Nomura Quant

Connecting Markets East & West
Equity Research
Quantitative Equity Strategy

Quantitative Strategy
Inigo Fraser Jenkins NIplc
Alla Harmsworth NIplc
Paul Danis NIplc
Mark Diver NIplc
+44 20 7102 4658

inigo.fraser-jenkins@nomura.com
+44 20 7102 2219
+44 20 7102 3406
+44 20 7102 2987
alla.harmsworth@nomura.com
paul.danis@nomura.com
mark.diver@nomura.com
Gerard Alix Guerrini NIplc

+44 20 7102 8153
gerard.guerrini@nomura.com
Rohit Thombre
Robertas Stancikas NIplc
+91 22 305 32561

rohit.thombre@nomura.com
+44 20 7102 3127

robertas.stancikas@nomura.com
Quantitative Solutions Industry Specialists
Ethan Brodie NSI

+1 212 667 1076
ethan.brodie@nomura.com
Bhavik Shah NIplc

+44 20 7103 9988
bhavik.shah@nomura.com
Sarah McCarthy NIplc
Norman Pfeifer NIplc
+44 20 7103 9988

sarah.mccarthy@nomura.com
+44 20 7103 9988

norman.pfeifer@nomura.com
Rupal Agarwal
+91 22 6723 5436
rupal.agarwal@nomura.com
October 2014
See Appendix A-1 for analyst certification, important

disclosures and the status of non-US analysts.
Any authors named on this report are research
analysts unless otherwise indicated.
Introduction
Market outlook
Are earnings growing in Europe?
Global quant equity portfolio:
Tactical factor allocation: Buy growth over income as rates rise
Strategic quant trades
Long horizon concentrated strategies

Sector allocation and current trade ideas
Fund-management strategy
Is passive the new active?
Natural weighting
Cross-asset alternative beta/risk premia investing
EM country selection
Website, recommended strategy portfolio
Market outlook
European EPS and market multiple
European EPS and the market multiple

Ratio
23
Earnings
trough
Earnings
trough
Multiple
peak
Multiple peak
Multiple expansion following earnings troughs

Earnings
trough
Multiple
peak
Ratio
350
21
300
19
17
250
15
200
13
Multiple
peak
Multiple
change (PE
points)
Trailing earnings
30/06/1976
11.5
30/04/1979
10.30
35
-1.20
31/01/1984
12.9
31/01/1984
12.90
0.00
31/03/1993
14.7
31/01/1994
16.24
10
1.53
30/06/2003
12.6
27/02/2004
13.35
0.78
31/07/2009
12.6
30/09/2009
13.34
0.78
0.78
Forward Earnings
11
150
9
100
Market Multiple (LHS)
7
5
Jan-88
Earnings trough
Multiple at
earnings trough
Number of
months from
earnings trough
to multiple peak
Peak
multiple
attained
European EPS (RHS)

50
Jan-91
Jan-94
Jan-97
Jan-00
Source: Datastream, IBES, Nomura Strategy research
Jan-03
Jan-06
Jan-09
Median
Jan-12
European 10-year inflation-adjusted earnings and current

earnings
European and US Shiller P/E
Index
Ratio
115
50
US Shiller PE
45
110
Europe Shiller PE
40
105
35
100
30
95
25
90
Consensus
2015
forecast
20
85
15
80
10
75
5
0
Jan-1881
Jan-1905
Jan-1929
Source: Nomura Strategy research, Shiller database
Jan-1953
Jan-1977
Jan-2001
70
Jan-80
Current earnings
Jan-85
Jan-90
Jan-95
Jan-00
Jan-05
Jan-10
4
Earnings versus monetary policy: Drivers of eurozone

equities
Absolute equity returns
Equities Relative to Bonds
Coefficients
t Stat
Intercept
6.7
1.2
Fwd PE
12m fwd gth in trail
eps
-0.1
-0.3
0.2
Fed Dummy
Europe dummy
Absolute equity returns
Coefficients
t Stat
Coefficients
t Stat
Intercept
7.2
2.9
Intercept
11.8
1.9
-0.4
-0.9
4.0
ERP
eps
-0.2
-0.5
3.9
Fwd PE
eps
0.2
0.2
3.3
10.2
1.0
Fed Dummy
9.3
0.9
Fed rates
0.7
0.9
0.4
0.1
Europe dummy
0.2
0.0
Europe rates
-1.3
-2.1
Figure shows the result of a regression of 12-month forward equity returns and 12-month forward returns of equities relative to bonds on start-of-period valuations and monetary policy. In the two left
tables, the monetary policy is represented by a dummy variable that takes the value of 1 on the first hike of a cycle and zero otherwise, in the right panel we use the actual level of short-term rates.
In the US, we use Fed funds target rate, in the euro area before the introduction of the EUR we use an avg of the French and German short-term rates. Regression is run from 1989 to 2013 for the
dummy regressions and 1992 to 2013 for the short rate regressions.
Source: Nomura Strategy research
Flow-based sentiment indicators

Global mutual fund activity indicator*
4
Global net issuance and 12-month forward returns
Feb 1998
Aug 2014
Z-score
2.5
Strong flows indicative of bullish sentiment
12 month trailing
net issuance (%
mcap)
Global Net Issuance (LHS)
12 month forward
returns (%)
Global 12m Fwd Returns (RHS, inverted)
-70
-50
2.0
-30
1.5
-10
1.0
10
0.5
1
30
0.0
Jan-89
50
Jan-93
Jan-97
Jan-01
Jan-05
Jan-09
Jan-13
Source: SDC, Dealogic, Bloomberg, Datastream, Nomura Strategy research
Cross-border equity flows*

2.5
2.0
-1
Flows as % of
Market Cap,
3MMA
1.5
1.0
0.5
-2
0.0
-0.5
Weak flows indicative of bearish sentiment
-3
Feb-98
-1.0
-1.5
Feb-01
Feb-04
Feb-07
Feb-10
Feb-13
*Mutual fund net inflows are based on US net purchases of all equity mutual funds as well as net purchases of European, Japanese and
Global Emerging markets funds. US and Global Emerging market flows are measured as the 12-week moving average of flows
expressed as a percentage of US and GEM market capitalisation, while European and Japanese figures are measured in relation to
reported assets under management. Return series is 12-week forward local currency return of Datastream World Index. ** Z-score is
measured in standard deviation and is a rolling 2-year average. Japanese data prior to July 2005 is based on retail flows as a % a
Japanese market cap. Source: AMG, EPFR, Datastream, FTSE, Nomura Strategy research
-2.0
Jan-87
Jan-92
Jan-97
Jan-02
Jan-07
Jan-12
*Purchases of international equities by US, European & Japanese investors. Source: Nomura strategy research, US
Treasury, ONS, ECB (from Jan 1998), Bank of France, Bank of Japan, Bundesbank, Sveriges Riksbank. The latest data
point is estimated from weekly frequency data Source: EPFR, Nomura Strategy research
Cumulative net flows into European equity mutual funds & ETFs
USD bn
Equity holdings and total financial assets

USD trn
USD trn
0
Total Financial Assets (LHS)
160
Equity (RHS)
-20
35
140
30
-40
120
-60
25
100
-80
20
80
-100
15
60
-120
10
40
-140
20
Source: EPFR, Nomura Strategy research
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Jun-14
Dec-10
Jun-13
Jun-10
Jun-12
Dec-09
Jun-11
Jun-09
Jun-10
Dec-08
Jun-09
Jun-08
Jun-08
Dec-07
-180
Jun-07
Jun-07
-160
Chart shows aggregate holdings of equity and total financial assets of Households and Insurance
companies and pension funds domiciled in the US, eurozone, Japan and the UK. The equity aggregate
includes holdings of mutual funds, but excludes unquoted equity and other equity where possible.
Source: US Federal reserve, ECB, ONS, BOJ, Nomura Strategy research
Composite sentiment indicator
1 Year Z-score
2.0
Sentiment optimistic
Future market weakness
1.5
1.0
0.5
-0.6
0.0
-0.5
-1.0
-1.5
Sentiment pessimistic
Future market strength
Our composite sentiment indicator combines five different sentiment signals: Mutual flows, Nasdaq speculative positioning, Investors Intelligence survey, Put-call ratios and Implied to realised volatility.
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
-2.0
Historical efficacy of the composite sentiment indicator
Index
400
350
300
250
200
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
CSI - combines five different sentiment signals: Mutual flows, Nasdaq speculative positioning, Investors Intelligence survey, Put-call ratios and Implied to realised volatility.
Source: Nomura Quantitative Strategy research
2011
2012
2013
EM country correlation (rolling 6-month window, daily)
Correlation
0.6
6 month rolling correlation
3 month correlation
0.5
0.4
0.3
0.2
0.1
0.0
Aug-01
Aug-03
Aug-05
Aug-07
Aug-09
Aug-11
Aug-13
Daily average pairwise correlation between 14 MSCI EM country indices with a 130-day rolling window. Countries considered - Egypt, South Africa, Turkey, Czech Republic, India, Indonesia, Chile,
Poland, Hungary, Russia, Peru, Brazil, Thailand, South Korea. Source: Nomura Strategy research
10
EM flows
Monthly net purchases of global emerging market funds
(GEM)* and 12-month forward GEM returns relative to
developed markets, 1996 - Aug 2014
Difference between GEM flows and regional flows
2.5
Flows as % of
EM Market Cap,
12MMA Ann
2.5
GEM Flows
Region Flows
2.0
2.0
1.5
1.5
Flows as % of
GEM Market Cap,
12MMA Ann
Net Purchases of Global Emerging

Markets * (LHS)
-60
Global Emerging Market Return relative

to Developed (RHS, Inverted)
-40
1.0
-20
1.0
0.5
0.5
0.0
-0.5
0.0
20
-1.0
-0.5
-1.5
40
-1.0
-2.0
-2.5
Jan-96
Correl: -0.71
Jan-99
Jan-02
Jan-05
Jan-08
Jan-11
Jan-14
Chart shows 12-month moving average of annualised monthly net purchases of GEM funds expressed as a percentage of
global emerging market capitalisation. The Region Flows line is the sum of dedicated regional Asia ex Japan, LatAm and
emerging EMEA flows on the same basis. Source: EPFR, FTSE, Nomura Strategy research
-1.5
Jan-96
60
Jan-99
Jan-02
Jan-05
Jan-08
Jan-11
*Purchases of Global Emerging Market Equity Funds as a percentage of market capitalisation,

12 Month Moving Average.
Sources: EPFR, FTSE, Datastream, Nomura Strategy research
Jan-14
11
Reliability of GEM flow indicator
Fwd Relative Returns (EM-DM)

1m
2m
3m
ERP (%)
6m
9m
12m
EM
ERP spread
DM
EM-DM
31/10/2000
-1.8%
0.3%
11.9%
9.2%
9.0%
9.3%
4.5
1.8
2.7
31/12/2001
6.6%
9.9%
11.6%
12.5%
14.6%
15.9%
2.8
1.6
1.2
31/03/2003
-0.8%
0.5%
4.6%
13.7%
15.5%
23.9%
9.7
6.1
3.7
30/04/2007
2.4%
6.9%
14.2%
25.3%
19.2%
25.4%
4.7
4.7
0.0
31/10/2008
-0.9%
2.8%
5.5%
23.6%
33.3%
38.1%
14.6
11.4
3.2
30/12/2011
5.7%
6.9%
1.8%
-2.6%
-2.3%
0.4%
9.7
9.9
-0.2
31/01/2014
-1.6%
1.8%
1.0%
1.4%
4.2%
7.2%
13.6%
14.9%
18.8%
7.7
6.0
1.7
Average
Source: Nomura Quantitative strategy
12
Relative equity risk premium and relative forward returns
% yoy
Forward Excess Returns (RHS)
Relative ERP of EM relative to World (LHS)
60
50
40
30
20
10
-1
-10
-2
-20
-3
Jul-00
Jul-02
Jul-04
Jul-06
Jul-08
Jul-10
The equity risk premium is calculated as the difference between the market cap-weighted earnings yield and the real bond yield for both FTSE World and FTSE AW Emerging Markets.
Source: Factset, IBES, Datastream, FTSE, Bloomberg, Nomura Quantitative strategy
Jul-12
-30
Jul-14
13
Multi-asset correlation (90 day)
Index volatility - Factor volatility (Global)

%
Correlation
coefficient
0.7
5
0.6
4
3
0.5
2
1
0.4
0
0.3
-1
-2
0.2
-3
0.1
Weekly average of absolute pairwise-correlations between returns of different asset classes over a 90-day rolling
window. Asset classes considered - FTSE World Index (proxy for developed equities), FTSE EM Index (proxy for
EM equities), dollar spot, gold spot, US govt. 10y bond, commodity index, credit spread indices (investment
grade and high yield). Source: Nomura Quantitative strategy
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Sep-14
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
-4
Chart shows 75 day rolling realised volatility of the FTSE World index less the average 75-day rolling
volatility of Value, Growth, Momentum, Risk and Quality for a global universe. Note that the underlying factor
indices are long-short $-neutral. Source: Nomura Quantitative strategy
14
Are earnings growing in Europe?
Micro to macro earnings indicator

European 12m forward EPS and European light commercial
vehicle sales
% y/y
40
30
European 12m forward EPS and Frankfurt airport freight

volumes
%
y/y
European 12-month fwd EPS (LS)

European new light commercial vehicle sales (Advanced
2-months, RS)
% y/y
Frankfurt airport air freight volumes (Advanced 4-months, RS)
40
25
20
15
10
-5
30
-15
-20
-25
-30
20
10
10
-10
-10
-20
-20
-30
-35
-40
-45
Apr-03
Apr-06
Apr-09
% y/y
European hotel occupancy rate (Advanced 3-months, RS)
40
30
20
10
0
-10
-20
-30
-40
Apr-00
Apr-03
Apr-06
-40
Apr-97
-30
Apr-00
Apr-03
Apr-06
Apr-09
Apr-12
Apr-12
European 12m forward EPS & European hotel occupancy rate
-50
Apr-97
30
20
-10
-50
Apr-00
% y/y
Apr-09
Apr-12
y/y chg
(%)
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
European 12m forward EPS and global oil & gas rig count
% y/y
40
% y/y
50

