Deutsche Bank db X-trackers How to add value to your portfolio with ETFs David Patterson Head of UK Wholesale Distribution Investors Chronicle Conference, November 2011 db X-trackers – Simply buy the market 2 platforms db X-trackers ETFs Deutsche Bank db X-trackers Datum db-X ETC 1 2010 DB Blue template db X-trackers ETFs Innovation and liquidity for your portfolio — Launched January 2007 — Over 190 ETFs covering a broad range of asset classes — Equities – developed and emerging markets, short daily indices — Fixed Income – bonds, credit (long and short), money market — Alternatives – hedge fund, commodity, currency — Euro 32.4 billion assets – number 2 in Europe and number 4 globally* — Broadest range of fixed income ETFs in Europe — All db X-trackers ETFs are compliant with Reporting Fund requirements Largest funds (in £ billion) DAX ETF 4.77GBP MSCI EMERGING MARKETS TRN INDEX ETF 2.33GBP EONIA TOTAL RETURN INDEX ETF 1.61GBP EURO STOXX® 50 ETF 1.44 GBP MSCI WORLDTRN INDEX ETF 1.37 GBP *Source: Deutsch Bank 11/10/2011 Deutsche Bank db X-trackers Datum 2 2010 DB Blue template What is value? Whatever you want it to be.... Value as a style Value in a sector Value from low cost access to assets, style and sector “A cynic is a man who knows the price of everything but the value of nothing.” - Oscar Wilde. Value: Securities that appear underpriced, i.e. “cheap” Deutsche Bank db X-trackers Datum 3 2010 DB Blue template Value, value, everywhere, another drop, you blink… An ocean of value Deutsche Bank db X-trackers Datum 4 2010 DB Blue template Lets talk “style”: what makes good value? Value Index methodology A “Value Stock” is the stock of a company whose price is undervalued by the market compared to its asset value and earning growth, thereby offering a potential increase in stock value to the company’s actual value. Remember “Value” = “cheap” But how do you estimate or measure intrinsic value? Subjectivity influences and varying analysis methodologies can result in the same information being interpreted differently to arrive at different conclusions of “values”. There are several different value index methodologies used by S&P, Russell, MSCI, Morningstar, the DJIA...... Deutsche Bank db X-trackers Datum 5 2010 DB Blue template How to assess Value Indices Example: MSCI Europe Value TRN Index methodology A “Value Stock” is the stock of a company whose price is undervalued by the market compared to its asset value and earning growth, thereby offering a potential increase in stock value to the company’s actual value. The following variables may be taken into account when selecting the Value Stock which comprise the Index: (i) book value to price ratio, (ii) 12 month forward earnings to price ratio, (iii) dividend yield to price ratio. Be aware that how a style index (growth or value) is weighted can impact its performance and most likely wont track its “parent” (market capitalisation weighted) index. Deutsche Bank db X-trackers Datum 6 2010 DB Blue template Value Index based ETFs : 47 Global listings (47/2643) However in Europe...very limited choice Source: Deutsche Bank ETF/ETC Product Directory 9thSeptember 2011 Deutsche Bank db X-trackers Datum 7 2010 DB Blue template So is there value in value as a style? Some points to consider “October. This is one of the peculiarly dangerous months to speculate in stocks. - The others are July, January, September, April, November, May, March, June, December, August and February.” Mark Twain “The four most expensive words in the English language are: ‘this time it’s different”. Sir John Templeton “The market can act irrationally and be wrong a lot longer than you can stay solvent” Value investing has done well, but is cyclical (& can hurt e.g; late 1990s) Deutsche Bank db X-trackers Datum 8 2010 DB Blue template Value in broad markets and sectors Some points to consider Large developed stockmarkets are arguably value markets anyway “It’s better to be roughly right than precisely wrong”. John Maynard Keynes “The most common cause of low prices is pessimism”. Warren Buffett Capitalisation weighting is straightforward, whilst style investing can be subject to arbitrary classification criteria Style definitions may weight growth stocks that don’t grow and value stocks can remain “undervalued” for long periods! Deutsche Bank db X-trackers Datum 9 2010 DB Blue template Time out! ETPs vs ETFs vs ETCs vs ETNs Clarify the terminology London Stock Exchange Exchange Traded Products (ETPs) Other Products Secured / Collateralised (Backed by assets) Unsecured ETFs ETCs