CLWYD PENSION FUND INVESTMENT PERFORMANCE AND FINANCIAL MARKETS

Transcription

1 CLWYD PENSION FUND INVESTMENT PERFORMANCE AND FINANCIAL MARKETS NOVEMBER 2018

2 CONTENTS AGENDA Performance 3 Risk Management 6 Market Conditions and Outlook Investment Strategy Review 16 Questions 18 JLT Specialty Limited 2

3 1 PERFORMANCE

4 PERFORMANCE SUMMARY PERIODS ENDING 31 MARCH 2018 Manager Fund 12 months % 3 years % p.a. Fund Target Fund Target Investec Global Strategic Equity BlackRock ACS World Multifactor Equity n/a n/a n/a n/a Wellington Emerging Markets (Core) # Wellington Emerging Markets (Local) # Total Equity Stone Harbor LIBOR Multi-Strategy Stone Harbor Multi-Asset Credit n/a n/a Multi-Asset Credit Portfolio Permira Credit Solutions III n/a n/a n/a n/a Private Credit Portfolio n/a n/a n/a n/a Total Credit n/a n/a n/a n/a ManFRM Managed Futures & Hedge Funds n/a n/a ManFRM Hedge Funds (Legacy) * Managed Account Platform n/a n/a Pyrford Global Total Return Investec Diversified Growth Total Diversified Growth Best Ideas Portfolio n/a n/a Tactical Allocation Portfolio n/a n/a In-House Property In-House Infrastructure In-House Timber / Agriculture Real Assets n/a n/a In-House Private Equity In-House Opportunistic Private Markets Portfolio n/a n/a Total In-House Assets Insight LDI Portfolio Total (ex LDI) TOTAL CLWYD PENSION FUND Key points: Equities: high absolute returns, tempered somewhat by Feb/March market volatility, relative performance mixed Multi-Asset Credit : performing well; low absolute returns Managed A/C Platform: promising performance (excl. legacy assets) Tactical Allocation Portfolio: Best Ideas portfolio suffered in Equity market volatility in Feb/March. DGF disappointing Real Assets: mixed performance over 12 months, but strong over 3 years. Private Markets: strong performance in Private Equity and Opportunistic in-house portfolios. LDI: reflective of yield environment and strong equity markets 4

5 PERFORMANCE SUMMARY PERIODS ENDING 30 SEPTEMBER 2018 Manager Fund 12 months % 3 years % p.a. Fund Target Fund Target Investec Global Strategic Equity BlackRock ACS World Multifactor Equity n/a n/a n/a n/a Wellington Emerging Markets (Core) # Wellington Emerging Markets (Local) # Total Equity Stone Harbor LIBOR Multi-Strategy Stone Harbor Multi-Asset Credit n/a n/a Multi-Asset Credit Portfolio Permira Credit Solutions III n/a n/a Private Credit Portfolio n/a n/a Total Credit n/a n/a ManFRM Managed Futures & Hedge Funds ManFRM Hedge Funds (Legacy) * Managed Account Platform Pyrford Global Total Return Investec Diversified Growth Diversified Growth Portfolio Best Ideas Portfolio Tactical Allocation Portfolio In-House Property In-House Infrastructure In-House Timber / Agriculture Real Assets Portfolio n/a n/a In-House Private Equity In-House Opportunistic Private Markets Portfolio n/a n/a Total In-House Assets Insight LDI Portfolio TOTAL (ex LDI) TOTAL CLWYD PENSION FUND Key changes since March: Equities: continued developed Equity Bull market gave strong absolute returns; emerging markets weak in Multi-Asset Credit : low absolute and relative returns in strong Equity markets Managed A/C Platform: strong Equity markets proving tough environment Tactical Allocation Portfolio: strong performance from Best Ideas portfolio. DGF continues to suffer in strong Equity markets Real Assets: strong benefits from allocating to illiquid assets Private Markets: outstanding shorter term performance, strong over three years, and continuing to add value. LDI: reflective of strong equity markets 5

6 CONTENTS 2 RISK MANAGEMENT JLT Specialty Limited 6

7 THE FUND S RISK MANAGEMENT FRAMEWORK WHAT IT IS DESIGNED TO ACHIEVE Purpose of Risk Management Framework The Fund has a comprehensive risk management framework in place (established in 2014) The overriding objectives are to maintain a stable and affordable contribution rate while ensuring that returns are achieved in excess of CPI, as required under the funding arrangements* These objectives are two fold but conflicting risk needs to be taken in order to achieve returns, but risk does not guarantee returns a reasonable balance between the two objectives must be ensured** What is it comprised of? Managed within a QIAIF with Insight Investment Management */** Source Mercer 7