Global oil & gas rig count (RS)
30
40
20
30
10
20
10
-10
-10
-20
-20
-30
-30
-40
-40
-50
Apr-97
-50
Apr-00
Apr-03
Apr-06
Apr-09
Apr-12
16
Micro to macro earnings indicator

European 12m forward EPS and global steel production
% y/y
40
Regression statistics
% y/y
R2: 79%
35
Global steel production (advanced 5-months, RS)
30
25
Variable (months advanced)
Coefficient
t-stat
20
10
0
-10
15
European Hotel Occupancy (3m)
2.27
3.21
Frankfurt cargo volumes (4m)
2.16
3.37
World Steel Production (5m)
1.81
2.42
Global Oil/Gas rig count (0m)
2.98
3.03
Europe light commercial vehicle registrations (2m)
3.32
5.54
Constant
5.64
7.61
-5
-20
-15
-30
-25
-40
-50
Apr-97
-35
Apr-00
Apr-03
Apr-06
Apr-09
Apr-12
In the above table, we regress the y/y% change in European 12m fwd EPS on the Z-scores (expanding window
from Jan. 2000) of the y/y% change in European hotel occupancy rate, Frankfurt airport cargo volumes, World
Steel Production, Global Oil/Gas Rig count and European light commercial vehicle registrations advanced by 3, 4,
5, 0 and 2 months, respectively.
European 12m forward EPS and micro-macro indicator

40
% y/y
Z score
30
Micro-macro indicator*
20
10
0
-10
-1
-20
-2
-30
-3
-40
-50
Apr-97
-4
Apr-00
Apr-03
Apr-06
Apr-09
Apr-12
* Includes the European hotel occupancy rate, European light commercial vehicle sales, Frankfurt airport freight/mail volumes, global oil & gas rig count and global steel production.
Source: Datastream, IBES, Fraport, STR Global, Nomura Strategy research
17
Nomura medium-term macro model for European

earnings
% y/y
Europe 12m forward EPS level (LS)
Medium-term model* (R2 = 75%)
30
20
10
0
-10
-20
-30
-40
Jan-92
Jan-95
Jan-98
Jan-01
Jan-04
Jan-07
Jan-10
Jan-13
*Includes Spanish/German 10-year government bond yield spread, euro area M1 money supply, US corporate bond yield spread over Treasury, US unemployment initial claims, and global
semiconductor sales. R2 = 75%
Source: IBES, Datastream, Nomura Strategy research
18
European earnings and economic sentiment
Gap between economic sentiment indicator and earnings
Index
40
European consensus EPS revision balance* (LS)
125
EU economic sentiment indicator (RS)
20
15
20
115
10
105
5
0
-20
95
-5
-40
85
-10
-15
-60
75
-20
-80
Jan-88
65
Jan-92
Jan-96
Jan-00
Jan-04
Jan-08
Jan-12
-25
Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12
19
Change in lending standards and subsequent loan growth

% y-o-y
Bank lending to non financial business (LS)
Strong European currencies are weighing on earnings

%
-30
20
Net change in lending standards to firms last quarter
(inverted, advanced 5-quarters, RS)
%
40
Market cap weighted European currency index* (RS)

European
currencies
weakening
-20
20
15
y/y %
European 12m fwd EPS revision balance* (LS)
20
-10
0
10
25
15
10
10
5
5
20
-20
0
30
0
40
-5
-40
-10
50
-5
European
currencies
strengthening
-60
60
-10
Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1 2015
70
-80
Jan-88
-15
-20
Jan-92
Jan-96
Jan-00
Jan-04
Jan-08
Jan-12
20
US pent-up capex: key potential positive

US private fixed investment in equipment and cost
average age: non-residential equipment/software
Rising US capacity utilisation
% y/y
US Capacity Utilisation Mfg- SA
25
85
Average age of non-resisdential equipment

(advanced 1-yr, RS)
20
80
Years
US private fixed investment in equipment (LS)
7.5
15
7.3
10
75
70
65
-5
7.1
6.9
-10
60
6.7
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-15
6.5
-20
1991
1996
Capex intentions and policy uncertainty

50
2006
2011
Capex/depreciation for European sectors

Index
Philly Fed survey of capex intentions (LHS)
2001
Ratio
3.0
50
2.5
100
2.0
150
1.5
200
1.0
250
0.5
300
0.0
Jan-88
Capital Goods
Technology
Telecoms
US economic policy uncertainty (Inverted, RHS)

40
Consumer Cyclicals
Utilities
30
20
10
0
-10
-20
-30
Jan-85
Jan-89
Jan-93
Jan-97
Source: Bloomberg, Nomura Strategy research
Jan-01
Jan-05
Jan-09
Jan-13
Jan-91
Jan-94
Jan-97
Jan-00
Jan-03
Jan-06
Jan-09
Jan-12
21
Consensus implies a large gap between US and

European margins: we think it might close
FY3
22%
Europe
FY2
US
21%
FY1
20%
19%
FY3
FY2
18%
17%
FY1
Source: IBES, Nomura Strategy research
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
16%
22
US profit margins at a turning point?

US profit margins typically fall on the back of labour market
gains, with a lag
%
We are now past the point in the cycle when profit margins
begin to fall
%
US non financial corporate profit margins

US unemployment rate (advanced 2.5-years)
11
17
?
10
15
9
13
Mar-73
4.9
12.9
20
1.2
Sep-77
6.8
13.4
29
2.2
Jun-84
7.2
11.8
19
3.6
Sep-97
4.9
13.3
64
2.9
Sep-06
4.5
14.5
40
1.8
Average
5.7
13.2
34.4
2.34
Median
4.9
13.3
29
2.2
Current
6.3
14.9
55 (so far)
3.7 (so far)
11
6
9
5
7
5
Mar-70
Mar-80
Mar-90
Mar-00
Date of
profit
margin
peak
Months from the

Decline in
peak in the
unemployment
unemployment
rate
rate and the
experienced
Profit
subsequent
before profit
margin
US
peak in profit
margins
unemployment peak
margins*
peaked*
level
rate
Mar-10
*Non-financial profits (w/ inventory and CC adjustment) as a share of non financial gross product
Source: Datastream, Nomura Strategy research
23
Factor allocation and global quant equity portfolio
Global factor views
Long
Neutral
Short
Source: Bloomberg, Nomura Quantitative strategy
Growth (global)
Risk (global)
Large caps (Europe)
Gearing
Value (global)
Momentum (global)
Quality (global)
Dividend yield
25
European growth vs income and 5y5y inflation
Ratio
Growth/Income (LHS)
5y5y inflation (RHS)
110
2.3
105
2.2
2.2
100
2.1
95
2.1
90
2.0
85
2.0
80
Jan-14
1.9
Feb-14
Mar-14
Apr-14
Chart shows the relative performance of Growth over income (both long-short) and 5y5y inflation.
May-14
Jun-14
Jul-14
Aug-14
Sep-14
26
Growth has been de-rated...
Valuation of Global Composite Growth
Valuation of European Composite Growth
Ratio
Ratio
Global Composite
Growth - 12mth Fwd
P/E
5.0
Global Composite
Growth - Price/Book
4.5
Europe Composite Growth - 12mth Fwd P/E

Europe Composite Growth - Price/Book
4.0
3.5
3.0
3
2.5
2.0
2
1.5
1.0
0.5
0
Jan-90
Jan-94
Jan-98
Jan-02
Jan-06
Jan-10
Jan-14
0.0
Jan-90
Jan-94
Jan-98
Jan-02
Jan-06
Jan-10
Jan-14
27
and expectations for growth companies have been

significantly cut
Long-term expected earnings growth for Global Composite

Growth Style
Earnings revisions for Global Composite Growth Style
25
Net earnings
revisions %,
(up -down) /
total, 3MMA
16
20
15
15
14
13
10
12
5
11
0
10
-5
9
-10
-15
-20
Jan-90
Jan-94
Jan-98
Jan-02
Jan-06
Jan-10
Jan-14
6
Jan-90
Jan-94
Jan-98
Jan-02
Jan-06
Jan-10
Jan-1
28
US rates and factor performance
Rate cycles and factor performance
Growth relative to income and Fed funds rate

%
15
Income
31/03/1972
30/04/1976
31/08/1977
31/10/1980
30/03/1984
31/12/1986
31/03/1988
28/02/1994
30/06/1999
30/06/2004
Avg
Median
All period average
22.3%
9.1%
-24.8%
6.5%
4.6%
-1.8%
-2.9%
4.5%
-43.4%
4.5%
-2.1%
4.5%
-2.6%
Growth
9.6%
48.5%
-4.5%
17.9%
9.6%
1.9%
Momentum
Value
34.6%
3.1%
15.2%
10.4%
22.5%
17.6%
20.6%
-6.2% -0.2%
53.5% -46.0%
4.4% 17.8%
17.6% -9.5%
16.4% -0.2%
-0.9%
2.6%
Gearing
Quality
US Federal Funds Target Rate (LHS)
150
Growth-Income 2 yr (RHS)
Risk
10
100
5
-7.6%
-39.7%
8.9%
-12.8%
-7.6%
-1.0%
8.6%
-7.5%
-6.6%
-1.8%
-6.6%
1.2%
3.0%
25.0%
0.2%
9.4%
3.0%
4.9%
50
0
0
-5
-50
-10
-15
Dec-72
Shows one-yr fwd returns after the first hike in each cycle for our post-88 internal styles and the longer-term Ken
French styles. Avg and Median refer to the average and median of the one-yr fwd returns after the first hike while the
all period average refers to the average monthly returns of the respective series over the whole sample period
regardless of monetary policy. Source: Nomura Quantitative Strategy research
-100
Dec-78
Dec-84
Dec-90
Dec-96
Dec-02
Shows two-year returns from growth-income and changes in the Fed rate.
Dec-08
29
US rates and factor performance
Low-high yield and fed funds rate
Performance of momentum and fed funds rate
Index
Fed Fund
Rate, %
135
Fed Fund
Rate, %
Index
20
Low-high yield (LHS)
9065
High-low mtm (LHS)
12
US Federal Funds Target Rate (EP) (RHS)

18
US Federal Funds Target Rate (EP) (RHS)

125
8065
10
16
7065
115
14
6065
6
12
105
5065
10
4
4065
95
8
6
85
2
3065
0
2065
75
2
65
Dec-78
Dec-83
Dec-88
Dec-93
Dec-98
Dec-03
Dec-08
0
Dec-13
Chart shows the relative performance of low-high yield stocks (ie, the INVERSE of an income strategy) and the
Fed funds rate. Source: Nomura Quantitative Strategy research
-2
1065
65
Dec-85
-4
Dec-90
Dec-95
Dec-00
Dec-05
Dec-10
30
US GDP cycles and factor performance
Early recession
Style
Price to Book (cheap/expensive)

Momentum (high/low)
Price to Cashflow (cheap/expensive)
Dividend Yield (cheap/expensive)
PE, trailing (cheap/expensive)
Size (Large/Small)
Average
return all
periods, %pa
11.40
7.25
8.36
-0.14
7.11
-12.45
Return,
t-stat
%pa
7.98
15.41
15.72
10.76
15.71
10.46
1.14
2.50
3.65
2.41
3.63
1.24
Late recession
Return,
t-stat
%pa
7.90
-8.30
4.47
-1.16
2.90
-16.70
1.10
-1.47
1.08
-0.28
0.70
-2.20
Early expansion
Return,
t-stat
%pa
20.68
8.04
12.08
4.81
11.78
-15.86
4.50
2.18
5.19
1.84
5.04
-3.43
Mid expansion
Return,
t-stat
%pa
12.19
8.58
9.75
-3.54
8.25
-5.91
2.75
2.33
4.37
-1.41
3.70
-1.22
Late expansion
Return,
t-stat
%pa
11.38
14.89
4.20
-2.22
2.13
-7.39
2.59
3.93
1.94
-0.88
0.99
-1.54
Note: Shows the return to factor portfolios in different market environments from 1926 to 2013. Factor returns are the annualised spread in returns between top and bottom quintile on each of the factors shown sourced from
the Kenneth French data library available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/index.html. Periods of expansion and contraction are as defined by the NBER. Last recession ended in June 2009, so the
analysis has only been run until that point in time. Source: Kenneth French Data Library, NBER, Nomura Quantitative Strategy research
31
UK rate cycles and factor performance
30/06/1988
30/09/1994
31/10/1996
30/09/1999
27/02/2004
31/08/2006
Avg
Median
All period average
Income
Growth
Value
Gearing
Quality
Risk
-2.99%
-9.74%
13.36%
-17.35%
15.93%
-7.08%
-1.31%
-5.04%
3.40%
-0.20%
6.63%
-8.72%
17.18%
-9.71%
1.86%
1.17%
0.83%
1.03%
-9.07%
14.16%
-19.71%
25.24%
-3.87%
1.35%
-3.87%
1.92%
2.31%
-4.04%
-8.84%
0.01%
3.40%
-1.43%
0.01%
-1.55%
11.49%
11.17%
2.67%
4.40%
-5.54%
4.84%
4.40%
5.48%
-1.86%
-3.81%
1.94%
-12.01%
3.03%
-2.54%
-1.86%
0.35%
Shows one-yr fwd returns after the first hike in each cycle for our post-88 internal styles and the longer-term Ken French styles. Avg and median refer to the average and median of the one-yr fwd returns after the first hike while the
all period average refers to the average monthly returns of the respective series over the whole sample period regardless of monetary policy. Source: Nomura Quantitative Strategy research
32
Europe ex UK growth and income driven by valuation,

ECB and Fed
Europe ex UK income
R2
Intercept
PBK
12m fwd gth in trail eps
Fed rates
Europe rates
0.27
Coefficients
11.83
-18.13
0.03
-0.06
0.72
Europe ex UK Growth
R2
t Stat
2.70
-2.68
0.74
-0.13
1.67
Intercept
PBK
12m fwd gth in trail eps
Fed rates
Europe rates
0.60
Coefficients
14.40
-6.72
0.00
1.05
-0.78
t Stat
8.57
-9.79
-0.14
5.55
-4.47
33
Income strategies unattractive
Analyst revisions for income strategy

