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New recipes for investment success. 21 May 2009. Emma Douglas & Mark Johnson. FOR PROFESSIONAL INVESTORS ONLY. The knives are out for pensions…. Try changing the ingredients. Your DC default option… The governance of your DB scheme…. What’s wrong with Lifestyle?. - PowerPoint PPT Presentation
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New recipes for investment success
21 May 2009
FOR PROFESSIONAL INVESTORS ONLY
Emma Douglas &Mark Johnson
2
The knives are out for pensions…
3
Try changing the ingredients
1. Your DC default option…
2. The governance of your DB scheme…
4
What’s wrong with Lifestyle?
•Members hate seeing their investments fall in value
•Members don’t understand benchmarks
•Members retire earlier than they expected—In some schemes 80% retire early
•Members think managers are making tactical asset allocation decisions
I’m alright, I’m in
Lifestyle
5
Diversified Growth Strategies
•Has a return target
•Cash + 3-4% or RPI + 5%
•Multi-asset portfolio
• Invests in equities, bonds and cash
•Also property, high yield bonds, commodities, hedge funds, private equity etc
•Capital preservation bias
•No guarantee
6
From a member’s perspective
Medium-low risk•Aiming for long term capital growth
•Expected to outpace inflation
•Less volatile than traditional funds
•Capture most market upside in rising markets BUT
•Capital preservation ethos helps to limit downside
•Money is being managed by experts
7
Does it work?
GBP Composite data - 31 December 2003 to 31 March 2009
Source: BlackRock
Annualised Average Return (%)
Annualised Absolute Volatility (%)
FTSE All Share 1.5% 13.4%
BlackRock Target Return 5.3% 6.3%
Best Monthly Return (%)
Worst Monthly Return (%)
# of Negative Months
FTSE All Share 6.3% -13.2% 25/63
BlackRock Target Return 3.3% -6.4% 19/63
8
Can we communicate?
‘Snorkelling not scuba diving’
9
% Weight in Fund
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Jul-08
Aug-08
Sep-08
UK Equities25.1
%35.2
%13.2
%11.5
%15.2
%20.3
%15.1
%20.1
%11.8
% 9.5% 9.0%15.7
%12.1
%12.1
%14.9
%
Overseas Equities 2.2% 5.6% 0.9% 6.0% 9.5%12.0
% 8.3%10.8
% 7.5% 4.3% 4.0% 8.6% 0.6% 0.2% 1.6%
Emerging Market Equities 3.7% 8.2% 0.0% 0.0% 0.3% 2.3% 2.7% 1.9% 3.2% 5.0% 5.8% 3.0% 2.7% 2.7% 2.5%
Sector Equities 0.0% 0.0% 2.0% 1.6% 1.1% 2.2% 4.0% 5.4% 8.2% 6.7% 5.6% 5.2% 5.1% 4.7% 2.3%
Natural Resources 0.0% 0.4% 1.0% 0.4% 2.7% 0.5% 0.7% 0.2% 3.3% 2.4% 3.3% 1.7% 3.0% 3.7% 3.7%
Infrastructure 0.3% 0.3% 2.9% 2.3% 2.1% 1.0% 5.6% 8.3% 6.5% 6.0% 5.1% 4.3% 4.0% 4.0% 0.3%
Hedge Funds 0.0% 0.0% 0.0% 4.0% 5.7% 7.7%10.0
%10.7
% 8.5%10.8
%10.3
%10.4
%10.0
% 9.1% 9.1%
Global Currency 0.0% 0.0% 0.0% 4.1% 3.5% 1.2% 1.4% 1.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Property 0.3% 0.4% 0.0% 2.6% 5.7% 5.6% 7.2% 6.3% 5.2% 4.6% 3.5% 3.1% 2.0% 2.1% 2.1%
Diversified Commodities 0.0% 0.0% 0.0% 0.5% 1.0% 2.0% 2.0% 1.2% 0.8% 2.5% 3.7% 2.9% 3.5% 3.0% 2.9%
Derivative Strategies 0.0% 0.0% 0.0% 0.0% 2.3% 0.7% 1.1% 0.9% 3.0% 3.1% 4.7% 4.1% 4.0% 4.4% 5.5%
Private Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.5% 1.3% 1.3% 1.0% 1.2% 1.3%
Fixed Interest & Short Duration Cash
64.4%
25.5%
15.4%
11.6%
27.2% 9.9%
11.3%
13.6% 5.9% 5.3% 6.2% 6.2% 5.0% 5.6% 8.6%
Cash 4.0%24.4
%64.5
%55.3
%23.6
%34.7
%30.6
%19.3
%36.0
%38.3
%37.5
%33.5
%47.0
%47.2
%45.2
%
Total Portfolio100.0
%100.0
%100.0
%100.0
%100.0
%100.0
%100.0
%100.0
%100.0
%100.0
%100.0
%100.0
%100.0
%100.0
%100.0
%
Not this!
Source: BlackRock. *Positions taken from the BIJF Target Return Fund, a representative account. Launch date of BIJF TR Fund June 30 2005.
10
DC Target Return Fund December 2007
Looks fine in a pie chart!