8 THE FUND S RISK MANAGEMENT FRAMEWORK BENEFITS OF THE FRAMEWORK Key highlights The Fund is currently ahead of the expected funding level at 30 September 2018 by around 12% on the current funding basis^ Relative value trade removed in August 2018 resulting in a realised gain of c. 25m^^ Dynamic protection structure in place Fund well positioned to benefit if equity markets enter a sustained sell off Excess collateral is available that can be taken out of the QIAIF and invested elsewhere to generate a higher expected return ^/^^ Source Mercer 8

9 3 MARKET CONDITIONS AND OUTLOOK

10 EVENTFUL 2018 TRADE WAR, YIELD PICK-UP AND UNCERTAIN MARKETS Era of higher volatility? Volatility levels rose sharply in 2018 and subsided until Q However, the VIX saw an uptick in October 2018 CBOE S&P 500 VIX Asset yields (%) Equities yield higher UK Equities now yield more in comparison to UK investment grade bonds Mar-17 Equity markets saw some correction in early-2018 but started on an up-move post that, however, slowed in October FTSE 100 Oct Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 UK BBB rated bonds UK A rated bonds UK AA rated bonds UK AAA rated bonds UK 10Y gilts FTSE 100 FTSE All Share Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Risk premium for FTSE 100 has widened consistently since start of % Jan-09 Oct-18 Bond yields saw some stability post the rapid pick-up at the start of the year. However, in October, bond yields rose UK 20 year Gilt yield Jan-09 Oct-18 Central banks are turning hawkish Fed forecasts one more hike in 2018 and three for 2019 BoE & ECB Turning hawkish with ECB to stop bond buying Note: Yields refer to yield to maturity for bonds and earnings yield for equities. Earnings yield refer to reciprocal of the trailing PE ratio of the index. Risk premium is the spread between earnings yield of an equity index and nominal gilt yield. Central Banking actions BoE stance as UK proceeds through Brexit? Whether Fed is able to maintain its pace of tightening? ECB and the end of QE in Europe KEY THEMES IN H Global growth and inflation Weakening global growth rate Inflation seems to pick up in developed economies Trade war jitters US-China trade relations can impact both nations Increased uncertainty in the markets Sentiments related to impact on China can spill-over to other Asian EMs Jan-16 Muted return expectations High valuations point towards muted returns 5.1% Oct-18 Risk-on sentiment and momentum in risk assets to prevail in the absence of a trigger Source: Bloomberg 10

11 ECONOMIC CYCLE WHERE DO THE MAJOR ECONOMIES OF THE WORLD STAND? Recovery Expansion Downturn Recession US Robust GDP growth Rising inflation Credit growth slightly moderated Higher M&A activity Monetary policy tightening Russia Moderate GDP growth Rising inflation Monetary policy neutral UK Moderate GDP growth Rising inflation Credit growth moderated Rise in M&A activity Monetary policy key MPC members sound hawkish Brazil Moderate GDP growth Rising inflation Modest Credit growth Moderated M&A activity (to rise after elections) Monetary policy neutral Europe Moderate GDP growth Improving inflation Increased credit growth Upbeat M&A activity Monetary policy Bond purchases to stop, turning hawkish India High GDP growth Moderate inflation; likely to rise Rising credit growth High M&A activity Monetary policy neutral Rising trade deficit Japan Moderate GDP growth Rising inflation - levels still low Credit growth increased slightly Rise in M&A activity Monetary policy continuing with QE, turning hawkish China Moderate GDP growth Rising inflation Credit growth (regulatory roadblocks) Rise in M&A activity Monetary policy -Accommodative 11

12 GLOBAL GROWTH ON TRACK? WEAKENING OF SYNCHRONISED GLOBAL GROWTH Global key indicators are slowing EM debt-to-gdp increases, while Advanced Economies (AE) remain flat (in %) Downside risks to global growth have risen over the last few months amidst the possibility of a trade war. This is reflected in the economic policy uncertainty index. Global Economic Policy Uncertainty Index (LHS) JP Morgan's Global Composite PMI (RHS) EMs (LHS) AEs (RHS) Global debt-to-gdp ratio, which is already at a high level, is expected to increase further. Note: Political Uncertainty Index: Note: Credit to Non-financial sector as a % of GDP Except for the US, most countries slowed or stagnated. However, global economic growth would not be sustainable if advanced economies, such as Europe and Japan, do not perform. Real GDP (y-o-y %) Net profit margin (%) 10 8 This has resulted in divergent monetary policies between Advanced Economies (AE) and Emerging Markets (EM) US (LHS) Japan (LHS) Euro area (LHS) UK (LHS) China (RHS) 2 S&P 500 Index EuroStoxx 600 Index FTSE 100 Index MSCI EM Index Nikkei 225 Index Any further monetary tightening in AEs would worsen the financial conditions in EMs. Source: Bloomberg,BIS 12

