There is No Such Thing as Smart Beta October 25, 2016 Dr. Michael - PowerPoint PPT Presentation

Allianz Global Investors Allianz Global Investors There is No Such Thing as Smart Beta October 25, 2016 Dr. Michael Heldmann, CFA Director, Senior Portfolio Manager, Head of Best Styles North America For institutional use in one-on-one presentations only

Investment Beliefs AllianzGI Best Styles  Investment styles carry risk premiums which account for roughly 80% of long term excess equity returns  The core of a portfolio should have persistent and stable exposure to these risk premiums  Active risk management and diversified exposure is paramount as we strive for consistent outperformance independent from the economic or market environment 2

The Do’s & Don’t of Style Investing DON’T DO  Diversified and stable × Attempt to style time exposure over time × Use a single style premia  Employ active risk to adjust for gaps in style exposure in the aggregate management and equity portfolio portfolio construction ×  Avoid exposure to non Believe that having multiple managers rewarding risks guarantees a diversified style exposure  Use as a core equity investment × Use passive vehicles for style exposure 3

Smart Beta is new, but is style investing? 4

Style Investing is Nothing New AllianzGI has been style investing for over 20 years 1993 1934 Last 3 years 1968 1999 Momentum Value Launch of AllianzGI Best Launch of vast majority Earnings Premium Investing of single and multi Revisions Styles Global Developed Equity strategy factor ETFs Value & Size Additional academic Investment Style work on style premiums 2013 2014 2015 $200B $375B $450B Although the presence and importance of investment styles has been well established for decades, the investment industry is just now being inundated with hundreds of smart beta ETFs that are long on marketing, but short on live track records 5

Why factors are risky — and carry a risk premium Earnings Value Momentum Growth Quality Revisions Visibility of earnings – Higher uncertainty Risk of major As with momentum, Profitability has a mean about future cash performance mean reversion continuing to meet reversion tendency too flows – the value – moreover, many setbacks tendencies may expected earnings premium is lead to setbacks growth rate high-quality stocks comparable to the have a low beta, which credit spread may trend towards 1, in weak market phases Investment styles carry higher risks than the broad market and may be subject to sharp pullbacks in performance along with short and medium term periods of high volatility. This necessitates a disciplined, skilled active manager that can harvest the returns, while navigating the risks. Source: Allianz Global Investors. 6

Where Do Excess Returns Come From? Investment style risk premiums are the drivers of active equity returns 1980s 1990s 2000s Performance based on Alpha managers’ Skills Value Alpha Premium Alpha Alpha Small Cap Active Premium Performance Returns Value Momentum coming from Premium Premium Risk Low Small Cap Premiums Volatility Premium Premium Excess Excess Excess Market Beta Market Beta Market Beta Source: MSCI, Allianz Global Investors. 7

Many Investment styles are successful in the long run, but timing outperformance is extremely difficult Relative Performance of MSCI World Risk Premium Indices MSCI High Dividend MSCI Momentum MSCI Quality Mix (Value) MSCI Minimum Volatility MSCI Small Cap 220% Relative Performance in % 200% 180% 160% 140% 120% 100% 80% 60% 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 8 Source: Allianz Global Investors, MSCI; as of December 31, 2015. Past performance is not indicative of future results.

Investment style diversification can lead to stable outperformance Relative Performance of MSCI World Risk Premium Indices MSCI High Dividend MSCI Momentum MSCI Quality Mix (Value) MSCI Momentum & MSCI Small Cap High Dividend (Value) 220% 200% Relative Performance in % 180% 160% 140% 120% 100% 80% 60% 40% 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 9 Source: Allianz Global Investors, MSCI; as of December 31, 2015. Past performance is not indicative of future results.

The Best Styles investment styles Earnings Value Momentum Growth Quality Revisions  Earnings Yield  Revisions over 3/6  Price momentum  Track record  Profitability measures months over of delivered growth  Free Cash Flow Yield – ROE/ROIC  Surprises over 3/6  Trend in EPS – 12 months ex 1/ 3  Operating Cash Flow  Indebtedness months months estimates over 12 Yield months  Upgrades over 3/6 – 24 months ex 1/3 – Debt to Assets  Book Yield  Stability in earnings months months – Interest Coverage growth  Dividend Yield – CDS spreads  EV/EBITDA  Earnings Visibility  Volatility “worst of” correlation equal weighting equal weighting equal weighting driven weighting weighting Source: Allianz Global Investors. 10

Diversified investment style mix — stable across time Allocation to investment styles over time Model Portfolio Target Allocations — Supplemental Information Key performance drivers for Best Styles: 100%  Valuation  Earnings change 80%  Price momentum 60% Combination of: Value  Contrarian investment style Revisions (e.g., valuation) 40% Momentum Growth  Trend-following investment styles (e.g., earnings, momentum) Quality 20% Seeks to have stable style mix over time 0% 2001 2003 2005 2007 2009 2011 2013 2015 As of March 31, 2016. The allocations shown above are for a model account that separate holdings by Investment Style. Model accounts have certain inherent limitations. The performance results and account attributes do not reflect the results of trading in actual accounts or the material economic and market factors that could impact an invest ment manager’s decision -making process. The model allocations shown above are supplemental information and supplement the Best Styles Global Developed Equity GIPS compliant composite presentation in the Appendix. See additional disclosure at the end of this presentation. 11

Establishing a diversified investment style mix Diversified investment style mix Standard quant scoring, or mix of risk premium ETFs Quality Value Quality Value Earnings Growth Earnings Growth Change Change Momentum   Momentum  Small overlap with high diversification potential  Strong overlap of investment styles implies a focus on over-loved, over-owned stocks which are highly at risk at market turnarounds A diversified investment style mix manages the risks of investment styles During any given stage of the investment process the selection criteria may vary from those shown above. The diagrams and statements above reflect the typical investment process applied to this strategy. At any given time other criteria may affect the investment process and the characteristics shown above. See additional disclosure at the end of this presentation. 12