ETNs Exchange Traded Funds Exchange Traded Commodities Exchange Traded Notes — Diversified basket of securities — UCITS regulated — Secured/collateralised Deutsche Bank db X-trackers Datum — Single-commodity or diversified basket of commodities — Single asset or diversified basket of securities — Unsecured/uncollateralized — Futures or physically backed — Issuer credit risk — Secured /collateralised 10 2010 DB Blue template ETF construction and transparency Full Physical, Partial/Optimised Physical, or Synthetic Each method has merits and high levels of transparency Full physical replication more common on liquid, concentrated, single country indices ( e.g FTSE 100, S&P 500) Partial physical replication using sampling or optimisation more common on broad market indices with multiple components and/or countries: can produce higher tracking error Synthetic replication provides perfect index tracking regardless of index, providing access to more asset classes Securities lending to enhance returns is common throughout all UCITS structures: Inside ETF with physical , outside ETF with synthetic Deutsche Bank db X-trackers Datum 11 2010 DB Blue template ETF liquidity construction Accessing the underlying market – same for physical and synthetic Synthetic replication ETF Full or partial Physical replication ETF ETF Cash Investor Collateral (90%-120%) Cash Shares SWAP Counterparty Index Return Asset Return Investor ETF Shares SWAP (up to 10%) Sampling or Optimisation REPLICATE HEDGE Asset Market of underlying Index (e.g. Bonds, Equities) Deutsche Bank db X-trackers 11/7/2011 12 2010 DB Blue template Use of swaps by UCITS funds — Use of OTC swaps in UCITS is not unique to the ETF market — UCITS 3 (2001) provided rules and a framework on how funds could use derivatives as part of their investment policy: — Maximum counterparty exposure of 10% of NAV (for EU credit institutions) and 5% for other financial institutions — Requirement for risk management processes to be put in place by the management company — Possible to track financial indices using OTC derivatives such as swaps — Other types of UCITS funds distributed to retail investors using derivatives: — Absolute return funds — Long/short, 130/30 type strategies — Capital protected funds — Structured funds Deutsche Bank db X-trackers Datum 13 2010 DB Blue template Summary of db X-trackers structure — Deutsche Bank uses synthetic replication for its ETF platform because: — It provides the most efficient way to track an index – perfect index tracking before fees and index replication costs — Allows access to broad range of markets and asset classes — For the db x-trackers ETF platform, DB has in place market leading standards in terms of innovation and disclosure — First synthetic ETF provider to offer fully collateralised products — Full disclosure of collateral and swap exposures on daily basis on www.dbxtrackers.com Deutsche Bank db X-trackers Datum 14 2010 DB Blue template db X-trackers website collateral publication Deutsche Bank db X-trackers Datum 15 2010 DB Blue template Comparison of physical vs. swap based index replication Hypothetical example of physical vs. swap based index replication Index Performance of a swap based ETF Performance of a physical ETF Underperformance relative to index Deutsche Bank db X-trackers Datum Index Performance after fees and tracking costs Performance after fees, tracking costs and impact of real life factors With Physical Replication ETFs there can be inconsistent and unstable tracking performance 16 Complete asset allocation tool box with synthetic replication ETFs — Access to a wide range of markets and asset classes via ETFs — Construct diversified portfolio based on investor risk-return-profile Equities Bonds Themes Countries Regions Sectors Developed Emerging Sovereign bonds Property Private Equity Infrastructure Shariah Fundamental Dividends Markets - £, $, € Inflation linked Corporate Emerging Markets Global Sovereign Commodities: ETFs Broad commodity indices Money Market Alternative Investments Short and Leverage SONIA (£) EONIA (€) Fed Funds Hedge Funds Equities Currency Bonds Credit strategies Effective Rate Commodities ($) Direct / Physical Indirect / synthetic replication Deutsche Bank db X-trackers Datum 17 2010 DB Blue template Deutsche Bank db X-trackers Why use ETFs at all? 18 MSCI Emerging Markets vs Bloomberg Active Index for Funds Relative Performance - MSCI Emerging Markets Index Index The Bloomberg Active Index for Funds Emerging Markets Index (BAIF EM)* is made up of 121 actively managed EM funds and calculated by Bloomberg The BAIF EM Index has an underperformed the MSCI EM Index by 12.4% compared to 2.06% for the db x-trackers MSCI Emerging Markets TRN Index ETF As of: Source: January 2011 MSCI, Deutsche Bank Deutsche Bank db X-trackers 19 Value in broad markets and sectors Some markets and sectors to consider through db X-trackers ETFs MSCI Emerging Markets MSCI BRIC FTSE 100 FTSE 250 EURO STOXX 50 S&P 500 MSCI World Health Care ("People are living longer than ever before, a phenomenon undoubtedly made necessary by the 30-year mortgage.