average annual excess returns (%) 3.3 1.4 0.5 Annualised volatility 2.2 1

28. Slide 28: Conclusions

    Conclusions © Page 28

29. Slide 29: Conclusions

    Conclusions  We classify investment styles in Fixed Income markets into those based on (a) Momentum, (b) Carry and (c) Reversion to fair value  In the long historical sample, we find that the performance of Momentum and Carry is robust while that of Value is relatively weaker  Momentum and Carry

30. Slide 30: Analyst certification and disclaimers

    Analyst certification We, Vasant Naik and Mukundan Devarajan, hereby certify (1) that the views expressed in this report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research and (2) no part of my compensation was, is or will be direc

31. Slide 31: Strictly Private and Confidential

    STRICTLY PRIVATE AND CONFIDENTIAL ©

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