(global and Europe)
Valuation of global income strategy

Ratio
1.2
20
Global Dividend Yield - 12mth Fwd P/E
Net earnings
revisions %,
(up -down) /
total, 3MMA
Global Dividend Yield - Earning Rev. (3MMA)

Europe Dividend Yield - Earning Rev. (3MMA)
15
Global Dividend Yield - Price/Book

1.0
10
5
0.8
0
0.6
-5
-10
0.4
-15
-20
0.2
-25
0.0
Jan-90
Jan-94
Jan-98
Jan-02
Jan-06
Jan-10
Jan-14
-30
Jan-90
Jan-94
Jan-98
Jan-02
Jan-06
Jan-10
Jan-14
34
Dividend payout ratio for the highest yielding companies
Ratio
0.75
0.70
Global high dividend quartile: median payout for last constituents

Global high dividend quartile: median payout
0.65
0.60
0.55
0.50
0.45
0.40
0.35
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
Jan-05
Jan-08
Note: The chart shows 12m trailing dividends as % of 12m forward EPS for the top quartile of dividend yield factor and for the current constituents of September 2014 back through time.
Source: FTSE, Worldscope, Nomura Quant research
Jan-11
Jan-14
35
Risk still attractive
Risk valuations
Ratio
3.0
Correlation between Risk and Growth

Europe Composite Risk - Price/Book
Correlation
1.2
Growth and Risk - Europe
US Composite Risk - Price/Book

Global Composite Risk - Price/Book
2.5
1.0
Growth and Risk - Global
0.8
0.6
2.0
0.4
0.2
1.5
0.0
-0.2
1.0
-0.4
0.5
-0.6
-0.8
0.0
Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14
-1.0
May-00
Figure shows rolling 90 day pairwise correlation coefficient between the styles.
May-03
May-06
May-09
May-12
36
Correlation of Momentum with other factors

Momentum global equity factor correlation (90 day)
Correlation
1.5
Val-mom
Mom-Risk
Mom-Quality
Mom-Size
0.5
-0.5
-1
-1.5
May-00
May-02
May-04
Rolling 90-day correlation between factor pairs. Source: Nomura Quantitative strategy
May-06
May-08
May-10
May-12
May-14
37
Sector exposure of styles
Composite growth
Global Europe US
UK
JP
Composite risk
A ex JP GEM
Global Europe US
UK
JP
Dividend yield
A ex JP GEM
Global Europe US
UK
JP
A ex JP GEM
Basic Industries
8%
4%
6%
-4%
10%
3%
-8%
1%
-3%
5%
2%
8%
10%
13%
2%
-5%
5%
-13%
6%
-0%
1%
Capital Goods
2%
2%
5%
-7%
-6%
4%
8%
-2%
-4%
-2%
-4%
4%
6%
5%
-4%
-5%
-8%
-3%
2%
-7%
-11%
Consumer Cyclicals
13%
21%
26% 37%
-2%
-1%
-2%
8%
14%
16%
7%
-18%
-3%
-4%
-11%
-15%
-4% -33% -10%
-5%
-15%
Consumer Staples
-2%
-9%
-5% -16%
0%
0%
-2%
-11%
-14%
-7% -12% -8%
5%
-3%
5%
-1%
10% 11%
2%
-4%
-7%
Energy
-4%
-4%
1%
0%
-4%
-10%
3%
-0%
11% 10%
2%
5%
-2%
7%
-6%
-3%
4%
1%
9%
Financials
-16%
-11%
0%
-11%
-3%
9%
24%
-4%
16% 10%
-15%
-7%
6%
7%
8%
21%
4%
18%
19%
Healthcare
4%
4%
6%
6%
-6%
6%
8%
-5%
-12%
-7%
-3%
-2%
-1%
-0%
-12%
-12%
-14%
0%
8%
-6%
-7%
Media
7%
2%
8%
3%
3%
-1%
2%
-2%
-3%
4%
1%
-4%
0%
1%
-1%
4%
-6%
3%
-2%
0%
-3%
Technology
10%
11%
-1%
3%
3%
8%
16%
10%
1%
3%
1%
6%
3%
4%
-14%
-9%
-10% -3% -10%
-2%
-8%
Telecoms
-3%
-2%
-2%
0%
0%
-1%
-10%
-3%
1%
-0%
0%
-2%
-5%
-11%
12%
9%
4%
6%
16%
-20%
-18%
-27% -10% -3%
-2%
0%
-10%
-5%
-18% -16%
8%
-1%
-4%
18%
21%
-8%
0%
4%
Utilities
3%
-18% -14%
-2%
Table shows the net exposure to sectors from taking long-short positions in top-quartile portfolios on the styles shown. Source: Nomura Quantitative strategy
4%
3%
21% 17%
38
Neutral Momentum
Global & Europe Composite Momentum - Price/Book
Impact of GDP cycle on Momentum returns (US, 1926-2013)
Ratio
5.0
Global Composite Momentum - Price/Book
4.5
Return, %pa
T-stat
Europe Composite Momentum - Price/Book
Average across periods
4.0
Early recession
3.5
Late recession
Early expansion
3.0
Mid expansion
2.5
Late expansion
7.25%
15.40%
2.5
-8.30%
-1.47
8.00%
2.18
8.60%
2.33
14.90%
3.93
2.0
1.5
1.0
0.5
Jan-90
Jan-94
Jan-98
Jan-02
Jan-06
Jan-10
Jan-14
39
Utilities
Telecoms
Technology
Media
Healthcare
January
Financials
Energy
Consumer Staples
Consumer Cyclicals
Capital Goods
Basic Industries
Momentum composition is changing

September
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
40
Value is not offering good value
Ratio
0.7
Global Composite Value - Price/Book
Global Composite Value - 12mth Fwd P/E
0.6
0.5
0.4
0.3
0.2
0.1
Jan-90
Jan-93
Jan-96
Jan-99
Relative price/book and PE of cheap/expensive stocks. Source: Nomura Quantitative strategy
Jan-02
Jan-05
Jan-08
Jan-11
Jan-14
41
and analysts are worryingly bullish on value

companies
10
Net earnings revisions

%, (up -down) / total
Europe Composite Value - Earning Rev. (3MMA)

Global Composite Value - Earning Rev. (3MMA)
5
0
-5
-10
-15
-20
-25
-30
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
Jan-05
Jan-08
Jan-11
Jan-14
42
Divergence of factor valuations by region
US
Europe
Japan
Asia
Pacific
Value
-0.35
-0.64
-0.78
-0.21
-0.48
-0.43
Growth
-0.62
-1.32
-1.12
-0.71
-0.08
0.02
Risk
0.58
-0.80
-0.66
0.66
0.41
-0.44
Momentum
-1.06
-1.31
0.99
-0.38
-0.38
-0.55
ROE
0.89
2.05
0.97
0.55
0.89
0.99
As on Aug 31, 2014
Figure shows Z scores of the current price/book of top relative to bottom quartile of stocks for each factor within each region
Emerging
Markets Australia
43
Price/book and P/E valuation of large/small cap stocks
Ratio
Europe Size - Price/Book
4.5
Global Size - Price/Book
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Jan-90
Jan-94
Jan-98
Jan-02
Jan-06
Jan-10
Jan-14
44
Real time factor performance for all regions
Source: Bloomberg
45
Stable dividend strategy

Aim
There is a hunt for yield, but simply buying passive equities is not an optimal way to do that and buying the
highest yielding equities looks outright unattractive.
Instead we prefer to buy the next tranche of stocks down in terms of yield level, where the dividend is well
covered and an analysis of historical dividend policy implies that dividends are likely to grow or be stable.
Purely systematic.
Methodology
The stocks are ranked on the following five criteria on an equal-weighted composite basis.
Trailing last reported Dividend Yield.
Dividend Growth (Compounded Annual Growth Rate over the past five years), but with a knockout clause that
the stock gets excluded if in any given year that growth is negative.
Last reported FCF dividend cover.
Standard deviation of the annual dividend growth rate over the past five years.
The five-year Z score of the Fwd P/E.
We then create a combined rank and select the stocks that are in the top quartile based on this combination of
criteria. The investment universe is the top 500 stocks from the FTSE World and the FTSE Japan for our
Japanese version.
46
Stable dividend portfolio Global universe

Absolute return performance
Relative returns performance
1270
190
Stable Dividend
1070
170
Stable Dividend
FTSE WORLD
870
150
670
130
470
110
270
90
70
Dec-92
Dec-96
Dec-00
Dec-04
Dec-08
Dec-12
70
Dec-92
Dec-96
Dec-00
Dec-04
Dec-08
Dec-12
Relative return statistics
Absolute return statistics
Return, % pa
Annualised monthly
volatility
Annualised
monthly IR
1 yr
1.0
2.3
0.4
15.2
3 yr
1.6
3.8
0.4
15.6
12.7
5 yr
1.8
4.7
0.4
11.8
8.5
Whole Period
2.5
7.2
0.4
Return, % pa
Benchmark
1 yr
22.2
18.6
3 yr
18.0
5 yr
Whole Period
47
Global multifactor model

Aim
Our core purely systematic global stock-selection approach.

Has been published and hence live since July 2009, based on an initial European version first
published Sept 2008.
Objective is to find a combination of factors that works smoothly over the cycle, so one does not
need to dynamically allocate between factors.
A key differentiating aspect is that we include a non-linear combination of factors. The economic
interpretation of this is that it measures the level of agreement between factors.
So the model selects stocks that are attractive on factors that have worked within each sector
historically and gives extra score to those where the factors agree.
We choose to let the model use different factors within each sector to better capture different
accounting and business drivers within sectors.
Where possible, we guide the learning process to include at least one component from each of the
value, quality, momentum and growth factor groups.
Methodology
We use a learning-based model that identifies which factors are most effective within each sector.
This involves an expanding-window panel regression so there is no period that is just in-sample.
Although the factor coefficients evolve in the learning period, they have been fixed since 2003, so
this is a static multifactor model.
Based on the 500 largest companies in the developed world, it selects the most attractive top/bottom
quartiles; the long-only version just selects the top quartile of stocks within each sector.
The model does not take any sector views.
48
Non-linear global multifactor model

One of the key innovations over previous work is that we introduce a non-linear cross-term factor that
models the interaction of factors
The functional form of our multifactor model:
ri ,t:t + = + 1.Vi ,t + 2 .M i ,t + .(Vi ,t M i ,t )
Certain non-linear interaction functions can have the economic interpretation of measuring agreement.
Extra complexity should only be added with good reason, but we can show an empirical benefit to such a term.
To defend against a charge of data mining, we impose an a priori functional form that we believe is
defendable.
Non-linear interaction terms also have the benefit of lessening the impact of crowding if it brings together
factors in ways that are not usually practiced.
49
Non-linear global multifactor model
We use a cubic interaction factor as our favoured approach
Interaction Score
Alternative is a discontinuous interaction screen
Interaction Score
Increasing momentum
Cheaper
Increasing momentum
Cheaper
50
Non-linear global multifactor model:

weights of factors by sector
Basic
Consumer
Industries Cyclicals
Value
Growth
Quality
Momentum
Interaction
Price/book
EV/EBITDA
PE (forward)
PE (trailing)
FCF Yield
Div Yld (b'back adjusted)
Healthcare
Media
Tech
Telecoms
Utilities
Financials
10
20
35
20
25
25
10
Interest Cover
Debt/EBITDA
Change in Shares
EBITDA Margin
ROE
ROCE
Accruals
Energy
25
20
(V+M)
Consumer
Staples
20
Internal Growth
Growth FY0-FY3
Long-Term Growth
Sales Growth (historical)
1m Price Momentum
9m Price Momentum
12m Price Momentum
Normalised 12m P Mtm
6m Earnings Momentum
Capital
Goods
20
30
20
25
15
20
35
25
10
10
20
15
25
20
30
35
10
-15
-25
25
-15
-10
-20
20
10
25
15
10
-5
-15
-20
15
-15
-5
-20
25
20
25
20
15
10
10
15
25
20
20
10
15
51
Global multifactor model
Performance of Nomura global multifactor model
Value added from non-linearity
Dec 91 = 100
Dec 91 = 100
750
700
Whole Period
Dec 91 - Jun 04
Jun 04 - Present
July 09 - Present
Jan 10 - Present
650
600
Annualised
Return, monthly Annualised
% pa
volatility monthly IR
9.2
6.8
1.3
13.0
8.3
1.6
4.7
4.1
1.1
5.2
4.3
1.2
4.8
4.3
1.1
Live Period
Out of sample
125
120
Performance
Annualised
during live
Return, % monthly Annualised
period
pa
volatility monthly IR
Non-linear
model
5.2
4.3
1.2
Linear model
Start of
Length of
Drawdown Drawdown (Days)
10/10/2005
368
19/09/2007
135
13/10/2008
546
23/04/2010
173
550
500
450
4.4
4.1
Live Period
Out of sample
1.1
% Fall
-3.1
-2.9
-8.4
-3.4
115
400
110
350
300
250
105
200
150
100
Relative performance of non-linear and linear versions of our global multifactor model.
Dec-13
Dec-11
Dec-09
Dec-07
Dec-05
Dec-03
Dec-01
Dec-99
Dec-97
Dec-95
Dec-93
Dec-91
Dec-13
Dec-11
Dec-09
Dec-07
Dec-05
Dec-03
Dec-01
Dec-99
Dec-97
Dec-95
Dec-93
Dec-91
100
52
Global multifactor (long-only version)

