Aon Hewitt: Alternative Investments

Transcription

1 Aon Hewitt: Alternative Investments

2 Alternatives the Alternative way to a better Balanced Portfolio

3 NZAM who are we? Fund of Hedge Funds established Privately owned. $600 mio funds under management. 480 clients mostly private but also institutional. Net returns 8.12% p.a. worst year -8.64% (1994). Recently appointed Sir John Anderson as Advisory Chairman and Jonathan Mason as a Non-Exec Director.

4 What is an Alternative Investment? Investments that are not traditional bond, equity or property investments. It s a meaningless name they are better described as diversifying investments. They are not a replacement, they are an additional, diversifying source of return. The largest categories of Alternatives are: Commodities Private/Venture Equity Hedge funds Alternatives can also include collectibles such as art, coins and classic cars. Focus on the most liquid and diverse hedge funds.

5 Hedge Funds A hedge fund is a fund that aims to achieve absolute returns - it seeks to generate profits for investors irrespective of market conditions. Hedge funds invest in equities, fixed income, currencies and commodities. Hedge funds can profit from falling markets by going short (selling securities) or by using derivatives to hedge portfolios. Hedge funds are designed to manage risk risk free is 100% cash; not 100% invested. Hedge fund managers interests are aligned with their investors. This is a skill-based business and skill costs. The focus should be after fee returns.

6 Global Trends in Alternative Investing 10% 3% 28% 4% 14% 34% 53% 13% 31% Alternatives Equities Fixed Income Cash Distressed Debt Private/Venture Capital Hedge Funds Energy/Nat Resources Private Real Estate The survey covered 835 endowments in 2013 managing US$448 billion and was conducted by Commonfund Institute and the National Assn of College and University Business Officers

7 Houston we have a problem - The Prospects for the Traditional Balanced Fund Source: BCA The benefits of diversification are widely accepted concept but there is very little diversification remaining in the traditional balanced fund it is dominated by the equity risk premium. Alternatives provide crucial diversification.

8 Equity Markets the party s getting late.

9 .and the punchbowl s empty!

10 Equities are rich but bonds are worse. 10

11 It s looking good for hedge funds. 11

12 Balanced Fund Sources of Return Equities the equity risk premium or beta. Bonds primarily credit risk and duration risk. The equity risk premium completely dominates bond/equity portfolios that is not balance. Alternatives components of the above but also alpha the return derived from manager skill independent of markets.

13 After Fee Returns since 1999 Jan Dec 2014 Annualised Return Volatility Drawdown Correlation to HFRI Global Shares (MSCI World Local) 4.08% % 0.68 Global Bonds (Citi World BIG in NZD Hedged) 7.92% % Hedge Funds (HFRI FOF 100% Hedged to NZD) 7.78% % -

14 After Fee Returns in crisis markets "Tech Wreck" Annualised Return Volatility Drawdown Correlation to HFRI Global Shares (MSCI World Local) % % 0.23 Global Bonds (Citi World BIG in NZD Hedged) 10.55% % Hedge Funds (HFRI FOF 100% Hedged to NZD) 4.26% % - Global Financial Crisis Annualised Return Volatility Drawdown Correlation to HFRI Global Shares (MSCI World Local) % % 0.74 Global Bonds (Citi World BIG in NZD Hedged) 9.54% % 0.06 Hedge Funds (HFRI FOF 100% Hedged to NZD) -2.61% % -

15 After Fee Returns post GFC Post-GFC Annualised Return Volatility Drawdown Correlation to HFRI Global Shares (MSCI World Local) 17.25% % 0.81 Global Bonds (Citi World BIG in NZD Hedged) 7.50% % Hedge Funds (HFRI FOF 100% Hedged to NZD) 7.37% %