“ Doug Larson) FTSE Global Real Estate S&P Global Infrastructure Global Select Dividend 100 IBOXX UK Gilt Inflation Linked Index DBLCI OY Balanced Deutsche Bank db X-trackers Datum 20 2010 DB Blue template Value in broad markets and sectors Some markets and sectors to consider through db-X ETCs Gold GBP Gold (Sterling hedged) Remember, ETCs are not ETFs Physical precious metal ETCs hold the metal Other db-X ETCs hold gold as collateral Silver GBP Silver (Sterling hedged) GBP Oil GBP Agriculture Natural Gas db Commodity Booster Energy Booster Understand “Booster” or Optimum Yield methodology Deutsche Bank db X-trackers Datum 21 2010 DB Blue template Commodity Futures – the impact of “rolling“ Development of major Oil indices since 2005 Crude Oil Spot 250 db WTI Booster USD Index DJUBS Crude Oil Index S&P GSCI Crude Oil Index Indexed to 100 Indexed to 100 points as per 01 August 2005 200 150 100 50 0 Aug. 05 Source: Deutsche Bank db X-trackers Feb. 06 Aug. 06 Feb. 07 Aug. 07 Feb. 08 Aug. 08 Feb. 09 Aug. 09 Feb. 10 Aug. 10 Bloomberg, May 2010. Past performance is not a reliable indicator of future results. 22 ETCs explained Exchange Traded Commodities (ETCs) Physically backed (eg precious metals) Synthetic backed (agriculture, energy, metals) — Tracks the “spot” price — Tracks the “future” price — For products that can be physically stored — For products that cannot be physically stored — Secured by the underlying precious metal deposited with the custodian — Typically secured by liquid assets (equities, bonds, gold) deposited with a custodian Deutsche Bank db X-trackers Datum 23 2010 DB Blue template db Physical Gold and Silver GBP Hedged ETC db Physical Gold GBP Hedged ETC db Physical Silver GBP Hedged ETC Underlying: Gold Spot price (GOLDLNPM) Metal Entitlement: 1/100 troy ounce Underlying: Silver Spot price (SLVRLN) Metal Entitlement: 1 troy ounce Product Fee: 0.29% p.a. FX Hedging Fee: 0.40% p.a. Product Fee: 0.45% p.a. FX Hedging Fee: 0.40% p.a. Exchange code: XGLS SEDOL: B68FL05 Exchange code: XSIH SEDOL: B65S8K6 24 Value in acquisition and ownership of ETFs Look at all parts of the value chain and consider: all-in fees index methodology “optimum yield” approaches spreads stamp duty (none on ETFs) brokerage deals ( e.g. regular savings offers) and ultimately it all comes down to tracking difference Deutsche Bank db X-trackers Datum 25 2010 DB Blue template Summary of Value opportunities in ETFs Style, Sector, Cost Capitalisation weighting is straightforward, whilst style investing can be subject to arbitrary classification criteria Style definitions may weight growth stocks that don’t grow and value stocks can remain “undervalued” for long periods! Asset allocation is all important: consider sector and markets ETFs first Look at all parts of the value chain of your tracker: consider impact of allin fees, index methodology, “optimum yield” approaches, spreads, stamp duty (none on ETFs), brokerage deals, and tracking error. Deutsche Bank db X-trackers Datum 26 2010 DB Blue template Summary: Features of swap based ETFs — Highly efficient index tracking — Access to a wider range of markets and asset classes than possible under direct replication — Swap based ETFs have evolved beyond UCITS guidelines to limit or eliminate counterparty exposure Key investor considerations for all ETFs and tracker funds — Know your index. — Check the tracking performance vs. index — Check the costs of buying and selling — Know and understand the market and structure risk Deutsche Bank db X-trackers Datum 27 Further Information www.dbxtrackers.com Deutsche Bank db X-trackers Datum Brochures / Guides 28 2010 DB Blue template Further Information www.etc.db.com Deutsche Bank db X-trackers Datum ETC Brochures 29 2010 DB Blue template Investment risks relating to db X-trackers ETFs (1) — Investors should note that the db X-trackers ETFs are not capital protected or guaranteed and investors in each db X-trackers ETF should be prepared and able to sustain losses up