Absolute return performance (out of sample period)
Relative returns performance (out of sample period)
320.0
GMF Long only Sector Weighted
FTSE WORLD
270.0
220.0
170.0
120.0
70.0
Jun-04
Jun-07
Jun-10
Jun-13
140
135
130
125
120
115
110
105
100
95
90
Jun-04
GMF Long only Sector Weighted
Jun-07
Jun-10
Jun-13
Return, % pa
Annualised monthly
volatility
Annualised
monthly IR
1 yr
7.7
2.3
3.3
15.2
3 yr
3.3
3.4
1.0
16.0
12.7
5 yr
2.8
3.1
0.9
11.5
8.0
Out of sample
Period
3.2
3.2
1.0
Return, % pa
Benchmark
1 yr
30.1
18.6
3 yr
19.4
5 yr
Out of sample Period
53
The Nomura Global Equity Quant Recommended Portfolio
Strategic
trades
Tactical
trades
Trade
Bloomberg
1 month
YTD
1 year
2 year
3 year
1 year R/R
Global Multifactor Model
na
+1.4%
+4.7%
+12.9%
+7.1%
+5.7%
3.1
Equity Alternative Beta
na
+0.4%
+0.3%
+1.5%
+2.0%
+2.2%
0.7
Volatility Risk Premium
NMEDSVP1 & NMEDSVP2
+1.4%
+4.1%
+7.8%
+6.5%
+8.8%
3.5
Natural Index
na
+1.8%
+7.0%
+21.8%
+21.4%
+16.9%
2.5
Stable Dividends
NMRASDVD
+2.7%
+8.8%
+22.2%
+21.3%
+18.0%
2.4
Long Composite Risk
NMGLRISK
-0.9%
-2.2%
+0.3%
+3.3%
-2.1%
0.1
Long European cheap domestic
NMRDOMS
-2.5%
+9.0%
+9.4%
+18.5%
+1.1%
1.2
Short European Dividend Yield
NMRADVDL/NMRADVDS
+1.5%
-9.7%
-11.1%
-3.6%
-0.4%
1.9
+2.0%
-4.5%
-0.2%
+4.6%
+3.2%
0.0
+0.8%
+2.8%
+3.4%
-2.3%
+2.0%
0.8
+0.8%
+1.1%
+1.7%
+1.0%
+0.1%
1.0
1 month
YTD
YTD R/R
Recommended Quant Portfolio
+0.6%
+1.4%
1.1
HFR Market Neutral Index
+0.9%
+2.3%
1.1
Long Composite Growth

Long European Size
NMRASIZE
Long EM quant country selector Model
(As of end of Aug 2014)
Note: As of end-August 2014.

We established our Recommended Global Quant portfolio in August 2013 (see A portfolio of Quant Ideas August 27 2013). It uses a combination of strategic strategies that are long-term
core quant holdings and tactical ones that are a function of the cycle. The strategic and tactical components receive equal weighting and among the strategic quant trades we use equal risk
contribution weighting. This is an absolute return strategy, so the benchmark is cash or market neutral hedge fund strategies
Source: Bloomberg, Nomura Quantitative strategy
54
Long horizon concentrated strategies: a global recommended

quant stock portfolio
Return vs Risk for 3-year holding period P/E-based

strategies
13
Return
FWD PE + Q
FWD PE + Q
12
FWD PE + Q
FWD PE
FWD PE
FWD PE + M
FWD PE + M
FWD PE + M
FWD PE + Q
11
FWD PE
FWD PE + M
FWD PE
10
9
8
Top 500 ex Fin

Top 500
FTSE WORLD ex Fin
FTSE WORLD
7
6
14
15
16
17
18
19
20
21
Risk
Figure shows return vs risk for several 3-year holding period and quarterly rebalancing P/E-based strategies. The portfolios are long only and built as the aggregate of 3 shifted portfolios with a one year interval and
rebalanced every 3 years. The benchmark is the top-500 stocks in the FTSE World universe.
The screening details:
- The 3yr concentrated version is defined as the cheap top-20 stocks screened on their respective factor.
- In the 3yr holding sector-neutral version the screening is on a sector neutral basis and the sector weights match sector weights benchmark at the rebalancing period.
- The 3yr quartile version is defined as the cheap quartile stocks screened on their respective factor.
- The quarterly rebalancing version is defined as the cheap quartile stocks screened on their respective factor with a 3-month holding period.
The Value + Q or Value + M portfolios are screened using a composite ranking averaging value score with the quality or momentum score. Quality is defined on an equal weighted composite basis by EBITDA Margin,
ROE, tax/pre-tax income, credit rating and change in number of shares. Earnings momentum is defined as the percentage change in average consensus of the 12-month forward earnings over the past two quarters.
56
Global Recommended Portfolio

Aim
This is a blend of bottom-up systematic stock selection with top-down strategy views on regions and sectors.
The systematic stock selection uses our long-horizon quant stock selection model.
Note that the portfolio has always been a blend of quant and discretionary, but the long-horizon quant stock
selection model has only been used since we published it in 2013.
Portfolio has been run since 1997.
57
Global Recommended Portfolio

Absolute return performance
250
Relative returns performance
Portfolio performance index
Portfolio relative
performance Index
125
Benchmark performance
index
200
120
115
150
110
105
100
100
95
50
90
85
0
31/12/1999
31/12/2002
31/12/2005
31/12/2008
31/12/2011
80
31/12/1999
31/12/2002
31/12/2005
31/12/2008
31/12/2011

Return, % pa
Benchmark, % pa
1yr
23.07
22.28
2yr
23.88
5yr
Since 2000
Rel Return, % pa
Tracking Error
IR
1yr
0.79
2.96
0.27
20.63
2yr
3.26
3.43
0.95
15.43
15.14
5yr
0.29
4.44
0.06
4.94
4.25
Since 2000
0.69
5.74
0.12
Note: Portfolio benchmark is FTSE All World Total Return index in USD terms
58
Global Quant Stock Portfolio

Sector
Stock
Currency
North America
Capital Goods
Consumer Cyclicals
Energy
Financials
Healthcare
Media
Technology
DEERE & CO
NORTHROP GRUMMAN CORP
GAP INC
CHEVRON CORP
AFLAC INC
ALLSTATE CORP
CANADIAN IMPERIAL BANK
DISCOVER FINANCIAL SVCS INC
MERCK & CO
PFIZER INC
DIRECTV
INTL BUSINESS MACHINES CORP
ORACLE CORP
SEAGATE TECHNOLOGY PLC
Energy
Financials
Telecoms
Media
Consumer Cyclicals
Telecoms
Capital Goods
Consumer Cyclicals
Energy
Financials
Healthcare
Technology
Telecoms
8.1
9.4
2.9
10.7
6.2
5.0
8.2
5.3
3.5
2.2
5.9
17.9
3.0
5.2
104.7
127.3
2559.7
119.2
229.8
28.6
65.7
172.2
24.9
15.0
200.5
82.4
15.3
96614.8
100884.0
17204.1
38748.2
6764.5
27354.5
133404.1
78387.7
47336.4
14993.3
29848.9
28185.5
27619.6
7.6
7.7
214.6
6.5
20.0
1.9
6.1
14.7
2.1
1.2
17.2
2.5
2.6
42.1
20.3
73.8
24.3
14.4
103165.6
41109.8
93106.6
117953.9
15146.2
13.0
21.1
16.5
28.8
66.4
Rel Perf. since
Rel Perf. Over
Analyst
Added2
week2
Rating6
6.8
10.1
3.3
11.3
6.5
5.7
8.7
5.6
3.6
2.2
6.4
19.8
3.3
5.6
12.3
12.7
13.9
11.4
9.5
10.7
11.2
11.1
16.8
13.2
13.4
9.7
12.5
10.9
6 Mar 14
6 Mar 14
31 Jul 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
-10
-3
13
8
-11
6
9
1
0
-14
1
-3
0
18
-3
-1
6
0
0
0
1
0
0
1
0
0
0
1
Not Rated
Not Rated
Neutral
Not Rated
Not Rated
Not Rated
Not Rated
Buy
Not Rated
Not Rated
Neutral
Not Rated
Buy
Not Rated
8.3
9.5
108.7
9.8
24.4
2.6
6.6
7.2
1.9
2.1
5.2
7.1
2.1
7.5
7.2
145.8
10.3
61.3
2.8
7.2
15.0
2.4
1.6
23.7
11.1
1.7
13.9
17.6
17.6
11.6
3.7
10.2
9.1
11.5
10.4
9.4
8.4
7.4
9.1
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
-10
-10
1
0
-13
4
-3
-4
-7
-12
-9
-8
7
2
2
0
0
0
0
1
1
3
5
0
1
3
Neutral
Buy
Buy
Buy
Neutral
Neutral
Buy
Buy
Buy
Buy
Reduce
Buy
Buy
3.0
1.9
6.7
2.2
0.5
4.0
2.0
7.3
1.9
0.8
4.0
2.2
6.4
1.8
0.9
10.5
9.1
11.5
13.2
15.9
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
4
-6
5
-17
-13
0
-1
3
2
0
Buy
Buy
Not Rated
Not Rated
Neutral
20135.9
30307.5
28573.7
18061.1
24578.6
1.0
2.7
1.6
0.6
3.7
1.6
2.7
2.1
0.5
3.6
1.7
2.2
1.8
1.2
4.0
7.5
9.4
9.2
23.6
16.6
6 Mar 14
6 Mar 14
6 Mar 14
31 Jul 14
6 Mar 14
-1
6
2
-2
12
0
-1
-1
1
-2
Buy
Buy
Buy
Buy
Buy
34.9
111862.1
2.2
3.6
2.7
12.9
6 Mar 14
-4
-3
Buy
2.9
31.0
4.7
71.4
224.8
59.0
5.4
162.2
0.5
0.7
17.6
0.8
1.0
0.7
52.7
2.2
1212.6
1.2
2.9
9866.8
1785.3
14893.3
6404.5
34471.9
15246.9
10034.8
4185.5
39275.2
26021.6
37191.9
181164.9
6727.8
58235.6
49906.0
3257.9
130106.2
37083.9
1525.2
0.3
4.2
0.3
8.6
19.8
6.5
0.5
N/A
0.1
0.1
1.0
0.1
0.1
0.1
4.5
0.1
104.2
0.1
0.3
0.4
5.0
0.4
5.7
27.8
8.3
0.7
39.7
0.1
0.1
1.2
0.1
0.1
0.1
5.0
0.1
87.7
0.1
0.3
0.4
3.6
0.4
5.3
31.1
9.4
1.0
25.5
0.1
0.1
1.2
0.1
0.2
0.1
5.4
0.1
151.8
0.1
0.3
7.3
8.7
13.2
13.6
7.2
6.3
5.6
6.4
6.0
5.2
14.5
6.0
5.3
6.2
9.8
16.6
8.0
13.1
8.3
31 Jul 14
31 Jul 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
31 Jul 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
-5
-10
37
31
-8
6
-6
-16
16
20
40
14
17
-5
-1
-6
-9
20
4
-4
-2
5
1
1
-1
0
2
-2
-1
5
-2
-3
-1
-1
-2
-3
1
1
Neutral
Not Rated
Not Rated
Buy
Buy
Neutral
Reduce
Not Rated
Buy
Neutral
Not Rated
Neutral
Reduce
Buy
Not Rated
Buy
Buy
Not Rated
Not Rated
GBP
GBP
GBP
GBP
GBP
Overweight
ITOCHU CORP
MITSUBISHI CORP
MITSUI & CO
FUJI HEAVY INDS
NIPPON TEL&TEL CP
JPY
JPY
JPY
JPY
JPY
Underweight
BHP BILLITON LTD
AUD
Emerging Mkts
Basic Industries
9.1
8.4
2.7
11.1
6.2
5.7
8.1
5.0
3.5
2.2
5.2
16.3
2.9
5.3
Date
Added
Underweight
ROYAL DUTCH SHELL
STANDARD CHART PLC
ASTRAZENECA
GLAXOSMITHKLINE
BRITISH SKY BROADC
Asia Ex Japan
Basic Industries
29358.8
27327.9
11818.2
245590.5
26802.4
26703.5
38712.3
29539.3
173885.6
188232.5
43404.5
191787.1
144199.5
19155.2
EUR
EUR
DKK
EUR
EUR
NOK
EUR
EUR
EUR
EUR
EUR
CHF
EUR
Japan
Capital Goods
83.9
127.6
46.2
128.6
61.4
61.5
96.9
62.7
60.3
29.5
86.2
192.3
41.6
61.2
Price/ earnings
Dec 15 (x)
Neutral
BASF SE
SIEMENS AG
A.P. MOLLER-MAERSK
BAYER MOTOREN WERK
VOLKSWAGEN AG
STATOIL ASA
TOTAL
ALLIANZ SE
AXA
CREDIT AGRICOLE SA
MUENCHENER RUECKVE
SWISS RE AG
ORANGE
United Kingdom
Energy
Financials
Healthcare
Mkt Cap
US$m
USD
USD
USD
USD
USD
USD
CAD
USD
USD
USD
USD
USD
USD
USD
Europe Ex UK
Basic Industries
Capital Goods
Consumer Cyclicals
Calendarised EPS y/e Dec1

2013a
2014e
2015e
Price ($)
27 Aug 14
Underweight
Overweight
CHINA SHENHUA ENER
KUMBA IRON ORE LTD
ITAUSA INV ITAU SA
LG CORP
HYUNDAI MOTOR CO
KIA MOTORS CORP
CAIRN INDIA
SK HOLDINGS CO LTD
BANK OF CHINA LTD
BANK OF COMMUNICAT
BCO BRADESCO SA
CHINA CONST BK
CHINA MINSHENG BAN
IND & COM BK CHINA
TEVA PHARMA IND
INTOUCH HOLDINGS P
SAMSUNG ELECTRONIC
AMERICA MOVIL SAB
TURK TELEKOMUNIKAS
Portfolio perf. (US$ terms, %)3
Nomura Strategy Recommend Portfolio