16 Dec-98 Nov-99 Oct-00 Sep-01 Aug-02 Jul-03 Jun-04 May-05 Apr-06 Mar-07 Feb-08 Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Aug-13 Jul-14 Value of Portfolio Adding Hedge Funds to a Traditional 60/40 Balanced Fund Global Perspective. $2, $2, $1, $1, $1, $1, $1, $ $ $ % Equity, 40% Bond 60% Hedge, 40% Bond 40% Equity, 40% Bond, 20% Hedge Equity = MSCI WORLD FREE - Net - Local Bond = Barclays Capital Aggregate Bond Index Hedge = HFRI Fund of Funds Composite Index

17 Jan-99 Aug- Mar Oct- May Dec- Jul-02 Feb- Sep- Apr- Nov- Jun- Jan-06 Aug- Mar Oct- May Dec- Jul-09 Feb- Sep- Apr- Nov- Jun- Jan-13 Aug- Mar Oct- Value of Portfolio (NZD) Adding NZAM to a Traditional 60/40 Balanced Fund NZ Perspective. $3, % Equity, 40% Bond $3, $2, % NZAM, 40% Bond 40% Equity, 40% Bond, 20% NZAM $2, $1, $1, $ NZAM is Net of fees Equity = MSCI WORLD FREE - Net(unhedged to NZD) Bond = Citi World BIG $-

18 Return p.a Hedge Funds - A Superior Risk Adjusted Return 9.00% 8.00% Maximum Drawdown/Return Plot Sep Sept % 6.00% 5.00% 4.00% 3.00% NZAM Global (Net) Cash Global Equities (NZD) 2.00% 1.00% 0.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% Maximum Decline

19 Conclusions Hedge funds provide critical diversification benefits to balanced portfolios. They have attractive stand alone risk/return characteristics. They reduce overall portfolio volatility. The timing is right neither bonds nor equities have much left to give. NZAM is ready to help.

20 Alternative Investments Do you have the tools to fix the roof when the sun is shining? Prepared by Aon Hewitt Retirement Investment Consulting

21 Agenda Exposure to Alternatives in NZ Why is it low? Product Structure Products Performance April

22 Exposure to Alternatives Global Pension Funds Endowments and Charities KiwiSaver Funds April

23 Global Pension Assets Asset Allocation Scheme e Cash 6% 3% 1% 2% 2% Equities 49% 61% 51% 55% 42% Bonds 40% 30% 36% 28% 31% Other 5% 6% 12% 15% 25% Source:Towers Watson April

24 Endowments and Charities The largest endowments have average allocations of: 13% US Equity, 17% Non-US Equity, 11% Fixed Interest and Cash 23% Hedge Funds, 20% PE/VC, 16% Real Assets Endowments with over $1 billion AUM allocate 59% to alternative investments, the average endowment allocates just less than 30% [CFA Society, 2013] April

25 Endowments and Charities The predominant focus of both types of funds rests on diversification away from traditional asset classes to alternative asset classes. The outlook over the next three years is likely to be one of diversification from core asset classes into alternatives, with real estate, infrastructure, private equity and hedge funds attracting the strongest interest. Scheme Endowment s Foundations Equity 33% 39% Fixed Income 14% 13% Cash 2% 2% Real Estate 5% 3% Infrastructure & Commodities 10% 8% Alternatives (Hedge Funds and PE) Source: DHR International % 35% DHR surveyed and reported on a total of 118 endowments and foundations, representing a total market value of $420.9 billion. April

26 KiwiSaver Schemes Allocation to Alternatives Balanced Funds Scheme Benchmar k Actual AMP Capital 7% 4% Commodities/Infrastructure ANZ 0% - 10% 0% Kiwi Wealth 0% 0% Aon Nikko 18% 19% Multi-Strategy/Options ASB 0% 0% BNZ 0% 0% Fidelity/Grosven or 0% 0% Mercer 14.5% 12% Alternatives, Infrastructure and Natural Resources Fisher Funds 0% 0% Westpac 0% - 15% 6% Westpac Alternative Investments Trust April

27 KiwiSaver Schemes Estimated KiwiSaver Market Asset Allocation at 31/12/14 Sector Weight Cash & NZ Bonds 33.4% Overseas Bonds 19.5% NZ Shares 8.2% Australian Shares 5.0% International Shares 27.8% NZ Property 2.7% International Property 1.9% Other 1.4% Total 100.0% Source: Morningstar April