13 SCENARIO ANALYSIS CENTRAL SCENARIO Summary In the third quarter of 2018 we are witnessing: The optimistic view of strong and synchronized global growth that was being priced in of-late by the financial markets may not be the reality anymore, as material interruptions have come into the fore in the latest quarter. While the Market Forecast Group does not foresee a recession right around the corner, we believe that it is unlikely that we will see economies growing and asset classes yielding at rates envisaged previously. The only bright spot amongst the developed economies is US which has managed to consistently churn out positive macro-economic data. While the Federal Reserve has signaled continuation of its tightening cycle with two more rate hikes in 2018, economic growth in the US may still face two key impediments lack of support from the fiscal policy front and interruptions due to a trade war. The UK on the other hand face a lot of uncertainty, primarily in terms of development of Brexit related events, Bank of England s monetary policy and real economic growth. In our central scenario, we believe a Soft Brexit outcome will transpire, resulting in favourable trade agreements and mobility terms, despite some areas of ambiguity. We believe that we are in an era of muted returns for risk assets, which will be driven by the risk premia, while interest rate sensitive lower risk assets may see negative returns as the tightening cycle progresses. SHORT TERM: 0 to 3 years UK Gilts: Rising base rates Inflation: Impact of rising crude prices and depreciation factored in Risk assets: Low growth environment with event risk, but risk on sentiment LONGER TERM: 5+ years UK Gilts: Low yields impact future returns Risk assets: Risk premia to support longer term returns although current high valuations may dampen such returns Analysis and Key Issues Low yields represent low growth expectations, exacerbated by political uncertainty, limiting short to medium term asset returns Risk on sentiment remains although somewhat reduced in the wake of the recent developments President Trump s tax bill supports equity prices but tariff plans are counter productive In particular, central banks remain ready to react Brexit uncertainties remain at large 13

14 ECONOMIC AND MARKET OUTLOOK JLT MFG - ALTERNATIVE SCENARIO ANALYSIS # Events UK Equity UK Bonds Global Equities Global Bonds EM Equities EM Bonds High Yield Bonds Probability of Event 1 Exacerbation of US-China Trade war situation 2 Fall-out on the Brexit front 3 Fed tightens too quickly 4 BoE tightens too quickly 5 Slower global growth and earnings slack 6 Euro area risks Fragmentation/Protectionism Sovereign credit risk in Italy 7 Strengthening dollar and plunging EM currencies 8 Crude prices moving above USD 80/bbl 9 A united US, EU and Japan against China - impact on the country s ability to export, sustain GDP and service its high debt levels Note It is important to realise that the scenarios presented here are not mutually exclusive. The colours shown represent the direction of impact rather than the relative severity of any movement. This analysis is relatively short term and therefore does not include the potential positive impacts in the long term of an orderly and mutually beneficial UK exit from the EU. 14

15 HOW ARE CURRENT RISKS VIEWED? RISK ENVIRONMENT Current Outlook The developed equity markets witnessed upward pressure amid a volatile quarter on account of supportive economic data. Emerging markets, on the other hand, recorded a sharp fall due to rally in US Dollar and escalation in global trade tensions. Concerns about political risk as the US President pushes for tariffs on another $200 billion imports from China and anticipated rise in interest rates are expected to bring volatility into the markets. Credit risk increased over the quarter as investors grew cautious with rising interest rates and the shift from quantitative easing to quantitative tightening. Liquidity risk continued to increase over the quarter primarily as central banks in most developed economies started to turn hawkish. Type of Risk Perceived Risk Market Risk Credit Risk Liquidity Risk Like most other indicators, the presented indicators are not definitive in nature but they can help in confirming or rejecting our assumptions about the current market movements and the underlying sentiment governing those movements. 15

16 INVESTMENT STRATEGY REVIEW

17 2019 ANOTHER IMPORTANT STRATEGY REVIEW KEY OBJECTIVES Desired outcomes 1 Understand the current investment climate and potential impact of decisions to be made 2 Enable the Officers, Actuary and other stakeholders to understand and quantify the Fund s current position 3 Review the suitability of the existing investment strategy 4 Understand the impact on both risk, expected returns and cost of adopting various asset allocations 5 Propose an appropriate investment strategy to the Officers and Fund Actuary for discussion 6 Present the revised proposals to the Committee 17

18 QUESTIONS?

19 CONTACT INFORMATION Kieran Harkin E: T: +44 (0) Nick Buckland E: T: +44 (0) Whilst all reasonable care has been taken in the preparation of this presentation no liability is accepted under any circumstances by Jardine Lloyd Thompson for any loss or damage occurring as a result of reliance on any statement, opinion, or any error or omission contained herein. Any statement or opinion unless otherwise stated should not be construed as independent research and reflects our understanding of current or proposed legislation and regulation which may change without notice. The content of this document should not be regarded as specific advice in relation to the matters addressed. JLT Benefit Solutions Limited. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No VAT No