FTSE All World Index
HKD
ZAR
BRL
KRW
KRW
KRW
INR
KRW
HKD
HKD
BRL
HKD
HKD
HKD
ILS
THB
KRW
MXN
TRY
1 WK
1.0
0.9
1 MTH
2.8
1.7
YTD
8.0
7.8
12 MTH
21.3
21.2
2013
2012
23.0
23.3
EPS Estimates are based on IBES Mean Consensus
Relative performance shown as total return performance less performance of FTSE All World total return index.
21.5
17.4
2011
-14.9
-7.3
2010
14.6
13.2
Return history presented as price return in US$ Terms from before 2006. Returns from 2007 to present are on a Total Return basis.
Starting 9th January 2009
Ending 12th September 2008
2009 4
55.9
35.8
2008 5
-16.1
-18.9
2007
6.9
12.8
2006
12.9
18.8
2005
11.1
8.9
2004
11.9
13.7
2003
33.7
31.0
2002
-23.8
-20.6
2001
-13.8
-17.5
2000
-2.8
-12.2
1999
40.8
24.2
1998
35.7
22.8
1997
20.1
13.6
EPS Estimates are based on IBES Mean

Consensus
2 Relative performance shown as total
return performance less performance of
FTSE All World total return index.
3 Analyst rating refers to Nomura research
department rating.
Past performance should not and cannot be
viewed as an indicator of future
performance. Complete record available
upon request
59
Sector allocation
Recommended sector weightings
Europe
Global
Benchmark
Recommended
Weighting
Recommendation
Energy
10
10
Neutral
Materials
Underweight
Industrials
10
14
Overweight
Consumer Discretionary
11
14
Overweight
Consumer Staples
Underweight
Healthcare
11
Underweight
Financials
22
30
Overweight
-Banks
11
19
Overweight
-Insurance
Neutral
-Other
Neutral
Information Technology
13
19
Overweight
Overweight
Telecom Services
Underweight
Underweight
Underweight
Utilities
Underweight
Benchmark
Recommended
Weighting
Recommendation
Basic Industries
10
10
Neutral
Capital Goods
12
Overweight
10
15
Overweight
Consumer Staples
13
Underweight
Energy
10
Neutral
Financials
22
31
Overweight
Banks
13
22
Overweight
Insurance
Underweight
Other
Overweight
Healthcare
12
Underweight
Media
Underweight
Technology
Telecoms
Utilities
4
4
2
0
Consumer Cyclicals
of which:
1Combination
of Cyclical Consumer Goods and Cyclical Services excluding Media

61
Cyclical growth over stable growth
Valuation of Cyclical Growth/Stable Growth (P/E)
Valuation of Cyclical Growth/Stable Growth (PBK)
Ratio
1.8
Ratio
2.2
2.0
1.6
Cyclical
growth/stable
growth
1.4
1.2
1.8
1.6
Cyclical
growth/stable
growth
1.4
1.2
1.0
1.0
0.8
0.8
0.6
0.6
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
Jan-05
Jan-08
Jan-11
Figure shows the relative valuation of high expected growth to high stable growth companies. The dot
at the end shows the same data for the subset of high expected growth companies from cyclical
sectors which constitute our Cyclical Growth basket. Source: Nomura Quantitative Strateg
Jan-14
0.4
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
Jan-05
Jan-08
Jan-11
Figure shows the relative valuation of high expected growth to high stable growth companies. The dot
at the end shows the same data for the subset of high expected growth companies from cyclical
sectors which constitute our Cyclical Growth basket. Source: Nomura Quantitative Strategy
Jan-14
62
Cyclical growth basket

Company
Sector
Company
Sector
HOLCIM LTD.
Basic Industries
SOCIETE GENERALE S.A. CLASS A
Financials
SOLVAY SA
Basic Industries
SCHRODERS PLC
Financials
LAFARGE SA
Basic Industries
ASHTEAD GROUP PLC
Financials
COMPAGNIE DE SAINT-GOBAIN SA
Basic Industries
PRUDENTIAL PLC
Financials
HEIDELBERGCEMENT AG
Basic Industries
BANCO SANTANDER S.A.
Financials
AKZO NOBEL N.V.
Basic Industries
BANCO POPULAR ESPANOL SA
Financials
GLENCORE PLC
Basic Industries
BANCO BILBAO VIZCAYA ARGENTARIA, S.A.
Financials
SKF AB CLASS B
Capital Goods
BANCO DE SABADELL SA
Financials
AIRBUS GROUP NV
Capital Goods
CREDIT AGRICOLE SA
Financials
VOLVO AB CLASS B
Capital Goods
COMMERZBANK AG
Financials
SIEMENS AG
Capital Goods
BANKIA, S.A.
Financials
HEXAGON AB CLASS B
Capital Goods
KBC GROUPE SA
Financials
INTERNATIONAL CONSOLIDATED AIRLINES GROUP SA Consumer Cyclcials
DANSKE BANK A/S
Financials
EASYJET PLC
Consumer Cyclcials
CAIXABANK SA
Financials
CRH PLC
Consumer Cyclcials
INTESA SANPAOLO S.P.A.
Financials
VALEO SA
Consumer Cyclcials
JULIUS BAER GRUPPE AG
Financials
PORSCHE AUTOMOBIL HOLDING SE PREF
Consumer Cyclcials
UBS AG
Financials
RENAULT SA
Consumer Cyclcials
ILIAD SA
Technology
VOLKSWAGEN AG
Consumer Cyclcials
ASML HOLDING NV
Technology
WHITBREAD PLC
Consumer Cyclcials
UNITED INTERNET AG
Technology
RYANAIR HOLDINGS PLC
Consumer Cyclcials
ARM HOLDINGS PLC
Technology
ADECCO S.A.
Consumer Cyclcials
LM ERICSSON TELEFON AB CLASS B
Technology
ACCOR SA
Consumer Cyclcials
INFINEON TECHNOLOGIES AG
Technology
A.P. MOLLER - MARSK A/S CLASS B
Consumer Cyclcials
RANDSTAD HOLDING NV
Consumer Cyclcials
AEROPORTS DE PARIS SA
Consumer Cyclcials
PANDORA A/S
Consumer Cyclcials
63
Avoid income stocks: underweight Insurance and Utilities
Earnings revisions of European

Insurance relative to the market
Free cash flow dividend cover Utilities
Long-term expected EPS growth rate for

Utilities and the market
Net earnings revisions %,

(up -down) / total, 3MMA
Ratio
18
2.5
20
15
16
2.0
10
Utilities
Market
14
1.5
12
1.0
10
0.5
-5
8
0.0
-10
6
-0.5
-15
-20
Mar-87
Mar-93
Mar-99
Mar-05
Mar-11
-1.0
Jan-88
Jan-94
Jan-00
Jan-06
Jan-12
2
Apr-88
Apr-94
Apr-00
Apr-06
Apr-12
64
Buying Growth: Further increasing Tech overweight
P/E of European Tech relative to the market
Earnings revisions of European Tech relative to the market
Ratio
15
3.5
Net earnings
revisions %,
(up -down) /
total, 3MMA
10
3.0
5
2.5
0
2.0
-5
-10
1.5
-15
1.0
-20
0.5
Jan-88
Jan-92
Jan-96
Jan-00
Jan-04
Jan-08
Jan-12
-25
Mar-87
Mar-91
Mar-95
Mar-99
Mar-03
Mar-07
Mar-11
65
Margin recovery plays

12m trailing EBITDA margins: Cyclicals /
defensives and EU economic sentiment
indicator
Ratio
0.90
12m trailing EBITDA margins:

Cyclicals / defensives (LS)
EU Economic sentiment indicator
(Advanced, RS)
Index
US/UK capex intentions composite and

Capital goods 12m fwd EBITDA margins
Index
US/UK capex intentions composite*

(Advanced, LS)
%
%
120
30
Capital goods 12m forward

EBITDA margins (RS)
115
ECB bank lending survey: Net change in firms

credit demand last quarter (Advanced, LS)
Bank 12m forward net profit margins (RS)
13.5
1.5
0.5
13.0
10
12.5
100
28
24
105
0.80
26
20
110
0.85
ECB bank lending survey and bank 12m

forward net profit margins
22
20
-0.5
-10
12.0
95
0.75
90
18
-20
-1.5
16
11.5
-30
85
0.70
-2.5
11.0
80
0.65
May-91
75
May-98
May-05
May-12
-3.5
Jan-07
10.5
Jan-10
Jan-13
*Includes Philly Fed capex intentions survey and BoE Agent scores
survey of manufacturing sector investment intentions. Source:
Datastream, Nomura Strategy research
14
-40
-50
Q2 2004
12
10
Q2 2007
Q2 2010
Q2 2013
66
Buy US capex exposure
US capex basket: median relative price/book and 12m fwd PE

Ratio
3.2
Ratio
US CAPEX basket: Median relative PBK (LHS)

US Capex basket: Median relative 12m FWD PE (RHS)
1.80
1.60
2.8
1.40
2.4
1.20
2.0
1.00
0.80
1.6
0.60
1.2
0.40
0.8
0.4
Jan-88
US capex-exposed companies (NMRAUSCX)
0.20
Company
Industry
Arcelormittal
Industrial Metals
BMW
Autos & parts
Clariant
Chemicals
CRH
Construction
Daimler
Autos & parts
Electrolux
Household goods
Fiat
Autos & parts
Heidelberg Cement
Construction
Hochtief
Construction
Philips
Industrials
Rexel
Electrical equipment
SAP
Technology
Siemens
Industrials
SSAB
Industrial Metals
0.00
Jan-92
Jan-96
Jan-00
Jan-04
Jan-08
Jan-12
67
Price/tangible book and return on tangible equity for banks
Europe
30
Global
Ratio
4.0
3.5
25
30
Ratio
3.0
25
3.0
20
2.5
3.5
2.5
20
2.0
15
2.0
15
1.5
1.5
10
10
1.0
1.0
5
Return on tangible equity (LHS)
Price/tangible book (RHS)
0.0
Jan-14
Jan-12
Jan-10
Jan-08
Jan-06
Jan-04
Jan-96
Jan-94
Jan-92
0
Jan-90
Jan-14
Jan-12
Jan-10
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
0.0
Jan-90
0.5
Price/tangible book (RHS)
Jan-02
0.5
Jan-00
Return on tangible equity (LHS)
Jan-98
68
Fund management strategy and minimum variance
Fundamental managers underperforming
Recent relative performance of active fundamental managers

has closely tracked momentum
102
106
101
104
100
102
Exclusively bottom up vs top down macro funds

Index
101.0
100.5
99
100
100.0
98
98
97
96
99.5
96
94
99.0
European Long-only fundamental

funds (LHS)
92
98.5
Aug-14
Jul-14
Jun-14
May-14
May-14
98.0
Apr-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
88
Sep-13
92
Aug-13
90
Jul-13
93
Mar-14
Composite Momentum: World (RHS)
Jan-14
94
Jan-14
95
70
Performance of unconstrained vs constrained managers
Concentrated fund performance and European cross-sectional

stock correlation
Correlation
3 Jan 05 = 100
Index
Up to 50 vs Up to 100 stocks performance (LHS)
115
101.0
0.60
Europe cross sectional stock correl (RHS)

113
100.8
0.50
111
100.6
109
0.40
100.4
107
100.2
0.30
105
100.0
103
99.8
0.20
101
99.6
99
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
0.00
Jan-05
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
95
Mar-14
99.2
Feb-14
97
Jan-14
99.4
0.10
Correlation is defined as 75 day rolling cross-sectional correlation between top 500 stocks in FTSE Europe
index. Source: Nomura Quantitative strategy
71
Asset share of fundamental managers with more than or

fewer than 100 stocks
25
2.5
Up to 100
>100
20
2.0
15
1.5
10
1.0
0.5
0
Jan-07
0.0
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
72
More active approaches gaining asset share
Cumulative asset shares of high- relative to low-TE funds, and

constrained relative to unconstrained funds
AUM share by tracking error bucket
180
3 Jan 05 = 100
Jan 05 = 100
Jan 05 = 100
140
180
0-4
160
High TE rel to low TE

(LHS)
130
140
Unconstrained vs
Constrained (RHS)
120
4 to 8
160
>8 (cap at 20)
120
140
110
100
100
120
80
90
60
100
80
40
80
70
20
60
Jan-05
Jan-07
Jan-09
Index of asset share of funds by tracking error range.

Jan-11
Jan-13
0
Jan-05
60
Jan-07
Jan-09
Jan-11
Jan-13
73
Global equity mutual fund flows active passive
Share of passively-managed equities
USDbn
1500
32
Active
Passive
All funds
30
1000
28
500
26
24
22
-500
20
18
-1000
16
-1500
Source: EPFR, Nomura Quantitative strategy
Source: EPFR, Nomura Quantitative strategy
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
14
74
Distribution of active
Relationship of active share and tracking error
% of Total
Sample
25
Highly active
%
Active
Enhanced
Average Tracking Error (5yr)

Quant
Average Tracking Error (5yr) (Quant-only)
Fundamental
20
6
15
5
4
10
3
5
2
1
20-30%
30-40%
40-50%
50-60%
60-70%
70-80%
80-90%
90-95%
>95%
0
0
Highly Active
Active
Enhanced
75
Active share
Highly active non quants and low active share quants

outperforming
Return and Risk for fund types
145.00
Highly active
Active
Enhanced
140.00
135.00
Highly
active
130.00
Active
3yr
125.00
Enhanced
5yr
120.00
Return
3.01
0.10
1.58
115.00
Risk
7.51
5.18
5.11
110.00
R/R
0.40
0.02
0.31
105.00
100.00
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
95.00
Highly active and active sample of non quant and quant funds, enhanced sample is purely quant funds. Source: Nomura Quantitative strategy research .
76
Active share and fees
Expense ratio by active share category
Active share and fee structure
Ratio
1.4
Highly active
Active
Enhanced
Management fee
1.13
0.98
0.46
Expense ratio
1.27
1.18
0.66
Front load
1.41
2.84
2.18
Back load
0.10
0.20
0.34
Performance fee
7.83
7.86
0.00
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Highly active
Source: Quantitative Strategy research
Active
Enhanced
We define highly active as funds with an active share>80%, active as between 50 and 80% and
enhanced index as active shares<50%. Source: Nomura Quantitative strategy research
77
Quant market share
% of AUM
10.0
Paradiso??
Purgatorio
Inferno
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
5.0
Note: Chart shows the asset share of quants as a proportion of total active equity AUM. Note that our sample of traditional quant funds is based on a survey that, although broad, is definitionally an under-representation of the true
size of quants, so we have scaled this up to set quant at 10% of active AUM in July 2007. We then add the asset share of our alternative beta sample to this, which is not scaled as we think that we have captured the bulk of listed
alternative beta assets. The Divine Comedy labels are, of course, just our own call. Source: Quantitative Strategy research
78
Performance of dynamic vs static quant funds

110
Share of AUM for dynamic and static quant funds
2 Jan 06 = 100
0.80
Static
108
Dynamic
0.70
106
0.60
104
0.50
102
0.40
100
0.30
98
0.20
96
0.10
94
Percentage AUM as a share of active equity funds

May-14
Dec-13
Jul-13
Feb-13
Sep-12
Apr-12
Nov-11
Jun-11
Jan-11
Aug-10
Mar-10
Oct-09
May-09
Dec-08
Jul-08
Feb-08
Sep-07
Apr-07
Nov-06
Jun-06
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Chart shows the performance of quant funds that use a dynamic factor allocation strategy relative to those that use a
static approach. Source: Nomura Strategy research
Jan-06
0.00
92
79
Performance of funds with and without discretion
Performance of funds with and without discretion

120
Index
Discretion on single
stocks/Pure quant
115
Asset share for funds with differing levels of discretion
Broad discretion/Pure
quant
0.70
Pure quant/systematic
0.60
Quant with discretionary

views on single stocks
110
0.50
105
0.40
100
0.30
95
Performance of funds that employ different levels of discretion relative to pure quant funds with no discretion.
Percentage AUM as a share of active equity funds.