28 Why is exposure in NZ so low? Performance of traditional asset classes Consultants Complexity Fees Products April

29 Performance of a typical Balanced Fund Annualised return of 14% over the last 6 years Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 April

30 Why is exposure in NZ so low? Consultants Complexity Fees Products April

31 Product Structure New Zealand vehicle (PIE) New Zealand based manager NZ$ hedged Multi strategy Multi manager April

32 Products Domestic Products Milford Active Growth Fund Salt Long/Short Fund Global Products AMP Capital Global Multi-Asset Fund (PIE) Nikko Multi-Strategy (PIE) Nikko Option (PIE) Mercer Liquid Alternatives (PIE) NZAM Alpha (PIE) Standard Life GARS (SICAV) April

33 Domestic Products Milford Active Growth Fund Has an Absolute Return benchmark/objective 10% p.a. Multi-Sector 10% Global Fund, 20% Cash & Bonds, 70% Domestic Equity (25% Aus) Global Fund includes one global long/short manager and 1 global macro manager Long equity and bonds A Growth Fund with high domestic equity exposure April

34 Domestic Products Salt Long/Short Fund Has an Absolute Return benchmark/objective OCR + 5% p.a. At end February it had 51 Long positions and 29 Short positions Over the course of February, the Fund held 105 different positions. 65 of these went up and 40 fell High volatility, low correlation Single manager, single strategy April

35 Global Products AMP Capital Global Multi-Asset Fund Has an Absolute Return benchmark/objective CPI % p.a. Two managers AMP Capital Multi-Asset Fund Schroder Real Return Fund Traditional and alternatives sources of return Diversified fund April

36 Global Products Nikko Multi-Strategy Fund Has an Absolute Return benchmark/objective Cash + 2.5% p.a. Managed by JP Morgan 40 underlying managers Long redemption period High Fees Multi-manager, multi strategy April

37 Global Products Nikko Option Fund Has an Absolute Return benchmark/objective Cash + 4% p.a. Single strategy Sells options on long term government bonds Low correlation with equity/bond markets High volatility NZ manager April

38 Global Products Mercer Liquid Alternatives Fund Has an Absolute Return benchmark/objective Cash + 3% - 5% p.a. Target correlation with equities <0.4 Target volatility 5% - 7% Multi-manager (23), multi strategy April

39 Global Products NZAM Alpha Fund Has an Absolute Return benchmark/objective Cash + 4% p.a. Correlation with equities = 0.06 Volatility 4% - 6% Multi-manager (<20), multi strategy New Zealand manager April

40 Global Products Standard Life GARS Fund Has an Absolute Return benchmark/objective Cash + 5% p.a. Single-manager, multi strategy Traditional and alternative strategies SICAV April

41 GARS performance attribution Stock Selection Security Selection -0.10% Market Beta Global Equity 0.52% Global REITs 0.52% Global Equity Oil Majors -0.09% Chinese Equity -0.16% Directional Strategies Long US Dollar vs Euro 1.22% Australian Short-term Interest Rates 1.21% Short UK Real Yield -0.83% Short US Duration -0.93% Relative Value US Equity Technology Sector vs US Equity Small Cap 0.97% European v US and Japanese Duration 0.71% Asian Basket vs US Variance -0.11% Global Miners vs Swiss Equity -0.97% GARS total 6.4% April

42 GARS traditional v advanced sources of return April

43 Performance dispersion The spread between first and fourth quartile performers has averaged 19.6%. The spread has tended to be higher in times of market stress. Over the period , only 21% of first-quartile performers in one year remained first-quartile performers in the next. Conversely, 23% of bottomquartile performers made the top quartile the next year. April

44 Recap Globally, exposure to Alternatives is increasing Exposure to Alternatives among NZ investors is low Lack of product is an issue but so is lack of demand April

45 Contact List Guy Fisher Investment Consultant Aon Hewitt Greg Lee Actuary & Principal Aon Hewitt April

46 Aon Hewitt: Alternative Investments