to the total capital invested. — Investment in db X-trackers ETFs involves numerous risks including among others, general market risks relating to the relevant index, credit risks on the provider of index swaps utilised in the db Xtrackers ETFs, exchange rate risks, interest rate risks, inflationary risks, liquidity risks and legal and regulatory risks. — The db X-trackers ETFs use Deutsche Bank as the counterparty for OTC derivative transactions. Although the db X-trackers ETFs fuly comply with the UCITS requirements in respect of counterparty exposure, in the event of a default under the terms of the OTC derivative transaction by Deutsche Bank, the db X-trackers ETFs could lose a portion of the NAV of the ETF. The NAV at the time of default also may be considerably less than the amount an investor originally invested depending on the performance of the relevant underlying index. You should therefore understand and evaluate the counterparty credit risk prior to making any investment. — The value of an investment in a db X-trackers ETF may go down as well as up and past performance is not a guide to the future. — Not all db X-trackers ETFs may be suitable for all investors so please consult your financial advisor before you invest in a db X-trackers ETF. Deutsche Bank db X-trackers Datum 30 2010 DB Blue template Investment risks relating to db X-trackers ETFs (2) — ETFs shares may be denominated in a currency different to that of the traded currency of the stock exchange on which the ETF is listed in which case exchange rate fluctuations may have a negative effect on the returns of the fund. — Tax treatment of the db X-trackers ETFs depends on the individual circumstances of each investor. The levels and bases of, and any applicable relief from, taxation can change. db X-trackers may trade in limited markets. — db X-trackers may be unable to replicate precisely the performance of an index. — Investors' income is not fixed and may fluctuate. — The value of any investment involving exposure to foreign currencies can be affected by exchange rate movements. — For further information regarding risk factors, please refer to the risk factors section of the listing particulars or full prospectus. Deutsche Bank db X-trackers Datum 31 2010 DB Blue template Disclaimer This document is intended for discussion purposes only and does not create any legally binding obligations on the part of Deutsche Bank AG and/or its affiliates (“DB”). Without limitation, this document does not constitute an offer, an invitation to offer or a recommendation to enter into any transaction. When making an investment decision, you should rely solely on the final documentation relating to the transaction and not the summary contained herein. DB is not acting as your financial adviser or in any other fiduciary capacity with respect to this proposed transaction. The transaction(s) or products(s) mentioned herein may not be appropriate for all investors and before entering into any transaction you should take steps to ensure that you fully understand the transaction and have made an independent assessment of the appropriateness of the transaction in the light of your own objectives and circumstances, including the possible risks and benefits of entering into such transaction. For general information regarding the nature and risks of the proposed transaction and types of financial instruments please go to www.globalmarkets.db.com/riskdisclosures. You should also consider seeking advice from your own advisers in making this assessment. If you decide to enter into a transaction with DB, you do so in reliance on your own judgment. The information contained in this document is based on material we believe to be reliable; however, we do not represent that it is accurate, current, complete, or error free. Assumptions, estimates and opinions contained in this document constitute our judgment as of the date of the document and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved. Past performance is not a guarantee of future results. This material was prepared by a Sales or Trading function within DB, and was not produced, reviewed or edited by the Research Department. Any opinions expressed herein may differ from the opinions expressed by other DB departments including the Research Department. Sales and Trading functions are subject to additional potential conflicts of interest which the Research Department does not face. DB may engage in transactions in a manner inconsistent with the views discussed herein. 