May-14
Dec-13
Jul-13
Feb-13
Sep-12
Apr-12
Nov-11
Jun-11
Jan-11
Aug-10
Mar-10
Oct-09
May-09
Jul-08
Dec-08
Feb-08
Sep-07
Apr-07
0.00
Nov-06
80
Jun-06
0.10
Jan-06
Jun-06
Nov-06
Apr-07
Sep-07
Feb-08
Jul-08
Dec-08
May-09
Oct-09
Mar-10
Aug-10
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
Feb-13
Jul-13
Dec-13
85
Jan-06
0.20
90
80
Relative performance of inductive and deductive quants

Index
Relative asset share of inductive and deductive quants

%
115
0.8
Induction
0.7
deduction
110
0.6
105
0.5
100
0.4
0.3
95
0.2
90
0.1
85
Jan-06
Jan-08
Source: Quantitative Strategy research
Jan-10
Jan-12
Jan-14
0.0
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
81
Minimum variance flows and performance
Asset share of minimum variance
Relative performance of minimum variance strategies
%
0.45
31 Dec 10 =
100
Minimum variance funds and ETFs (asset share)

Minimum variance funds (asset share)
Minimum variance funds and ETFs (asset share)

Minimum variance funds (asset share)
0.40
115
0.35
0.30
110
0.25
0.20
105
0.15
0.10
100
0.05
0.00
Dec-09
Dec-10
Dec-11
Dec-12
Percentage AUM as a share of active equity funds. Source: Nomura Strategy research
Dec-13
95
Dec-10
Dec-11
Dec-12
Dec-13
MSCI minimum variance is relative to MSCI World. For the relative minimum variance funds index the
performance of funds is relative to their own funds benchmark as defined on Bloomberg. Source:
Bloomberg, Nomura Quantitative strategy research
82
Minimum variance: the volatility advantage and valuations
Relative volatility of low volatility companies
Relative price to book of the global minimum variance portfolio

Ratio
3.0
0.2
-0.3
2.5
-0.8
2.0
-1.3
1.5
-1.8
Volatility of the MSCI low volatility index less volatility of the MSCI World index, rolling 30-day periods. Source: Datastream, Bloomberg, Nomura Strategy research
Jan-14
Jan-12
Jan-10
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
0.0
Jan-98
Feb-14
Feb-13
Feb-12
Feb-11
Feb-10
Feb-09
Feb-08
Feb-07
Feb-06
-3.3
0.5
Jan-96
-2.8
Jan-94
Volatility of MSCI Min Vol vs MSCI World
Jan-92
-2.3
1.0
Jan-90
Volatility of Min Var Sample of funds vs

MSCI World
83
Multi-asset still a bright spot
AuM of multi-asset funds, USD million
Multi-asset performance
USD mn
1000000
200
1 Jan 04 =
100
900000
180
800000
700000
160
600000
140
500000
400000
120
300000
200000
100
100000
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Source: Nomura Quantitative strategy research
Jan-04
80
84
Performance and AuM of multi-asset funds by mandate

type
Performance by mandate type

110
1 Jan 04 = 100
AuM by mandate type
Defensive
Balanced
Flexible
Lifetime
Defensive/Cautious
Balanced
Flexible
Lifetime
Index
350
300
105
250
100
200
95
150
90
100
85
50
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Source: Nomura Quantitative strategy research
Jan-05
80
85

Passive used to mean tracking the cap-weighted index. This definition is now changing to include
alternative/smart beta and other factor strategies. We think that a few criteria are desired for such
strategies though:
generate smooth outperformance over time;
have no discretionary input;
not concentrated in terms of individual stock positions;
implementable in large size; and
do not require heavy transactions costs
We are seeing this in practice with:
in Japan the GPIF buying a quality-biased index; and

the UK government proposing that the 89 local authority pension schemes sell all their actively
managed fund positions and go fully passive, but the latter can include non market cap weighting.
This is also extending into alternatives eg the adoption of risk premia strategies by Scandinavian
pension funds.
87
Types of alternative beta

Alternative beta, ltntv / bit, noun
1.
A financial market investment strategy previously thought of as being active, but now more freely available
especially when pre-packaged, eg, in ETF or swap format.
2.
A non-traditional benchmark (eg, as opposed to market cap weighting), specifically that outperforms
traditional benchmarks by already incorporating characteristics that are generally agreed to add value in the
long term.
Cross Asset Class

Static
Dynamic
Nomura Cross Asset Model

Global Quantitative Monthly May 2013
issues, 9 May 2013
Intra Asset Class

Natural Weighting
Algorithmic Beta
Alternative Beta TAA
When does Quality matter?

Joseph J. Mezrich, 23 July 2013
Usually Long-short
Usually Long-only
88
Investor confidence and alternative beta preferences
Concentrated
Low
Return model confidence
High
Max Sharpe ratio
Risk model confidence
High
1/
[min var, risk parity,
max diversification ]
1/N
Low
89
An alternative beta taxonomy
Risk Confidence
1/N
Here one weights
Diversity
weighting
Cap weight index
Return confidence
Here one screens

Risk
parity
Max
diversification
Min Var
90
Natural weighting
Risk
Value
1/
Variance
Free Cash Flow

& Earnings
Tradability
Volume
ROE
Quality
91
Natural weighting
Why natural indexation is different from the competition:
It uses a range of variables to try to determine the natural weight of a stock in the index.
The approach is anchored in mean-reversion which is a powerful long-term tool, and measures this
with valuation, but this is offset with quality and risk measures. Meanwhile, the volume input
ensures that the strategy is tradable in size and is geared towards large companies.
The approach smoothly outperforms the cap weighted index, but without the extended periods of
underperformance associated with approaches that are essentially mono-factor such as minimum
variance and fundamental indexation.
There is a clear rationale for why this focused approach should work.
92
Performance of natural indexation and its peers
June 1995 = 100

170
Natural Index (1000 stocks)
Minimum Variance (240 stocks)
Fundamental Index (1000 stocks)
160
150
140
130
120
110
100
90
80
70
Jun-95
Jun-97
Jun-99
Jun-01
Jun-03
Jun-05
Jun-07
Jun-09
Jun-11
Jun-13
93
Performance of components (1,000 stocks)
Jun 95 = 100
310
260
Index
Risk Parity
Volume
Value
FCF
Earnings
ROE
210
160
110
60
Jun-95
Jun-97
Jun-99
Jun-01
Jun-03
Jun-05
Jun-07
Jun-09
Jun-11
Jun-13
94
Natural weighting
Performance statistics for natural indexation and its peers
Natural Index
(1000 stocks)
Minimum
Variance
(240 stocks)
Fundamental Index
(1000 stocks)
Returns
10.5
8.2
10.0
Volatility
15.3
11.1
16.3
Return/Risk
0.7
0.7
0.6
Returns
2.6
-0.5
2.2
Volatility
2.5
9.2
4.6
Return/Risk
1.0
-0.1
0.5
Performance statistics
Absolute
performance
Relative
performance
95
Cross-asset alternative beta/risk premia investing
Cross-asset alternative beta
Weighting scheme:
Equal
Risk parity
Minimum variance
Max diversification
Equal risk contribution
IR-based
Equity Strategies
Credit Strategies
Rates Strategies
Income
Carry
Carry
Value
Value
Value
Quality
Momentum
Momentum
Momentum
97
Performance of alternative beta portfolio combinations
Dec 92 =100
180
170
Equally Weighted Performance
160
Sharpe ratio Performance

Risk Parity Performance
150
ERC Performance
MinVar Performance
140
MaxDiv Performance
130
120
110
100
90
Chart shows the performance of different portfolio combinations applied to cross-asset alternative betas. Strategies are rebalanced annually.
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Jun-10
Dec-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Jun-99
Dec-99
Dec-98
Jun-98
Dec-97
Jun-97
Dec-96
Jun-96
Dec-95
Jun-95
Dec-94
Jun-94
Dec-93
Jun-93
Dec-92
80
98
Performance statistics for alternative beta portfolio

combinations
Stats
Risk
Parity
Minimum
Variance
Return
1.77%
Vol
Return/risk
Max drawdown
(%)
Sample run December 1992-April 2013.

ERC
Sharpe
Ratio
Max
Diversification
Equally
weighted
1.66%
1.77%
1.40%
1.78%
2.62%
1.28%
1.33%
1.28%
1.43%
1.36%
1.87%
1.38
1.25
1.38
0.98
1.31
1.40
-2.9%
-2.5%
-2.3%
-2.5%
-2.1%
-3.3%
99
The benefits of a cross-asset approach to alternative

beta portfolio construction
return
vol
R/R
MDD (%)
Risk Parity
4.35%
4.21%
1.03
-12.64%
Minimum
Variance
2.38%
4.27%
0.56
-16.52%
ERC
3.36%
3.96%
0.85
-15.48%
return
vol
Fixed Income
R/R
MDD (%)
1.36%
1.34%
1.02
-3.23%
1.49%
1.37%
1.09
-2.98%
1.48%
1.35%
1.10
-2.84%
1.30%
1.41%
0.92
-3.48%
1.56%
1.40%
1.12
-2.69%
1.43%
1.36%
1.05
-2.90%
Cross asset
return
vol
R/R
MDD (%)
1.77%
1.28%
1.38
-2.95%
1.66%
1.33%
1.25
-2.47%
1.77%
1.28%
1.38
-2.31%
1.40%
1.43%
0.98
-2.46%
1.78%
1.36%
1.31
-2.13%
2.62%
1.87%
1.40
-3.31%
Uplift in
return/risk
EQUITY
FIC
34%
36%
124%
15%
63%
26%
124%
6%
87%
17%
39%
32%
Model \ Strategy
Equity
Sharpe
Max
Ratio
Diversification
2.34%
2.88%
5.36%
4.10%
0.44
0.70
-18.55%
-12.80%
Equally
weighted
4.30%
4.29%
1.00
-10.15%
Figure shows return statistics for combinations of alternative betas within fixed income, within equities and across both asset classes. Bottom row shows the uplift in the return/risk ratio that results in
moving from a single asset to multi-asset approach. R/R is return/risk ratio and MDD is max drawdown. Sample run December 1992-April 2013.
100
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
1.00
Jul-06
Apr-06
Correlation of alternative beta strategies
Correlation coefficient
0.80
0.60
0.40
0.20
0.00
-0.20
-0.40
-0.60
Average correlation (75days)
-0.80
-1.00
101
Equity alternative beta/risk premia

Aim
a long-short risk premium strategy;
offered to those who want a more transparent approach instead of usual alternatives; and
we also have a version where this is combined with credit and rates strategies to form a cross-asset risk
premium strategy.
Methodology
Our alternative beta strategy holds the following separate betas with static weights:
Income - Dividend yield + Net buy-back yield.

