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Agenda
Why is the Pension Investor different?Why is the Pension Investor different?
The journey, the destination or both?The journey, the destination or both?
Saver or Investor?Saver or Investor?
Tailored SolutionsTailored Solutions
Managing the journey to the destination with confidenceManaging the journey to the destination with confidence
1.) Investment manager hired
2.) Asset allocation decision
3.) Understanding my risk appetite
4.) Timing the market
Rank in order of importance What is the most important investment-related decision facing
pension savers?
Question
Investment Manager – difference between best and worst over 20 years
x% : (Lipper Survey of UK managers)
Asset allocation decision – need for risk and the need for protection
Understanding my risk appetite – a plan with conviction
Timing the market – 10 Years to 16.09.2011
Annualised Return 4%*Annualised Return if missed best 10 days -3%Annualised Return if missed worst 10 days 18%
Why the Pension Investor is different
* 6 of the top 10 days over the last decade were in 2008
Why the Pension Investor is different
The Pension Investor – the last of the long term investors The Pension Investor – the last of the long term investors
Behavioural Economics – greatest risk to adequacy of benefitsBehavioural Economics – greatest risk to adequacy of benefits
Risk must be taken when appropriate – investment time horizon – growth assetsRisk must be taken when appropriate – investment time horizon – growth assets
Risk must be reduced when appropriate – benefit drawdown time horizon; orderly and strategicallyRisk must be reduced when appropriate – benefit drawdown time horizon; orderly and strategically
Time is a natural smoother of volatility
But…… Pension investors must not step off the journey
Risk reduction can be strategically scheduled – via lifestyling
Typical fund mix in the accumulation phase with a strategic Lifestyling strategy will deliver
The Destination
Example 75% Growth Assets25% Defensive Assets
Only if…….
Member activated switching activity
Stepping Off The Journey
0
100
200
300
400
500
600
700
800
900
1000
Ja
n
Ma
y
Sep Oct
No
v
Dec
Ja
n
Fe
b
Ma
r
Ap
r
Ma
y
Ju
n
Ju
l
Au
g
Sep Oct
No
v
Dec
Ja
n
Fe
b
Ma
r
Ap
r
Ma
y
Ju
n
Ju
l
Au
g
Sep Oct
No
v
2005 2007 2008 2009
Source: Irish Life Corporate Business
Recognise that risk appetite and time horizon (age) are not necessarily linked Behavioural economics explores the difference between ‘savers’ and ‘investors’ Research suggests that pension savers evolve from one to the other How do we:- Segment our client base
Monitor the behaviourEnsure movement between segments
Ultimately as part of the drive for retirement income adequacy:- Risk is requiredRisk must be desired and understoodRisk must be appropriate
Is one starting point the solution…..
Both …
Has come a long way – but further to go …
Pension Savings – The Evolution
Single ManagerActive Managed Fund
Consensus Funds that removed • Single Manager Risk• Asset Allocation Risk• Stock Selection Risk
TailoredLifestyle Solutions
InflationInflationInvested contributions will not keep pacewith earnings inflation and the real value
of retirement savings will fallGrowth Assets Growth Assets
CapitalCapitalThe value of the retirement fund could fallsharply due to investment market volatility
Volatility Management &
Defensive Assets
Volatility Management &
Defensive Assets
Pension Conversion
Pension Conversion
Fluctuation of annuity rates leading to uncertainty about the amount of
retirement income receivable
Fixed Interest /Bond Fund
Fixed Interest /Bond Fund
Types of Investment Risk for Pension Investors
Risk Danger to Pension Investor Investmentstrategy
Evolution of growth assets – diversification
Evolution of volatility management
Evolution of defensive assets – match the benefit drawdown Manage risk through diversification of
Asset Class Investment Style (indexed & alpha) Investment Manager
Building long term strategic growth asset allocations Managing the Destination via the Journey
Tailored Solutions
Access a wide range of asset classes - efficiently & effectively
Evolution of Growth Assets
PrivateEquitiesPrivateEquities
InfrastructureEquities
InfrastructureEquities
GlobalEquitiesGlobal
Equities
ForestryForestryCorporate
BondsCorporate
BondsIndexed
CommoditiesIndexed
CommoditiesHedge Fund
Hedge Fund
High YieldEquities
High YieldEquities
Emerging Markets
Emerging Markets
European Property
European Property
Small CapEquities
Small CapEquities
CurrencyCurrency
Access genuine sources of alpha generation by:-
- Identify skilled managers
- Select genuine alpha strategies
- Monitor and understand performance drivers
- Tactically allocate between strategies
- Carry out due diligence on operational and investment process
Evolution of Volatility Management
Bond Fund Country Credit Duration exposure
Cash Fund Counterparty risk
Structured Products Capital Guarantees CPPI
Evolution of Defensive Assets
Long Term Strategic Growth Asset Allocation
Developed World Equities
50%
International Property 5%
Tactical Trading Strategies 5%
Relative Arbitrage 5%
Event Driven 5%
Equity Long/Short 5%
Managed Futures 5%
Commodities 5%
Small Cap Equities 5%
Emerging Market Equities 10%
Long Term Strategic Balanced Asset Allocation
Developed World Equities 25%
Government Bonds 25%
International Property 5%
Tactical Trading Strategies 5%
Relative Arbitrage 5%
Event Driven 5%
Equity Long/Short 5%
Managed Futures 5%
Commodities 5%
Small Cap Equities 5%
Emerging Market Equities 10%
Range of possible portfolios when alpha generation is added and we assume some of the
managers will deliver
Range of possible portfolios when restricted to standard asset classes
Range of possible portfolios when alternative asset classes are added
to opportunity set
Objective is to move up and/or left, i.e. higher return and/or lower risk
Risk
Exp
ecte
d R
etu
rnEfficient Frontier:Illustration of Expanding the Risk/Return Frontier
11
22
33
Typical Managed Fund
Conclusion
Recognise that for some investors the ‘journey’ matters and dictates actionsRecognise that for some investors the ‘journey’ matters and dictates actions
Segment clients by risk appetiteSegment clients by risk appetite
Provide solutions to meet these segmentsProvide solutions to meet these segments
Facilitate satellite investment options outside their ‘core’ requirement Facilitate satellite investment options outside their ‘core’ requirement
1.) 0%
Question
2.) Up to 25%
3.) Up to 50%
4.) 50%+
What do you now think an appropriate allocation to growth (equities) assets is?
Investing intelligently is about controlling the controllable. You can’t control whether the funds you invest in will outperform the
market today, next week, month or next year; in the short run your returns will always be hostage to the market and its whims
A Principled Framework for Investing !
But you can control:
Your Expectations, by using realism, not fantasy, to forecast your returns
Your Risk, by deciding how much of your assets to put at risk in the stock market, by diversifying and by rebalancing
Your own behaviour