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The product is designed for investors looking for an active asset allocation between European equity and bond markets. Roughly one third of the value added will over the long term result from asset allocation decisions and two thirds from security selection.

Investment Objectives
Average Tracking Error = 2.8% p.a.

• Tracking Error Budget for Asset Allocation Decisions: 0 - 2.5%
• Tracking Error Budget for Security Selection Decisions: 0 - 4.5%

Targeted Outperformance = 1.4% p.a.
Targeted Information Ratio = 0.5
Expected Contribution to Outperformance

• 67% Security Selection
• 33% Asset Allocation

Preferred Benchmarks
European Balanced

• x% Dow Jones Stoxx 
• 100-x% iBoxx Euro index family

Euroland Balanced

• x% Dow Jones Euro Stox Index
• 100-x% iBoxx Euro index family

Investment Philosophy
The objective is to outperform the benchmark by overweighting relatively "cheap" relative to "expensive" asset classes and taking advantage of market cycles and capturing the security selection capabilities of our global centres of competence.
The European Balanced investment process is based on carefully selected factors thathave a strong foundation in economic and portfolio theory and/or fundamental equity and bond analysis. All together these factors form a 3 - step quantitative model, back-tested with appropriate model selection and testing methodologies free of data mining and hindsight.
 Managed by experienced investment professionals with backgrounds in economics, equity valuation, fixed income portfolio management and asset allocation, the investment process insures consistent and reliable quantitative results complemented by common sense and professional judgment.

Tactical Asset Allocation
The Valuation and Economic Model together make up the Tactical Asset Allocation decision. The two models jointly analyse attractive valuations along with a cyclical and fundamental timing interpretation over a 2 to 12 month time horizon.
The Valuation Model is an indicator for the over and undervaluation of asset classes. It uses fundamental valuation in a long-term comparison to identify a relative under- or overvaluation of asset classes and capture longer term trends in valuation cycles.
The Economic Cycle Model is an approach to capital markets behaviour. By interpreting the fundamentals of pricing cycles for asset classes, it uses business cycle analysis to put valuation into context.

Dynamic Asset Allocation
The dynamic asset allocation decision is derived by using the Kernel Regression Model. This model uses various market variables (tested for significance and back-tested overtime) to compare the current market situation to variables in the past. This produces a market forecast for the attractiveness of equities relative to bonds over a 1 to 4 week time horizon.
The kernel model uses pattern recognition to adapt to changing market environments, as well as historic (abnormal) distribution of asset class returns and non-linear relationships between returns and variables to derive a short term forecast.

Integration and Judgment 
Each segment of the model (Economic Cycle, Valuation and Kernel) produces an independent score on equities versus bonds as a relative weighting of equities in the total portfolio within a range of -/+5%. The scores from the tactical and dynamic decisions are then added together to produce an overall score on equities vs. bonds with a maximum of +/-15%.
Through qualitative analysis, the Balanced Team can choose to dampen down or strengthen the signal given by the model. Each component of the model is reviewed on a qualitative basis, and the final score given by the model may be revised. Principally, the qualitative overlay can only result in a different magnitude of the asset allocation decision suggested by the model; the direction suggested by the model cannot be reversed. However, in extreme market conditions like 11th September 2001, the qualitative view can override the model.

Investment Universe
Equities: The broad universe consists of stocks that are constituents of the DJStoxx and the DJ Euro Stoxx indices. Additional stocks are added as appropriate.

Bonds: Euro denominated bonds issued by governments, banks, corporations and other entities based in OECD countries. The minimum rating of bonds purchased is BBB-. In addition to bonds, the fund holds money market instruments and uses derivatives for hedging purposes or in order to create synthetic bond positions.

Investment Process - Equities
Our European Equity strategy is based on the belief that market inefficiencies can best be identified through a combination of fundamental and quantitative analysis. This bottom-up approach incorporates quantitative and qualitative elements in a disciplined and repeatable manner, based on evaluating and assigning a score to each stock in the universe across three defined groups of factors: stock, sector and country.

Stock Scores based on these individual factor subscores are ranked, with the highest score being the more preferred, and portfolios are constructed from this list using quadratic optimisation techniques.

The Sector Score is derived from a combination of the qualitative view of the Asset Managers and quantitative sector analysis. The Asset Managers' sector-specific view forms an integral part of sector analysis and concentrates on less quantifiable aspects of a sector view, using the bottom-up view derived from company analysis as basis. The quantitative components of the analysis evaluate the top-down macroeconomics of a sector based on interest rates, inflation, consumer confidence, etc. and complement this with technical analysis (relative strength and earnings momentum).

The Country Score is derived from a separate quantitative country model. Core components of the country model evaluate the macroeconomic environment (monetary policy) and the technical situation.

Portfolio Construction is based on the stock scoring list, which is assembled once a month and contains all scores for all factors. The stock, sector and country factors are weighted 50%/30%/20% respectively, combined to produce a total score for a stock, which will determine its overall ranking in the stock scoring list. The total score in this list largely determines the stock weights and a change in the total score is the basis for the sale or purchase of a stock. In portfolio construction, risk controlling comprising detailed and strict reviews of risk, constraints and turnover, plays a major role.

Investment Process - Bonds
Our forecasting process is based on a combination of fundamental and quantitative analysis combined within the framework of a score-board approach. Credit analysis is of increasing importance.

We distinguish between several areas of forecasting:

• Market direction and form of the yield curve
• Relative attractiveness of market segments (government bonds, Jumbo-Pfandbriefe, corporate bonds)
• Relative attractiveness of corporate bond sectors
• Relative attractiveness of single issues (particularly corporate bonds)

In portfolio construction, we make use of quantitative models to analyse duration, yield curve and credit risks.

Portfolio Construction
Balanced Portfolio Construction is a process of combined decisions:

The Asset Allocation Decision is the combination of the Tactical and Dynamic model recommendations as well as the qualitative overlay from the team.

Rule-Based Allocation is used in which 30-70% of the overall decision is based on model results. Each component of the model makes a recommendation on a relative weighting in equities of -/+5%. Discretion around the recommendation used by the team in a qualitative overlay is also made in increments of -/+5%.

Equity and Bond Model Portfolios are received as inputs from their respective our centres of competence and are consistently checked and confidence weighted based on risk class.

Portfolio Risk Budgeting and Guidelines are closely monitored. The combined model portfolio is adapted to client restrictions and risk guidelines.

Risk Management
BarraOne Risk Management System

• Identify sources of risk
• Determine risk factor exposures
• Simulate different scenarios

Proprietary performance measurement system: Performance attribution analysis for all asset classes and individual assets.
Risk management offers feedback into portfolio construction and guidelines to model portfolio selection, alpha building and information management.

Asset Allocation/Fund Management Team
European Balanced funds are managed by the Asset Allocation/ Fund Management team which is based in Düsseldorf. It is headed by the CIO and comprises of 15 Fund Managers, 3 Quantitative Analysts and 1 Product Specialist.

It operates in close co-operation with the European Bond (based in Düsseldorf) and Equity teams (based in Düsseldorf/London).

Key Strenghts

• Expertise of three centers of competence
• Combined in an integrated process
• Added value from asset allocation, stock selection, and duration
• Blend of quantitative models and qualitative asset class analysis