Managing Equity risk for Retirees. David Itzkovits Head of Investments, Sanlam Global Investment Solutions

Transcription

1 Managing Equity risk for Retirees David Itzkovits Head of Investments, Sanlam Global Investment Solutions

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3 Retirement Equity Risks

4 Known risks Retirement Equity Risks Classical Finance

5 Classical Finance Rational Wealth maximisers Prices always reflect fair value Result = Efficient Markets

6 Is that the whole story?

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8 64%

9 44%

10 148%

11 Overlooked risks Retirement Equity Risks Classical Finance Behavioural Finance

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15 Anchoring

16 Anchoring

17 loss aversion

18 Loss Aversion

19 Scenario 1 Give you $1,000 Option 1 Heads you gain $1,000 more Tails you gain $0 more Option 2 You gain $500 more Scenario 2 Give you $2,000 Option 1 Heads you lose $1,000 Tails you lose $0 Option 2 You lose $500 guaranteed

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22 Overconfidence

23 Source: Haigh, M. S., & List, J. A. (2005). Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis. Journal of Finance, 60(1),

24 Font: Arial ( NO OTHER FONTS TO BE USED!!!) The use of italics are allowed but only in a general paragraph context and not to highlight or eccentuate in large size text. Use bold and colour to highlight information Spacing This is discretionary, and the text setting should be normal or 1.1, keep it consistent throughout the doc Size Slide headings: 30pt Body text: Relevant to the amount of content you wish to display per slide Section Headings: 44 60pt (relevant to the content) Please keep all the font sizes consistent. Bullets Primary supplied in the template Secondary ( ) Keep all bullet sizes consistent Colour Use only the supplied range of colour. If additional colours are required, you can use shades of gray. Please refrain from using black when you create new tables, graphs or diagrams Capitalisation Intro slides, section dividers and slide headers = lower case Content = sentence case Please refrain from using additional icons outside of the supplied range/style. Graphs / Tables: Placement: Centered within the white space between the two black bars Font size: 12 pt ( this size will be relevant to the amount of content displayed) Grid lines within graphs should be removed as far as possible. Format of dates on graphs? Horizontal/vertical 30/03/2009 Internally sourced graphs / tables MUST be updated to the new palate (externally sourced graphs/tables are exempt) Table make-up: All Borders black, 0.25pt weight Headers: Fill with colour (primary blue) with reversed out text (white) Do not use any gradients, bevel, emboss or shadows option when creating new elements. Do not use tables, graphs or any other data as full page pictures covering the entire slide Source placement: Bottom left 8pt (size), black Divider slides Half page block option: Use text right aligned to the word Sanlam Page numbers: Do not add in your own page numbers If required, use the supplied page number function on the bottom right corner. Font size 9pt PRINTING A4 landscape will appear widescreen Aa SIM Enhanced Yield Fund Category: Fund Investable Assets: Risk Profile: Minimum Time Horizon: SA Interest Bearing Short Term Local Cash, Government Bonds, Corporate Bonds, Inflation Linked Bonds Conservative 1 Year Benchmark: STEFI + 0.5% Fund Size: 3 M 6 M 1 Yr 2 Yrs SIM Enhanced Yield Investec STeFI Plus A Coronation JIBAR Plus STANLIB Enhanced Yield A STeFI Composite ZAR Beassa ALBI TR ZAR R2.6 BN Icons

25 Font: Arial ( NO OTHER FONTS TO BE USED!!!) The use of italics are allowed but only in a general paragraph context and not to highlight or eccentuate in large size text. Use bold and colour to highlight information Spacing This is discretionary, and the text setting should be normal or 1.1, keep it consistent throughout the doc Size Slide headings: 30pt Body text: Relevant to the amount of content you wish to display per slide Section Headings: 44 60pt (relevant to the content) Please keep all the font sizes consistent. Bullets Primary supplied in the template Secondary ( ) Keep all bullet sizes consistent Colour Use only the supplied range of colour. If additional colours are required, you can use shades of gray. Please refrain from using black when you create new tables, graphs or diagrams Capitalisation Intro slides, section dividers and slide headers = lower case Content = sentence case Please refrain from using additional icons outside of the supplied range/style. Graphs / Tables: Placement: Centered within the white space between the two black bars Font size: 12 pt ( this size will be relevant to the amount of content displayed) Grid lines within graphs should be removed as far as possible. Format of dates on graphs? Horizontal/vertical 30/03/2009 Internally sourced graphs / tables MUST be updated to the new palate (externally sourced graphs/tables are exempt) Table make-up: All Borders black, 0.25pt weight Headers: Fill with colour (primary blue) with reversed out Herding text (white) Do not use any gradients, bevel, emboss or shadows option when creating new elements. Do not use tables, graphs or any other data as full page pictures covering the entire slide Source placement: Bottom left 8pt (size), black Divider slides Half page block option: Use text right aligned to the word Sanlam Page numbers: Do not add in your own page numbers If required, use the supplied page number function on the bottom right corner. Font size 9pt PRINTING A4 landscape will appear widescreen Aa SIM Enhanced Yield Fund Category: Fund Investable Assets: Risk Profile: Minimum Time Horizon: SA Interest Bearing Short Term Local Cash, Government Bonds, Corporate Bonds, Inflation Linked Bonds Conservative 1 Year Benchmark: STEFI + 0.5% Fund Size: 3 M 6 M 1 Yr 2 Yrs SIM Enhanced Yield Investec STeFI Plus A Coronation JIBAR Plus STANLIB Enhanced Yield A STeFI Composite ZAR Beassa ALBI TR ZAR R2.6 BN Icons

