There’s value in currency Michael DuCharme, CFA

6 NOVEMBER 2014

Important information Nothing in this publication is intended to constitute legal, tax securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This information is made available on an "as is" basis. Russell Investments Canada Limited does not make any warranty or representation regarding the information. Unless otherwise noted, source for the data in this presentation is Russell Investments. All information contained in this material is current at the time of issue and, to the best of our knowledge, accurate. Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and, unless it relates to a specified investment, does not constitute the regulated activity of 'advising on investments' for the purposes of the Financial Services and Markets Act 2000. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Any forecast, projection or target is indicative only and not guaranteed in any way. Any past performance figures are not necessarily a guide to future performance. Any reference to returns linked to currencies may increase or decrease as a result of currency fluctuations. Any references to tax treatments depend on the circumstances of the individual client and may be subject to change in the future. Conscious Currency® is a trademark of Russell Investments. The Russell Conscious Currency® Index Series is designed to reflect the performance of common foreign currency market factors (Carry, Value, and Trend). Carry Index Carry aims to capture exposure to high-yielding currencies, offset by short positions in low-yielding currencies. Value Index Value aims to capture exposure to undervalued currencies, offset by short positions in overvalued currencies. Trend Index Trend aims to capture exposure to currencies trending positive by short positions in currencies trending negatively. Copyright© Russell Investments Canada Limited 2014. All rights reserved. Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell Investments Canada Limited and its affiliates, including Frank Russell Company, are collectively known as "Russell Investments”. Russell Investments, Russell Indexes and Russell Investments logo are either trademarks or registered trademarks of Frank Russell Company, used under a license by Russell Investments Canada Limited. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. First used: October 2014. INST-2014-10-14-0410 (EXP-10-2015)

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THIS CONFERENCE MATERIAL WAS CREATED BY RUSSELL AS AN EDUCATIONAL TOOL AND IS NOT FOR FURTHER DISTRIBUTION.

Source: MBC Strategic. http://mbcstrategic.com/

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Is currency risk battling against your return? Source: http://www.risk.net/latest_issue/insurance-risk/2013-apr

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Will currency affect your investment results? Historical USD - CAD 1971-2014 1.7

1.6

1.5

CAD / USD

1.4

1.3

1.2

1.1

1.0

0.9

10 YEARS

6 YEARS

10 YEARS

5 YEARS

0.8

Source: Bloomberg p.5

Hedge ratio

Hedge Ratio

Percent of Russell overlay clients

0 - 25%

6%

26 - 50%

33%

51 - 75%

15%

76 - 99%

› Lively debate between 0% and 100% › Empirical evidence can’t support firm recommendations › 50% “regret minimization” ratio

Photo source: istockphoto.com

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100% Hedge ratio data as of 31 August 2014

4% 42%

???

MSCI World currency weights basis points Currencies with weights > 1.0% with 50% hedge ratio 60% 30%

Even if you hedge and remove part of the currency risk, it doesn’t change the mix of the holdings—and now there is a long exposure to Canadian dollars

10%

56 28 12 5%

8

8

6 4 3 1

4

4 2

2

2

0% AUD

CAD

CHF

4

EUR

GBP

1

HKD

JPY

Source: Bloomberg 30 September 2014 Chart bars not to scale.

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Unless a portfolio is 100% hedged, one is making an active bet, often based on equity exposures…

USD

Active currency management performance Hedge Fund Reserve (HFR) Macro: Currency Index 10% 8% 6% 4% 2% 0% -2%

Active currency management cumulative return

-4% -6% -8%

Source: Bloomberg, 12/31/2004 to 8/31/2014 Active currency management results are based on the Hedge Fund Research Macro :Currency Index which includes managers employing discretionary and systematic currency strategies. Active is net of fees. Past performance is not a guarantee of future results. Indexes and/or benchmarks are unmanaged and cannot be invested in directly.

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Sources of return in currency markets

$

Carry Value Trend Tendency of higher interest rate currencies to appreciate relative to lower interest rate currencies.

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Compare currency to some equilibrium or fair value. Sell if currency is over-valued and buy if undervalued.

Buying (selling) currencies which have recently shown positive (negative) performance.

Currency indexes Rules-based construction

1

Equal weighting of 3 factors: carry, value & trend

2

Eligible currencies: AUD, CAD, CHF, EUR, GPB, JPY, NOK, NZD, SEK, USD

3

Each factor index: 3 long / 3 short currencies, equally weighted

4

Rebalancing: performed monthly

Indexes and/or benchmarks are unmanaged and cannot be invested in directly.

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Cumulative performance for an index series 140%

120%

2008 was very volatile, but value and trend compensated for the severe decline in carry, resulting in only a slight drop for the Composite

Carry

100%

80%

Composite

60%

Value 40%

Trend 20%

0%

-20%

Source: Russell Investments. December 1999 through September 2014. The inception date of the Russell Conscious Currency Index series is April 18, 2013. The returns provided for each Russell Index may include data for periods prior to when the index was in live production. Historical returns for these Russell Indexes prior to the live production date are calculated using the same Russell methodology; however, application to the performance calculation may vary due to data sources and the availability of historical data. Please contact the Russell Index Client Service Team for further detail. Past performance is not a guarantee of future results. Indexes and/or benchmarks are unmanaged and cannot be invested in directly

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Comparison of carry with equity benchmark Cumulative performance 140%

Carry 120% 100% 80% 60% 40%

MSCI World Hedged

20% 0% -20% -40% -60%

Source: Bloomberg from December 1999 through September 2014. Past performance is not a guarantee of future results. Indexes and/or benchmarks are unmanaged and cannot be invested in directly p.13

MSCI World hedged correlation analysis 24 month rolling correlation Composite

Carry 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2

Value 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0

Source: Bloomberg December1999 through September 2014.

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Trend 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8

Hedging scenarios MSCI World index with currency composite index December 1999 thorough September 2014 100%

80%

60%

100% Hedged + Composite

40%

20%

0%

100% Hedged -20%

-40%

Unhedged -60%

100% Hedged

100% Hedged + Composite

Unhedged

Source: Bloomberg and Russell Investments. Benchmark is MSCI World index. MSCI World hedged data is only available from October 2011. For periods before October 2011, the hedged equity graphs use static currency weights. Currency data is available from December 1999. Past performance is not a guarantee of future results. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. p.15

Risk vs. return MSCI World index with composite currency index December 1999 thorough September 2014 5.0%

Hedged with Composite Unhedged with Composite

4.0%

Annualized Return

3.0%

2.0%

1.0%

Hedged 0.0%

-1.0% 11.0%

Unhedged

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

Standard Deviation Source: Bloomberg and Russell Investments. Benchmark is MSCI World index. MSCI World hedged data is only available from October 2011. For periods before October 2011, the currency weights in the hedged index are based on the October 2011 values. Currency data is available from December1999. Past performance is not a guarantee of future results. Indexes and/or benchmarks are unmanaged and cannot be invested in directly p.16

WHEN YOU DON’T HAVE YOUR TIMMY’S Source: Shutterstock

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Managing currency exposure

› Optimal hedge ratio is impossible to determine

› Passive solution with 50% hedge ratio to minimise regret

› Recent active management results unfavourable

› Consider gaining currency exposure via an index

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Thank you.