Value - Price to book.
Quality - Return on equity.
Momentum - Composite of Earnings and Price momentum.
The strategies are all applied to a global large-cap universe with a long-short construction. We then combine
these with a risk-parity weighting to form the final strategy.
102
Equity alternative beta/risk premia

Performance
270
250
Risk Parity
230
210
190
170
150
130
110
90
70
Dec-92
Dec-94
Dec-96
Dec-98
Dec-00
Dec-02
Dec-04
Dec-06
Dec-08
Dec-10
Dec-12
Return statistics
Return, % pa
Annualised monthly
volatility
Annualised monthly IR
1 yr
2.9
1.7
1.7
3 yr
2.9
3.0
1.0
5 yr
2.7
2.6
1.0
Whole Period
4.3
4.2
1.0
103
Cross sectional & time series

Momentum
Income or carry
Index
330
Index
Index
115
450
Cross-sectional dividend yield (LHS)
Time series momentum (RHS)
113
400
Time series carry (RHS)
111
280
109
107
230
105
103
180
101
130
80
Dec-89
Index
Cross-sectional momentum (LHS)
Dec-97
Dec-01
Dec-05
Dec-09
105
300
250
100
200
95
150
100
97
50
Dec-13
110
350
99
95
Dec-93
115
0
Dec-89
90
85
Dec-93
Dec-97
Dec-01
Dec-05
Dec-09
Dec-13
Value or mean reversion

Index
Index
Cross-sectional price/book (LHS)
250
120
Time series mean-reversion (RHS)
115
200
110
150
105
100
100
50
0
Dec-89
95
90
Dec-93
Dec-97
Dec-01
Dec-05
Dec-09
Dec-13
104
Diversification benefit of time series and cross-sectional

factors
Value/Mean-reversion
CrossSectional
Carry/Income
Risk Parity
Time Series Combination
CrossSectional
Momentum
Risk Parity
CrossSectional
Risk Parity
Return
1.6%
0.4%
2.2%
5.3%
0.4%
4.4%
1.9%
0.5%
3.8%
Vol
12.0%
1.8%
9.2%
15.8%
2.0%
11.8%
15.7%
1.4%
12.8%
R/R
0.14
0.23
0.24
0.34
0.22
0.37
0.12
0.38
0.30
The table shows the return/risk of the cross-sectional factors defined as the top-bottom quartile portfolio from the Top 500 stocks FTSE World and the times series factors defined at the
index level. The Risk Parity portfolio is the risk weighted portfolio of the cross-sectional series with the volatility leveraged times series. The data are calculated using monthly returns from
Dec-89.
105
Possible implementation channels for alternative beta

Characteristic
Futures
ETFs
Stocks
Swaps
Certificates
Classification
Exchange listed derivative contracts

(un-funded)
Exchange Traded Fund

UCITs compliant for European
listings
(funded)
Physical Holding of Stock

Basket / (funded)
OTC Derivative
(un-funded)
Notes
(funded)
Fees
Commission paid per contract. eg, 1

EUR per lot (minimal cost for index
such as SX5E)
Management fee paid to ETF issuer

Broker Commission
Broker Commission
Borrow fee for shorts
positions
Financing Spread over Libor

Broker Commission
Management fee and/or

Broker Commission
Liquidity
Some contracts are very liquid on

exchange, otherwise determined by
cash market liquidity
Primary: Determined by underlying

liquidity
Secondary: On exchange trading
with market makers
Depending on underlying
Borrow cost for short
positions
positions
positions
Counterparty Risk
None. Client faces the exchange

and only posts small initial margin to
their clearer
Physical ETFs: Counterparty risk

owing to stock lending
Synthetic ETFs: The fund enters
into a swap with credit institution (s)
which are fully collateralized
None
Client faces the swap

counterparty and has risk to
the relevant institution (which
will be collateralized)
Client buys funded note from

the counterparty with full
counterparty risk in case of
default
Customize to get
exposure to theme
No
Ask ETF provider to create ETF due diligence process required
Yes
Yes
Yes
Ongoing
management /
operational effort
Requires cash management

Rolling futures
Daily margining
Custodian will take care of day-today management

Accounting is relatively simple
Custodian will take care of

day-to-day management
Requires cash management

Collateral management
needed on both sides
Custodian will take care of

day-to-day management
Market Making
On screen with anonymous

counterparty during opening times of
the exchange
Off screen with counterparty
On screen with anonymous

counterparty during opening times
of the exchange
Directly with market maker OTC
On Exchange
Trading with initial

counterparty, but can be
economically closed out with
third counterparty at any time
Trading only with initial

counterparty
Leverage
Yes
In general no (only a small number

of ETFs give leverage)
No
Yes
Yes
Shorting
Yes
L-S ETFs are possible , though

short ing ETFs can be hard in
individual cases of poor liquidity
Yes
Yes
Yes
106
EM country selection
Signal 1 Valuations performance of

forward P/E selection strategy relative to
the benchmark
July 00 =100
July 00 =100
107
July 00 =100
107
106
106
105
104
106
104
0.4%
102
Tracking Error
0.9%
0.5
101
% outperformance
55%
Signal 3 Sentiment performance of fund

flows momentum strategy relative to the
benchmark
104
Excess Returns
0.3%
106
Tracking Error
1.1%
105
0.3
% outperformance
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
101
104
52%
103
102
July 00 =100
Info Ratio
103
104
Signal 4 Growth performance of yield

curve steepening strategy relative to the
benchmark
July 00 =100
105
Jan-02
Jul-13
Jul-12
Jul-11
Jul-10
Jul-09
Jul-08
Jul-07
Jul-06
Jul-05
Jul-04
Jul-03
Jul-02
Jul-01
Jul-00
Jan-01
100
98
103
0.4%
Tracking Error
0.9%
Tracking Error
1.0%
Info Ratio
0.4
% outperformance
50%
Mar-05
99
Mar-04
44%
May-13
May-12
May-11
May-10
May-08
May-07
May-06
May-05
May-04
May-03
0.4%
0.4
% outperformance
May-02
100
Mar-03
Info Ratio
May-01
Jul-13
Jul-12
Jul-11
Jul-10
Jul-09
Jul-08
Jul-07
Jul-06
Jul-05
Jul-04
Jul-03
99
99
Jul-02
100
Jul-01
100
Jul-00
101
Excess Returns
May-14
102
101
May-09
102
Excess Returns
Mar-14
55%
105
0.5
Mar-13
% outperformance
Info Ratio
Mar-12
100
Excess Returns
Mar-11
Info Ratio
103
Mar-10
0.9%
Mar-09
0.5%
Tracking Error
Mar-08
Excess Returns
Mar-07
102
Mar-06
108
Signal 5 Risk: Performance of CDS 12month change Strategy Relative to the

Benchmark
Signal 2 Earnings performance of earn

rev strategy relative to the benchmark
108
Model recommendations for August 2014
% overweight/underweight recommendations relative to

benchmark
India
4.56%
Taiwan
3.51%
Turkey
2.96%
China
1.75%
Chile
1.16%
Brazil
1.07%
Czech Rep
Neutral
Hungary
Neutral
Indonesia
Neutral
Malaysia
Neutral
Philippines
Neutral
Thailand
Neutral
Mexico
-1.05%
Korea
-1.36%
Poland
-1.73%
Russia
-2.29%
South Africa
-4.20%
Israel
-4.37%
The model recommendations for overweighting and underweighting the regions given above are based
on a limit of 15% total deviation from the benchmark weight for the overweights and underweights.
Performance of EM country selection model relative to the

benchmark
135
130
Excess Returns
2.0%
Tracking Error
2.1%
Info Ratio
0.96
% outperformance
56%
125
120
115
110
105
100
2000
2002
2004
2006
2008
2010
2012
Chart shows the performance of the strategy derived by ranking countries as under/over
weight based on variables that capture relative valuations, earnings, sentiment, growth
and risk. We also impose a limit of 15% total deviation from the benchmark weight for
the overweights and underweights. Source: FTSE, Datastream, EPFR, Worldscope,
IBES, Factset, Bloomberg, Nomura strategy research
2014
109
Custom product services, website, Bloomberg access to models, data and

Recommended Portfolio
European Recommended Portfolio
Sector
Basic Industries
Capital Goods
Consumer Cyclicals
Consumer Staples
Energy
Financials - Banks
Financials - Insurance
Financials - Other
Healthcare
Media
Technology
Telecoms
Stock
BHP BILLITON
CRH PLC
HEIDELBERGCEMENT
RIO TINTO
SYNGENTA
ABB
PHILIPS
SCHNEIDER ELECTRIC
SIEMENS AG
SKF
A.P MOELLER-MAERSK
BMW
DEUTSCHE LUFTHANSA
DEUTSCHE POST
DSV
KERING
LVMH
RANDSTAD HOLDING
HENKEL
WM MORRISON
RECKITT BENCKISER
TESCO
BG GROUP PLC
GALP ENERGIA
TOTAL
BANCO SANTANDER
BARCLAYS PLC
BNP PARIBAS
CREDIT SUISSE
DANSKE BANK
DEUTSCHE BANK
PKO BANK
SOCIETE GENERALE
UNICREDITO ITALIANO
AVIVA PLC
AXA
PRUDENTIAL PLC
BLACKROCK
SCHRODERS PLC
MERCK KGAA
NOVARTIS
SANOFI
PUBLICIS
ALCATEL-LUCENT
INFINEON TECHNOLOGIES
SAP AG
ARM HOLDINGS
BT GROUP
Portfolio perf. (Euro Return, %)3

Nomura Strategy Recommend Portfolio
FTSE-World Europe Index
1
2
3
4
1 WK
2.9
2.3
Currency
GBP
EUR
EUR
GBP
CHF
SEK
EUR
EUR
EUR
SEK
DKK
EUR
EUR
EUR
DKK
EUR
EUR
EUR
EUR
GBP
GBP
GBP
GBP
EUR
EUR
EUR
GBP
EUR
CHF
DKK
EUR
PLN
EUR
EUR
GBP
EUR
GBP
USD
GBP
EUR
CHF
EUR
EUR
EUR
EUR
EUR
GBP
GBP
1 MTH
6.2
5.6
YTD
4.0
9.4
12 MTH
25.4
23.5
Price (LC)
Mkt Cap
4 Sep 14
19.05
18.58
58.36
32.42
326.10
163.50
23.65
65.50
98.59
164.00
14620.00
91.54
13.60
25.68
174.70
165.40
137.60
37.73
81.95
1.74
53.65
2.29
12.33
13.66
51.77
7.89
2.31
54.30
26.32
162.00
27.00
40.01
41.00
6.40
5.34
19.55
14.55
331.73
24.55
66.93
87.10
85.75
58.31
2.66
8.99
59.99
9.66
3.90
US$m
65,975
17,812
10,641
66,315
32,156
53,615
28,008
46,363
101,338
9,660
17,115
38,585
4,037
31,657
5,215
15,812
44,683
5,278
18,441
6,168
56,753
30,229
68,809
6,691
136,362
120,347
62,034
68,761
45,155
22,198
48,288
10,672
37,949
36,950
25,764
48,088
60,879
41,504
4,549
11,211
218,015
127,261
13,927
9,441
13,073
69,525
50,354
2013
29.3
20.0
2012
26.2
18.8
2011
-16.6
-8.5
2010
5.3
11.7
Calendarised EPS y/e Dec1

2014e
2.4
0.8
3.9
5.3
17.8
1.3
1.3
3.4
5.6
2.0
909.6
8.1
0.7
1.7
8.9
9.8
7.1
2.6
3.7
-0.1
2.6
0.2
0.6
0.4
6.1
0.5
0.2
5.0
1.8
12.9
2.3
2.7
3.9
0.3
0.4
1.8
0.5
19.2
1.5
4.6
5.3
5.2
3.5
0.0
0.5
3.4
0.2
2009
49.4
33.2
2008 4
-20.7
-20.4
2015e
2.7
1.1
4.9
5.7
18.3
1.5
1.3
3.6
7.3
10.9
866.4
8.3
1.1
1.7
8.9
9.7
7.1
3.1
4.1
0.1
2.7
0.2
1.1
0.5
6.6
0.6
0.3
5.5
2.8
15.0
3.3
3.2
4.8
0.5
0.5
2.0
1.0
21.5
1.7
4.9
5.8
5.7
3.4
0.2
0.6
3.7
0.3
2007
-4.5
3.6
2016e
2.8
1.4
6.0
6.2
22.2
1.7
1.8
4.0
8.2
12.5
1072.1
8.5
2.5
1.8
11.4
10.7
7.9
3.6
4.7
0.2
2.9
0.2
1.2
0.6
6.7
0.7
0.3
6.3
3.2
16.5
4.1
3.7
5.4
0.7
0.5
2.1
1.1
24.7
1.9
5.1
6.2
6.3
3.6
0.3
0.6
4.1
0.3
2006
20.9
17.2
2005
21.7
23.0
Price/
earnings
Date
Rel Perf.
since
Rel Perf.
Over
Analyst
Dec 15 (x)
7.1
16.6
11.8
5.7
17.8
107.0
17.5
18.0
13.5
15.1
16.9
11.1
12.4
14.7
19.7
17.1
19.3
12.0
20.0
13.5
19.7
10.4
10.8
27.5
7.9
13.3
8.5
10.0
9.3
10.8
8.2
12.6
8.6
12.6
11.7
10.0
14.9
15.5
14.0
13.8
14.9
14.9
17.3
16.8
14.4
16.2
14.9
Added
28 Jan 14
31 Aug 12
26 Nov 13
28 Jan 14
19 May 14
6 Feb 13
5 Nov 12
26 Nov 13
14 Oct 11
26 Nov 13
19 May 14
27 Nov 12
26 Nov 13
26 Nov 13
26 Nov 13
16 Jun 14
16 Jun 14
19 May 14
2 Jul 14
2 Jul 14
2 Jul 14
2 Jul 14
27 Nov 12
27 Nov 12
18 Jul 13
18 Oct 13
4 Nov 11
16 Apr 10
8 Apr 13
1 Apr 14
1 May 13
30 Aug 13
5 Nov 12
16 Apr 10
31 Jul 09
9 Jan 09
18 Jul 13
18 Jul 13
12 Dec 13
4 Sep 09
26 Nov 13
26 Nov 13
27 Nov 12
26 Nov 13
27 Nov 12
23 Oct 09
09-Sep-14
13 Apr 12
Added
-12
3
-5
-2
-8
-8
-8
-2
-9
-18
8
12
-21
-11
-2
1
-7
-9
-6
-4
6
-20
-6
-12
17
10
0
-33
-12
0
-37
-9
37
-103
38
-33
23
4
-5
60
16
2
5
-24
23
24
N/A
55
week
1
1
-1
-1
-4
1
-1
-1
1
-1
0
0
-1
0
-2
1
2
1
0
-9
1
-9
1
0
2
2
1
3
0
-1
1
2
4
6
1
2
-1
0
0
-1
4
2
0
0
-1
-1
N/A
-1
Rating2
Buy
Not Rated
Not Rated
Buy
Buy
Buy
Buy
Neutral
Buy
Neutral
Buy
Buy
Neutral
Buy
Buy
Buy
Buy
Not Rated
Buy
Buy
Buy
Neutral
Neutral
Buy
Buy
Neutral
Buy
Neutral
Buy
Buy
Neutral
Not Rated
Buy
Buy
Buy
Buy
Buy
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Neutral
Buy
Not Rated
Buy
Not Rated
Buy
2004
7.7
9.4
2003
22.5
12.6
2002
-34.0
-31.7
2001
-21.2
-17.3
2000
14.7
-2.9
1999
67.4
25.4
1998
26.4
18.6
1997
43.2
40.5
1996
35.7
24.7
1995
17.8
11.2
EPS estimates are based on Nomura estimates (for stocks under coverage), IBES (for stocks not currently under coverage)
Analyst rating refers to Nomura research department rating
Return history presented as price return in euro terms from before 2006. Returns from 2007 to present are on a total return basis.
Ending 12 September 2008
Please turn to the back for an explanation of Nomura's rating system.