26 Equity flows vs performance Buying high Selling low

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28 Denied risks Retirement Equity Risks Classical Finance Behavioural Finance Cognitive Aging

29 Cognitive Function Cattell, 1987

30 Economic Problem Solving Choi, Kariv, Müller, and Silverman, 2014

31 Economic Problem Solving Choi, Kariv, Müller, and Silverman, 2014

32 Economic Problem Solving Choi, Kariv, Müller, and Silverman, 2014

33 Memory & Analytic Tasks Source for data: Salthouse Source for data: Salthouse

34 APR by Borrower Age Source: Agarwal, Driscoll, Gabaix, and Laibson (2009)

35 Annual Characteristic - Adjusted Performance Level & Differential Investment Performance 3 2 Performance Level Performance Differential Below Above 72 Age Source for data: Korniotos and Kumar

36 Where is wealth concentrated?

37 Balance sheet of households Dollars in trillions USA Australia Assets $95.4 $8.4 Tangible $28.4 $5.5 Financial $67.0 $2.9 Liabilities $13.9 $1.3 Net Worth $81.5 $7.1 Population 323 million 29 million US data source: Federal Reserve Flow of Funds (2014) Aus data source: Australian Bureau of Statistics - Survey of Income and Housing, User Guide, Australia Population data is based on live data from the United Nations.

38 Distribution of wealth USA Australia Age Percent of Families Percent of Wealth Percent of Wealth > % 2.9% 7.8% % 11.2% 11.9% % 19.4% 20.2% % 27.9% 21.2% % 25.5% 22.6% % 12.9% 16.3% US data source: Survey of Consumer Finances (2013 wave) Aus data source: Grattan analysis of ABS (2013c)

39 Distribution of wealth USA Australia Age Percent of Families Percent of Wealth Percent of Wealth > % 2.9% 7.8% % 11.2% 11.9% % 19.4% 20.2% US data source: Survey of Consumer Finances (2013 wave) Aus data source: Grattan analysis of ABS (2013c) 42.3% 66.3% 60.1%

40 Retirement Challenge Pre- & post-retirement High cash/fixed income Short time horizon BUT still need to grow wealth Need to stretch money BUT can t take risk Want higher returns BUT afraid of equities Afraid of capital losses from interest rate rises in fixed income

41 Investors walk a fine line Risk of NOT BEING invested Risk of BEING invested

42 Why are investors afraid of equities? Source: Financial Express. Basis: Base Currency Total Return. Past performance is no guarantee of future results. 42

43 Markets are volatile S&P ASX 200 Calendar Year Returns vs. Intra-year Declines Despite average intra-year drops of 14.0%, annual returns positive in 18 of 23 years* Return Drawdown Source: SGIS, Bloomberg. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1993 to 2014

44 Markets are volatile S&P ASX 200 Calendar Year Returns vs. Intra-year Declines Despite average intra-year drops of 14.0%, annual returns positive in 18 of 23 years* Return Drawdown Source: SGIS, Bloomberg. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1993 to 2014

45 Traditional Risk Management = Diversification S&P 500 INDEX MSCI WORLD FTSE 100 INDEX HFRX Global Hedge Fund FTSE EPRA/NAREIT Develop JPMORGAN Global Aggregate Bond Index 40 Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 P2strategies Global Fund

46 Is there a solution?

47 Attributes of next generation Risk Management Traditional Risk Management Next Generation Investment Purpose Source for data: Sanlam Global Investment Equity returns over a cycle with reduced risk Equity returns over a cycle with reduced risk Primary Growth Asset Equities Equities Investment Process Discretionary Systematic Subject to Human Emotion Yes No Risk Management Strategy Diversification Dynamic Protection Equity Allocation Restricted (45-75%) Flexible (10-90%) Primary Protection Asset Bonds Cash & hedging (No bonds) Risk of - Bond Bear Market High N/A Risk of - Asset Correlations High Low Behavioural Predictability Low High Differentiation from other solutions Low High

48 Help Address Retirement Equity Risks Classical Finance Behavioural Finance Cognitive Aging

49 Help Address sequencing & longevity risk Withdrawal rate = 5% per year Colonial First State Wholesale Indexed Global Share Fund Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Source for data: Bloomberg and Milliman. 01 Jan 2004 to 15 May These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.

50 Help Address sequencing & longevity risk Sanlam Managed Risk Global Share Fund Class A Colonial First State Wholesale Indexed Global Share Fund Withdrawal rate = 5% per year 50 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Source for data: Bloomberg and Milliman. 01 Jan 2004 to 15 May These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.

51 Help Address sequencing & longevity risk Sanlam Managed Risk Global Share Fund Class A Colonial First State Wholesale Indexed Global Share Fund Withdrawal rate = 5% per year $7,000 or 1.4 years of additional withdrawals % Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15-29% 149, ,538 Source for data: Bloomberg and Milliman. 01 Jan 2004 to 15 May These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.

52 SMR Funds Confidence to stay invested

53 $100 Auction Silence is in effect Real Money First bid is $5, and bids go up $5 at a time You cannot bid twice in a row Highest bidder gets the $100 for his/her bid Second highest bidder pays his/her bid, and gets nothing in return

54 SMR Funds Confidence to stay invested Questions

55 Balance Transfer Credit Card 1 Balance: $10k APR: 15% Credit Card 2 Balance: $10k APR: 0% on balance transfer APR: 20% on new transactions

56 Balance Transfer Ploy Source: Agarwal, Driscoll, Gabaix, and Laibson (2009)

57 Thank you

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59 Disclaimer SMSF Association 2016 This presentation is for general information only. The material and opinions in this presentation are those of the author and not those of the SMSF Association. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.