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DB is authorised under German Banking Law (competent authority: BaFin - Federal Financial Supervising Authority) and regulated by the Financial Services Authority for the conduct of UK business. db x-trackers and db x-trackers II are registered with the Luxembourg Trade and Companies’ Register under numbers B-119 899 and B-124 284 respectively. DB Platinum Advisors acts as the management company. db x-trackers and db x-trackers II are each registered in the GrandDuchy of Luxembourg as an undertaking for collective investment pursuant to Part I of the law of 20 December 2002 relating to undertakings for collective investment, as amended. db x-trackers and db x-trackers II each qualiify as an undertaking for collective investment in transferable Securities under article 1(2) of the Council Directive 85/611/EEC of 20 December 1985. A full description of the terms and conditions of all sub-funds are included in the prospectus of db x-trackers and db x-trackers II. You can get the full and the simplified prospectus of each sub-fund of db x-trackers and db x-trackers II at info.dbx-trackers@db.com. © Deutsche Bank AG 2011. All rights reserved.” 2010 · page 32 Deutsche Bank db X-trackers Investment risks relating to db ETC (physical metals products) Investors should note that the db ETCs are not capital protected or guaranteed and investors in each db ETC should be prepared and able to sustain losses up to the total capital invested. —Investment in db ETCs involves numerous risks including among others, general market risks relating to the relevant precious metals, exchange rate risks, interest rate risks, inflationary risks, liquidity risks and legal and regulatory risks. —Prices of precious metals are generally more volatile than prices in other asset classes. —Investments in ETC securities will not accrue any interest and performance is subject to the deduction of the product fee. —The value of an investment in ETC securities may go down as well as up and past performance is not a good indicator of future —performance. —Investing in ETC securities will not make an investor the owner of the relevant metal. —Currency hedging component of ETC securities: In case the issuer has made a profit on a currency hedging component between relevant observation dates, the issuer and the investors will have an unsecured credit exposure to the Programme Counterparty for such a profit. —Not all db ETCs may be suitable for all investors so please consult your financial advisor before you invest in a db ETCs. —Investors' notional invested amount and potential profits are not fixed and may fluctuate. Other Risk Factors — — Tax treatment of the db ETCs depends on the individual circumstances of each investor. The levels and bases of, and any applicable relief from taxation can change db ETC may trade in limited markets. The value of any investment involving exposure to foreign currencies can be affected by exchange rate movements. For further information regarding risk factors, please refer to the risk factors section of the listing particulars or full prospectus. Deutsche Bank db X-trackers Datum 33 2010 DB Blue template Investment risks relating to db ETC (Index-based products) Product Related (for db ETC issued by DB ETC Index plc) —Investors should note that the db ETCs are not capital protected or guaranteed and investors in each db ETC should be prepared and able to sustain losses up to the total capital invested. —Investment in db ETCs involves numerous risks including among others, general market risks relating to the relevant commodities used in the index, credit risks on the provider of index swaps utilised in the ETCs, exchange rate risks, interest rate risks, inflationary risks, liquidity risks and legal and regulatory risks. —The db ETCs use Deutsche Bank as the counterparty for OTC derivative transactions who will post allocated gold as collateral. In the event of a default under the terms of the OTC derivative transaction by Deutsche Bank, the investors in db ETCs could lose a part of their capital invested not only due to a decline in the relevant underlying index but also if the value of the gold collateral declined after the counterparty default. The NAV at the time of default also may be considerably less than the amount an investor originally invested depending on the performance of the relevant underlying index. You should therefore understand and evaluate the counterparty credit risk prior to making any investment. —The value of an investment in a db ETC may go