Survival of the Fittest

Transcription

1 Survival of the Fittest The Evolution of Investment Strategies Chris Wood Pensions Investment Manager Michelin Tyre plc 17 May 2011

2 Evolution of Investment Strategies What has changed since 1990? Where are we now? Where are we headed? Any views expressed in this presentation are my own and do not necessarily reflect the views of my employer

3 Pension Scheme Asset Allocation 1990 to % 90% 80% 70% 60% 50% 40% Property Cash / Other Overseas Bonds Index Linked Gilts UK Fixed Interest Overseas Equities UK Equities 30% 20% 10% 0%

4 Pension Scheme Asset Allocation UK Equities 1990 to % +10% +18% Overseas Equities Gilts Fixed & Index Linked

5 The Decline of UK Equity Allocations Diversification of return seeking assets Overseas equities Global equities including emerging markets Alternatives Concentration risk Top 10 companies represent c. 40% of the All Share Index Gordon Brown removal of dividend tax relief in 1997 Increasing scheme maturity and risk awareness leading to increased allocations to bonds

6 Annualised Returns % per annum Investment Performance 1990 to % 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% UK Equities Overseas Equities (in ) UK Fixed Interest Gilts Index Linked Gilts Cash Property

7 Mar-90 Sep-90 Mar-91 Sep-91 Mar-92 Sep-92 Mar-93 Sep-93 Mar-94 Sep-94 Mar-95 Sep-95 Mar-96 Sep-96 Mar-97 Sep-97 Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Yield % Gilt Yields 1990 to Fixed Interest Gilt Yield 10 year Index Linked Gilt Yield

8 % Gilt Yields and Inflation 1990 to Fixed Interest Gilt Yield 10 year Retail Price Inflation Mar-90 Sep-90 Mar-91 Sep-91 Mar-92 Sep-92 Mar-93 Sep-93 Mar-94 Sep-94 Mar-95 Sep-95 Mar-96 Sep-96 Mar-97 Sep-97 Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11-4

9 Performance of Equities v Gilts 1990 to UK Equities Fixed Interest Gilts

10 Effective Decision Making The investment world has become much more complex for trustees 1990 Balanced mandates; one or two investment managers; UK equities over 50% of assets; peer group benchmarks 2000 Specialist mandates; larger number of managers; peer group benchmarks 2011 Increased awareness of risk especially relative to liabilities; greater diversification; alternative asset classes; Liability Driven Investment, including use of derivatives; scheme specific benchmarks

11 Where are we now? Risk reducing assets Liability Driven Investment To implement or not to implement, that is the question? Fixed interest gilt yields lowest they have been since 1950s Real yields on index linked close to all time low Economic recovery and unwinding of Quantitative Easing may lead to higher yields and higher inflation Long dated swaps yielding less than gilts What are people doing? Setting triggers for implementation at higher yields Gilt repos or gilt total return swaps Switching swaps to gilts

12 Gross Redemption Yield % Yield Curve Fixed Interest Gilts 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Jul-11 Jul-13 Jul-15 Jul-17 Jul-19 Jul-21 Jul-23 Jul-25 Jul-27 Jul-29 Jul-31 Jul-33 Jul-35 Jul-37 Jul-39 Jul-41 Jul-43 Jul-45 Jul-47 Jul-49 Jul-51 Jul-53 Jul-55 Jul-57 Jul-59 Redemption Date

13 Where are we now? Equities Unconstrained equity portfolios Best ideas stock selection little or no attention paid to index weighting of stocks/sectors/region Global Emerging markets Passive management returning to favour? Have active managers earned their fees? Fundamental indices Based on economic fundamentals of companies (eg sales, balance sheet size) rather than market capitalisation Avoids overweighting overvalued stocks and underweighting undervalued stocks Outperformed market cap indices by 2% pa over 5 years and by 2-4% p.a. in back tests (Source: Research Affiliates)

14 Hedge funds Where are we now? Alternatives More correlated to equities than we thought? /31/ /29/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ /30/ /31/ /31/ /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ /30/ /31/ /31/ /28/ /31/ /30/ /31/ /30/ /31/ /31/ /30/ /31/ /30/2010 Hedge Fund Research Composite Index $ MSCI Developed World Index (local currency) 12/31/ /31/ /28/ /31/ /30/2011

15 Alternatives (continued) Private equity Shortage of credit for heavily geared deals Less reliance on financial engineering Property Going global Infrastructure Theoretically ideal for pension funds How to implement? Finding the right vehicle Gold Win/win? Some say it will do well in economic recovery as an inflation hedge OR in economic slump due to safe haven status

16 Alternatives (continued) Commodities Inflation hedge? Diversification Emerging market growth esp. China Emerging market local currency debt High yields; scope for lower spreads Currency appreciation Mezzanine debt Distressed debt Insurance linked products eg catastrophe insurance Uncorrelated to other markets

17 Where are we headed? Fiduciary Management aka Implemented Consulting, delegated consulting, delegated investment.. Difficulties for trustees Need to get back to full funding BUT Lack of time Lack of expertise Increasing cost and complexity of advice and implementation Don t meet often enough Need for more dynamic implementation Don t miss the boat

18 Fiduciary Management Consultant to help set strategic objective? Trustees: Set the strategic objective Set the risk budget Set the permitted asset classes Monitor Fiduciary Manager s performance Consultant to help monitor Fiduciary Manager? Investment Managers Fiduciary Manager: Implements the strategy Tactical asset allocation Risk management derivative overlays Selects & monitors investment managers Investment Managers

19 Where are we going? DC Target Date Funds National Employment Savings Trust (NEST) will have target date funds as default Similar to traditional Lifestyle structures but: Three phases compared to usual two Transition between the different phases will be dynamically managed on the basis of what is happening in financial markets and the economy. * * Quote from Developing and delivering NEST s investment approach published by NEST

20 NEST Target Date Funds 3 Phases - illustrative Foundation Growth Consolidation Income seeking assets Return seeking assets Annuity matching assets Age

21 NEST s Investment Beliefs Understanding member characteristics, circumstances and attitudes is essential to developing an appropriate investment strategy Incorporate Ethical Social and Governance (ESG) factors into investment process Taking investment risk is usually rewarded in the long term Diversification is key tool for managing risk and return Risk derived asset allocation is the biggest determinant of long term performance Analysis of economic conditions and market regimes should drive strategic decisions Passive management generally delivers better value for money than active security selection Paraphrased from Developing and delivering NEST s investment approach published by NEST

22 Survival of the Fittest Adapt and survive More diversification of assets Implementing LDI Is Fiduciary Management the answer? Are Target Date Funds the future for DC?