DC Target Return Fund March 2009
Property, 3.0%
Overseas Equities, 3.0%
Hedge Funds, 6.0%Short DurationFixed Income
Portfolio,28.0%
Cash &Derivatives
Cover28.0%
Emerging Market Equities, 9.0%
Sector Equities, 3.0%
UK Equities11.0%
Infrastructure, 7.0%
Private Equity, 2.0%
UK Equities15.5%
Natural Resources, 2.2%
Diversified Commodities, 3.5%
Derivative Strategies, 2.9%
Overseas Equities, 4.2%
Hedge Funds, 5.5%
Private Equity Funds, 1.2%Infrastructure, 0.2%
Credit &Convertibles
22.1%
GovernmentBonds8.1%
Cash &Derivatives
Cover20.9%
Emerging Markets, 4.3%
Short Duration Fixed Income Portfolio, 9.4%
11
What challenges are DB clients facing?
Anything but a quiet life!
The DayJob
DB PlanClosings
AccountingChanges
‘Perfect Storm’ inMarkets
ActuarialChanges
VolatileFundingLevels
IncreasedComplexity
RegulatoryChanges
12
Where Has Effort Been Invested?
Typical Trusteetime spent
Mismatch between value and time spent
Selection of Managers
Manager Structure
Dynamic Asset Allocation
Strategic Asset Allocation
Contributionto overall success
13
What is Fiduciary Management?
Fiduciary Management involves (partial) outsourcing of the day to day management of the Pensions Scheme to a Fiduciary Manager• The Fiduciary Manager is responsible for a number of key
functions traditionally undertaken by client
• The key benefit for clients is that one single party is accountable for the design, implementation and oversight of the plan’s investment activities
• Partnership approach allows the sponsor and the pension fund to focus on high-level strategic objectives
Success requires a close partnership between the Sponsor/Pension Fund, their Advisors and the Fiduciary
Manager
14
Why Fiduciary Management?
Pension Fund Trustees and Sponsors are faced with• Greater emphasis on risk management - requires a higher
level of diversification and data• Increased complexity of financial products, creation of new
asset classes• Increased regulatory requirements and introduction of
international accounting standards• Increased complexity of Governance and Compliance rules• Cross over between strategy and tactics driven by market
volatility, shorter timeframes and more diverse allocations
‘In –Sourcing’ to get the benefits of an in house manager but without the limitations
15
Examples of Fiduciary Management
Full
• Board of Trustees responsible for setting strategic objectives and monitoring
• BlackRock responsible for strategic advice, dynamic asset allocation, portfolio structure, manager selection
Partial
• Members wished to outsource the management of their alternatives portfolio
• BlackRock responsible for the selection, implementation and risk monitoring across hedge funds, private equity, property, infrastructure and commodities
16
Fiduciary Management Illustration
Client
Fiduciary Manager
Custodian Risk
Management
Asset Allocation
Portfolio Implement-
ation
Performance Monitoring
Fiduciary Managed
Actuary/
Consultant
Portfolio Manager(s)
Custodian Performance Measurement
Risk Management
Traditionally Managed
Process should capture all interdependencies to meet aclient’s objectives
Actuary/
Consultant
Client
17
Tracking Pension Scheme Funding Level Development
Coverage ratio 2007 - 2008 weekly and monthly
1.15
1.20
1.25
1.30
1.35
1.40
1.45
01/ 10/ 2007 31/ 12/ 2007 31/ 03/ 2008 30/ 06/ 2008 29/ 09/ 2008
Weekly
MonthlySource: BlackRock.
18
A Client’s Perspective of a Fiduciary Relationship
Source: BlackRock
Tactical investmentsMonitor and select fiduciary
Investment performanceAsset allocation policyBenefits Consultancy
Benchmark selection
Funding
Set risk budget
Valuation assumptions
Implement asset allocationManage all suppliers
Comprehensive reporting - risk and performance
Scheme administration
Guidance on strategyHedging strategy
Manager monitoring and de-selectionBenefits policy, payment structure
Manager selection/ termsCashflow management
Portfolio constructionCovenant managementMonitor Fiduciary
Investment strategy (Investment Input)
Investment strategy Investment Strategy (Liability Perspective)
Risk modelling and managementScheme GovernanceActuarial
Fiduciary ManagerTrusteesConsultant
19
Bringing it All Together
Discuss SchemeInvestment
Objectives & ALM Study StrategicAdvice
Risk &Performance
Analysis
ClientService &Reporting
YourPensionScheme
Portfolio
Construction &Implementation
Long TermInvestment
Strategy
20
So if you want a healthier pension scheme …
21
… maybe there is a simpler ingredient
22
Any questions?
24
The following notes should be read in conjunction with the attached document:
1. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Services Authority. Registered office: 33 King William Street, London, EC4R 9AS. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.
2. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
3. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.
4. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.
5. Subject to the express requirements of any client-specific investment management agreement or provisions relating to the management of a fund, we will not provide notice of any changes to our personnel, structure, policies, process, objectives or, without limitation, any other matter contained in this document.
6. Unless otherwise specified, all information contained in this document is current as at May 2009.
THIS MATERIAL IS FOR DISTRIBUTION TO PROFESSIONAL CLIENTS AND SHOULD NOT BE RELIED UPON BY ANY OTHER PERSONS.