down as well as up and past performance is not a guide to the future. —Not all db ETCs may be suitable for all investors so please consult your financial advisor before you invest in a db ETCs. —Commodity indices are replicated using futures contracts which may lead to negative or positive roll returns —db ETCs may be unable to replicate precisely the performance of an index. —Investors' notional invested amount and potential profits are not fixed and may fluctuate. Other Risk Factors —Under certain limited circumstances as described in the Terms & Conditions, the allocated gold collateral could be substituted with collateral comprising financial assets that may include equity shares and fixed income securities. —Tax treatment of the db ETCs depends on the individual circumstances of each investor. The levels and bases of, and any applicable relief from taxation can change db ETC may trade in limited markets. —The value of any investment involving exposure to foreign currencies can be affected by exchange rate movements. —For further information regarding risk factors, please refer to the risk factors section of the listing particulars or full prospectus. —An investment in a db ETCs tracking a short index is intended for financially sophisticated investors who wish to take a very short term view on the underlying index, e.g. for day trading purposes. Therefore db ETCs on short indices are appropriate only for financially sophisticated investors who understand their strategy, characteristics and risks. db ETCs on short indices are not intended to be a buy and hold investment. Deutsche Bank db X-trackers Datum 34 2010 DB Blue template Disclaimer © 2010 Deutsche Bank AG, as of May 2011 This presentation contains a short summary description of the above mentioned ETCs and is for discussion purposes only. A complete description of the securities is in the respective and most recent prospectus of the above mentioned ETCs. This presentation is not for distribution to, or for the attention of, US or Canadian persons. Without limitation, this presentation does not constitute an offer or a recommendation to enter into any transaction. When making an investment decision, you should rely solely on the final documentation and any prospectus relating to the transaction and not this summary. Investment strategies involve numerous risks. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) the effect of any transaction they may enter into, including the possible risks and benefits of such transaction and should ensure that they fully understand the transaction and have made an independent assessment of the appropriateness of such transaction in the light of their own objectives and circumstances. In no way should Deutsche Bank be deemed to be holding itself out as a financial adviser or a fiduciary of the recipient hereof. Deutsche Bank may make a market or trade in instruments economically related to ETC securities or derivatives mentioned herein, and/or have investment banking or other relationships with issuers of the relevant securities. Deutsche Bank actively manages various risks, and on occasion may deal in securities mentioned in this document or in related instruments during the period between your receipt of this fact sheet and the award of any order. Whilst Deutsche Bank‘s trading or hedging activities are not intended to have any significant impact upon prices, its dealings could affect the prices you pay or receive for transactions in related securities. Deutsche Bank, and its current and future subsidiaries, parents, affiliates, divisions, officers, directors, agents and/or employees, disclaim all liability with respect to this document and the information herein, and are not liable for any errors or omissions, or for any damages howsoever arising from any reliance placed thereon, save as required by applicable laws and regulations. A full description of the terms and conditions of all securities are included in the prospectus of DB ETC Index plc and DB ETC plc. You can get the full prospectus of the DB ETC Index plc and DB ETC plc at St. Paul’s Gate, St. Hellier, Jersey, JE4 8ZB, Channel Islands Deutsche Bank AG is authorised under German Banking Law (competent authority: BaFin – Federal Financial Supervising Authority) and is regulated by the Financial Services Authority for the conduct of investment business in the United Kingdom. The registered address of Deutsche Bank AG, London Branch, is Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank db X-trackers Datum 35 2010 DB Blue template