Past performance is not a guarantee of future results.
We are adding ARM Holdings PLC (GBP 9.66, Not Rated) to our European recommended portfolio.
111
European Recommended Portfolio relative performance index
Dec 06 = 100
115
110
105
100
95
90
85
80
Dec-06
Dec-07
Dec-08
Dec-09
Performance of Nomura European strategy recommended portfolio relative to the FTSE World Europe index.
Dec-10
Dec-11
Dec-12
Dec-13
112
StrategyInsight https://apps.nomuranow.com/EQS
113
Global valuation and profitability

12 month Forward PE
Current Values
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials 2
Information Tech
Telecom Services
Utilities
Market
Post 1990 Average

US Eur ex UK
14.0
11.2
16.6
15.3
15.9
14.8
17.3
13.0
17.3
18.6
16.4
17.5
13.7
11.3
14.8
18.2
13.4
15.6
16.0
14.5
15.4
14.2
UK Japan Asia ex Jp3 Emerging World

10.4 10.5
15.3
7.3
13.0
11.7 13.4
13.2
12.3
14.8
14.9 13.4
15.7
13.8
15.2
15.1 12.2
15.6
11.9
14.9
16.5 19.3
17.2
21.0
17.7
17.1 25.1
20.8
15.9
16.9
11.3 12.9
13.9
8.8
12.7
26.9 17.1
17.3
12.1
14.5
20.2 15.0
16.3
14.8
15.1
15.2 17.9
13.7
11.8
15.3
13.3 14.2
14.5
10.9
14.6
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials 2
Information Tech
Telecom Services
Utilities
Market
US Eur ex UK
15.3
12.4
15.1
12.5
15.8
13.0
17.5
14.7
14.7
16.6
17.5
17.5
12.1
12.5
20.2
21.1
16.6
16.0
13.2
13.9
15.5
13.9

13.6 30.0
14.3
13.8
14.4
11.6
9.0
12.9
10.7
14.5
11.6 28.8
15.4
13.3
16.3
14.3 48.0
17.5
11.5
17.4
13.0 29.5
15.8
16.1
15.2
16.7 23.5
20.6
14.4
17.8
12.2 34.7
12.8
15.2
14.2
20.5 29.9
16.7
16.3
20.8
13.7 26.1
15.1
14.7
15.5
10.2 27.2
13.6
13.2
13.8
12.6 28.3
13.9
12.5
15.7
Enterprise Value / Sales

Current Values
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials 2,4
Information Tech
Telecom Services
Utilities
Market ex Financials
Post 1990 Average

US Eur ex UK UK Japan Asia ex Jp
1.6
0.8
0.7
0.3
1.9
2.0
1.3
1.0
0.9
2.5
2.1
1.1
1.4
1.0
1.2
1.8
1.2
1.5
0.8
1.9
1.4
1.5
1.9
0.9
0.8
2.1
3.8
3.9
1.3
4.5
NA
NA
NA
NA
NA
2.8
1.9
8.5
0.9
3.5
2.4
1.9
1.4
1.8
3.2
2.9
1.0
1.6
1.4
3.2
2.0
1.4
1.3
0.9
1.7
Emerging World
0.8
1.2
1.3
1.4
0.9
1.4
1.2
1.4
1.5
1.4
3.3
2.4
NA
NA
1.0
1.9
2.1
2.1
2.0
1.7
1.2
1.6
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials 2
Information Tech
Telecom Services
Utilities
US Eur ex UK UK Japan Asia ex Jp3 Emerging World

1.3
1.0
1.1
0.5
2.5
1.1
1.1
1.5
1.0
1.4
1.1
1.8
1.7
1.3
1.8
0.8
0.9
0.8
1.5
1.2
1.1
1.4
0.8
1.2
0.8
2.3
2.0
1.1
1.7
1.1
1.3
0.7
0.9
1.6
1.3
2.3
2.9
3.7
1.7
2.7
3.2
2.5
NA
NA
NA
NA
NA
NA
NA
2.6
1.6
2.8
0.9
1.6
1.8
1.8
2.9
2.4
2.7
1.7
4.1
4.6
2.4
2.2
1.3
1.6
2.3
4.1
3.6
1.8
1.8
1.1
1.3
0.9
1.9
1.8
1.3
Enterprise Value / EBITDA

Current Values
Post 1990 Average

US
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials 2
Information Tech
Telecom Services
Utilities
Eur ex UK UK
Japan Asia ex Jp3 Emerging World
7.3
9.8
11.9
10.8
11.4
12.7
3.9
9.3
9.2
8.0
11.1
13.6
6.1
7.1
8.7
10.4
10.7
10.3
5.7
7.2
8.7
7.1
8.0
10.6
13.1
7.3
10.0
11.8
10.5
18.3
5.0
8.2
10.8
7.9
13.7
14.4
6.5
8.6
10.4
9.2
11.0
12.7
NA
10.4
6.5
9.2
10.1
NA
11.7
5.7
4.9
8.0
NA
11.8
4.8
8.5
8.0
NA
7.2
5.9
10.8
7.8
NA
17.8
8.9
14.2
10.0
NA
5.8
6.2
7.9
7.2
NA
8.9
6.1
7.8
9.0
US
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials 2
Information Tech
Telecom Services
Utilities
Eur ex UK UK
Japan Asia ex Jp3 Emerging World
7.5
8.4
10.1
9.2
10.5
12.5
5.3
6.1
6.7
6.2
8.9
10.8
7.0
6.9
6.6
8.6
8.5
11.3
8.3
9.7
11.6
8.4
9.1
9.3
6.5
7.6
8.0
13.8
9.2
13.3
11.2
10.2
8.3
10.5
10.4
12.5
6.7
7.7
9.3
8.3
9.6
11.8
NA
12.1
6.9
7.4
9.5
NA
10.6
5.7
6.0
6.7
NA
14.2
6.6
6.3
7.2
NA
8.1
5.3
11.0
9.3
NA
11.5
9.3
11.5
9.1
NA
10.3
9.0
9.3
8.9
NA
10.7
6.2
7.4
8.5
1Ratios
reflect Earnings Before Goodwill Amortisation

excluding Real Estate
3Asia ex Japan = Australia, Hong Kong, New Zealand
& Singapore
Source: Worldscope, FTSE, I/B/E/S, Nomura Strategy
research
2Financials
114
Global valuation and profitability

6
6
Return on Capital Employed (ROE Financials)
Current Values
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials 2,4
Information Tech
Telecom Services
Utilities
Post 1990 Average

US Eur ex UK
11.3
10.0
9.2
7.0
8.4
9.3
11.7
7.9
14.3
10.7
14.7
15.1
10.6
7.6
19.4
8.8
7.5
9.6
5.9
5.8
11.5
9.1

12.9
4.5
4.7
9.3
10.5
7.0
3.9
9.3
4.5
6.8
15.6
5.3
6.9
4.3
7.6
14.4
5.8
11.4
10.6
9.3
13.1
7.4
9.3
13.6
12.1
21.5
8.4
16.8
12.3
14.7
7.2
10.3
11.0
14.9
9.8
13.9
6.1
10.4
13.0
15.5
19.4
7.2
15.9
12.4
11.2
9.7
0.4
8.3
5.5
5.2
13.8
5.1
8.3
8.5
9.8
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials 2,4
Information Tech
Telecom Services
Utilities
US Eur ex UK
12.4
12.6
9.0
8.8
9.3
8.4
8.1
7.8
17.8
11.7
17.7
13.2
14.6
10.9
14.2
11.4
9.3
9.7
7.5
7.8
10.9
9.4

12.5
3.9
11.4
13.9
11.6
10.8
4.2
11.3
9.0
7.9
10.4
3.7
8.1
6.9
6.9
11.2
4.4
8.4
8.4
7.0
12.8
4.8
9.6
12.3
13.4
28.2
7.7
11.3
12.9
16.2
12.2
1.7
11.5
12.0
11.1
12.8
4.1
13.1
10.8
10.1
10.4
6.8
19.1
12.6
9.2
8.3
3.3
14.9
5.6
6.7
11.2
4.1
9.6
9.3
8.8
Enterprise Value / Capital Employed (P/BV Financials)

Current Values
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials 2,5
Information Tech
Telecom Services
Utilities
Post 1990 Average

1.7
1.1
1.2
0.7
1.3
0.8
1.5
2.1
1.5
1.3
0.9
1.6
1.0
1.4
1.9
1.7
2.5
1.0
1.1
0.9
1.5
2.4
1.4
2.4
1.0
2.0
1.3
1.7
2.9
2.1
2.6
1.4
1.7
2.3
2.4
2.6
3.0
3.7
1.5
4.3
2.2
2.7
1.4
1.0
1.2
1.0
1.5
1.4
1.3
2.9
2.3
6.2
1.2
2.8
1.5
2.2
1.9
1.2
0.7
1.3
2.4
1.8
1.4
1.3
0.9
1.7
0.9
1.5
1.0
1.1
2.2
1.6
1.6
1.1
1.4
1.2
1.7
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials 2,5
Information Tech
Telecom Services
Utilities

2.1
1.6
1.9
0.9
1.5
1.8
1.8
1.7
1.3
1.5
1.2
1.7
1.2
1.4
1.7
1.3
1.4
1.1
1.1
1.1
1.4
1.8
1.2
1.9
1.1
1.7
1.3
1.4
3.4
2.1
1.9
1.3
1.6
2.0
2.4
3.4
2.5
5.5
1.7
2.4
2.2
3.1
2.0
1.7
1.7
2.0
1.5
2.1
1.8
3.3
2.6
4.9
1.2
2.1
2.0
2.5
1.8
1.4
1.4
1.4
3.2
2.3
1.5
1.2
1.2
1.1
1.2
2.1
1.2
1.2
2.1
1.5
1.6
1.2
1.5
1.4
1.6
1Ratios
reflect Earnings Before Goodwill Amortisation

1
excluding Real Estate
3Asia ex Japan = Australia, Hong Kong, New Zealand & Singapore
4Return on Equity used for Financials.
5Price to Book Value used for Financials.
6ROE and RoCE calculated pre goodwill and pre exceptionals.
Source: Worldscope, FTSE, I/B/E/S, Nomura Strategy research
2Financials
115
Appendix A-1
Any Authors named on this report are Research Analysts unless otherwise indicated
Analyst Certification
We, Inigo Fraser-Jenkins and Alla Harmsworth, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers
referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part
of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Important Disclosures
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The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking
activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and
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Distribution of ratings (Global)
The distribution of all ratings published by Nomura Global Equity Research is as follows:
47% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this rating are investment banking clients of the Nomura Group*.
43% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with this rating are investment banking clients of the Nomura
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10% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 24% of companies with this rating are investment banking clients of the Nomura
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As at 30 June 2014. *The Nomura Group as defined in the Disclaimer section at the end of this report.
Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013
The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analysts target price
is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted
cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current
price)/current price.
STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with
the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that
the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as
'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows:
United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at:
http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the
valuation methodology; Japan: Russell/Nomura Large Cap.
116
SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line
with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not
rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets
ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.
Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the
Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation
indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential
downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain
circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or
shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such
securities and/or companies.
SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most
stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the
weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Target Price
A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by
other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
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Connecting Markets East & West

Quantitative Equity Strategy

Inigo Fraser Jenkins NIplc

Alla Harmsworth NIplc

Paul Danis NIplc

Mark Diver NIplc

+44 20 7102 4658

+44 20 7102 2219

+44 20 7102 3406

+44 20 7102 2987

Gerard Alix Guerrini NIplc

Robertas Stancikas NIplc

+91 22 305 32561

+44 20 7102 3127

Quantitative Solutions Industry Specialists

Ethan Brodie NSI

Bhavik Shah NIplc

Sarah McCarthy NIplc

Norman Pfeifer NIplc

+44 20 7103 9988

+44 20 7103 9988

See Appendix A-1 for analyst certification, important

Tactical factor allocation: Buy growth over income as rates rise

Strategic quant trades

Long horizon concentrated strategies

Cross-asset alternative beta/risk premia investing

European EPS and market multiple

European EPS and the market multiple

Multiple expansion following earnings troughs

Market Multiple (LHS)

European EPS (RHS)

Source: Datastream, IBES, Nomura Strategy research

European 10-year inflation-adjusted earnings and current

European and US Shiller P/E

Source: Nomura Strategy research, Shiller database

Earnings versus monetary policy: Drivers of eurozone

Absolute equity returns

Equities Relative to Bonds

Absolute equity returns

Flow-based sentiment indicators

Global net issuance and 12-month forward returns

Global Net Issuance (LHS)

Global 12m Fwd Returns (RHS, inverted)

Source: SDC, Dealogic, Bloomberg, Datastream, Nomura Strategy research

Cross-border equity flows*

Equity holdings and total financial assets

Source: EPFR, Nomura Strategy research

Composite sentiment indicator

Historical efficacy of the composite sentiment indicator

EM country correlation (rolling 6-month window, daily)

6 month rolling correlation

Difference between GEM flows and regional flows

Net Purchases of Global Emerging

Global Emerging Market Return relative

*Purchases of Global Emerging Market Equity Funds as a percentage of market capitalisation,

Reliability of GEM flow indicator

Fwd Relative Returns (EM-DM)

Source: Nomura Quantitative strategy

Relative equity risk premium and relative forward returns

Forward Excess Returns (RHS)

Relative ERP of EM relative to World (LHS)

Multi-asset correlation (90 day)

Index volatility - Factor volatility (Global)

Are earnings growing in Europe?