Investment Strategy Webinar. July 17, 2013

Transcription

1 Investment Strategy Webinar July 17, 2013

2 Presenters Bob Penter, CFA, Partner Pension Risk Management Phone: Lucinda Downing, Sr. Research Analyst Global Asset Allocation Team Phone: Francois Otieno, Senior Consultant GIM / Fixed Income Phone: francois.otieno@aonhewitt.com Beth Hanig, Associate Partner Investment Consulting Phone: beth.hanig@aonhewitt.com Saif Choudhury, Consultant Investment Solutions Phone: saif.choudhury@aonhewitt.com 2

3 Discussion Topics Opening Remarks Market Outlook: Focus on Recent Volatility Spotlight on Fixed Income Thought Leadership Solution Packages Overview Defined Contribution Lifetime Income Solutions Closing Remarks Q&A Session 3

4 Market Outlook: Focus on Recent Volatility Lucinda Downing

5 Global Economic Environment Remains Weak Macroeconomic support for equities is not strong However, economic news flow has improved. Even the struggling UK and Eurozone economies have delivered positive surprises. China, however, continues to report weak economic data Good US jobs data and rising house prices but fiscal cuts have hit economic activity Citigroup Economic Surprise Indicator (G10 economies) Mixed US Economic Indicators Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun Manufacturing ISM Non-manufacturing ISM 48 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 5

6 Equities are Focused on the Short-Term S&P500 makes new highs 6% US equity market correction, but now back to all time highs - 25% on year-ago levels Fed s tapering statement on May 22 nd was nothing new, but markets appear to have been unprepared for it Valuations Cheapening Emerging market valuations as a ratio to developed Emerging markets more expensive Market has returned to short-term focus and is once again ignoring the challenge of less stimulus in the future Emerging markets continue to fall but, as a consequence, valuations have become compelling Emerging markets cheaper Source: Datastream 0.4 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Price to Book Ratio Forw ard Price-Earnings Ratio 6

7 Pronounced Move Up in Bond Yields 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% US real yields have risen more than nominal yields 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% Bond yields rose strongly since May and are now back up to levels last reached in August 2012 TIPS real yields are up significantly (120bp rise in real yields since April) Relative move indicates more confidence in the economic recovery 0.0% -1.5% Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun year US Treasury 10 year US Index Linked Treasury Market Aon Hewitt expectation Expectation* 20yr duration Increase from today Increase from today Now 3.5% In 1yrs 4.0% 0.5% 0.2% In 3yrs 4.3% 0.8% 0.5% In 5yrs 4.7% 1.2% 0.7% We expect some correction to this upward move, although multi-year bond bear market will remain intact We have increased our yield expectations over next 5 years as the risk of a policy error has increased * Based on end June 2013 yield curve 7

8 Uncertain Future is Not Fully Reflected in Markets Equity volatility has rapidly fallen from June peak Equity volatility has fallen with new highs reached by S&P 500 Falling gold price reflects market perception of low risk of extreme events FX markets have been destabilized by the huge move in the Yen and emerging currencies Jan 2013 Feb 2013 Mar 2013 Apr 2013 May 2013 Jun 2013 Jul 2013 Excessive bullish sentiment vulnerable to further upsets Currency volatility has moved up 2000 Gold price is trending down Source: Deutsche Bank s CVIX 8

9 Which Uncertainties Dominate? Will global economic conditions hold up? Major economic downside risk is small as long as yields rise gradually How disruptive will the sovereign bond environment be? This is a bigger risk than macro risk Will monetary stimulus be withdrawn in an orderly way? QE stimulus to continue for another year as economic removal conditions not yet achieved. Move to higher rates is a long way out We expect equities will avoid a period of sustained decline BUT underlying trend in equities is turning flatter as the risk-reward in equities has deteriorated We don t anticipate a bond market meltdown. Yields are likely to normalize over several years Uncertainties around monetary policy mean that there is likely to be more equity and bond market volatility 9

10 Spotlight on Fixed Income Francois Otieno

11 Fixed Income Market Review Index Returns 3.0 Index Returns 1.0 June 2013 Returns (%) Month YTD (June 2013) Barclays Aggregate Barclays Long Govt/Credit BofA ML US High Yield Master II CS Leveraged Loan JPM EMBI Global Diversified JPM GBI-EM Global Unhedged JPM CEMBI Sources: evestment, Barclays Live 11

12 Manager Performance by Strategy Type: Bank Loans Bank Loans 4.0% 3.0% 2.0% Returns 1.0% 0.0% -1.0% Average Return CSAM Leveraged Loan Index Average Excess Return -2.0% -3.0% -4.0% June Q2 YTD Sources: evestment, Managers 12

13 Manager Performance by Strategy Type: EMD EMD Blended 0.0% -1.0% Returns -2.0% -3.0% -4.0% Average Return JPM EMD Custom Weighted Index* Average Excess Return -5.0% -6.0% -7.0% -8.0% June Q2 YTD Sources: evestment, Managers *50% JPM EMBI Global Diversified, 40% JPM GBI-EM Global Unhedged, 10% JPM CEMBI 13

14 Manager Performance by Strategy Type: Unconstrained Unconstrained 4.0% 3.0% 2.0% Returns 1.0% 0.0% -1.0% Average Return Barclays Aggregate Index Average Excess Return* 3-Month LIBOR** -2.0% -3.0% -4.0% June Q2 YTD Sources: evestment, Barclays Live, Managers *Against the Barclays Aggregate **Standard Benchmark 14

15 Opportunities Within Fixed Income Going Forward Managers have generally characterized this recent sell off as a re-pricing of risk, which is vastly different from what we experienced in the last credit cycle of 2007/2008 In general, managers are staying the course but are selectively taking advantage of investment opportunities in light of the recent market pullback HEK continues to advocate Bank Loans; EMD; and Unconstrained Bond Strategies 15

16 Portfolio Implications for Switching from BC Aggregate to the BC Intermediate Index Portfolio Implications Investors looking to manage the volatility of the return-seeking portfolio should consider investing the risk-reducing portfolio in intermediate fixed income For those that are concerned about cash flow yield, recognize the yield reduction relative to the volatility reduction is minimal Reposition from Aggregate Index to Intermediate Aggregate Index Shorten the duration by 1.35 years Yield reduction of 30 basis points One year breakeven yield change is only 22 basis points Implementation Considerations Separate account clients could switch their BC Aggregate mandate to the Intermediate Aggregate Index with the same manager There are also a number of Mutual Fund and/or Commingled Fund options available 16

17 Defined Contribution Lifetime Income Solutions Beth Hanig Saif Choudhury 17

18 What is Retirement Income? Type of Option Managed Payout Existing Funds Managed Payout New Fund Deferred Guaranteed Monthly Withdrawal Benefit Deferred Guaranteed Monthly Income Benefit Deferred Fixed Annuity Traditional annuity End of Plan* Annuity Platform* Longevity Insurance* * Out of Plan Annuity Options 18

19 Current Market Plan Sponsor 2013 priorities (highest to lowest)* Participation Rates Diversification Leakage Savings Rates Retirement Readiness Distributions (retirement income) Regulatory / Fiduciary Issues Treasury Department proposed guidance on lifetime income options Government continue not to mandate, but to encourage Current Safe Harbor passed in 2008 provides greater fiduciary clarity Due diligence assistance is paramount Counterparty risk is top of mind * 2013 Aon Hewitt Hot Topics in Retirement 19

20 Plan Sponsor Adoption* Last year, plans sponsors continued to add new lifetime income options. The largest increase was managed payout with drawdown feature (9%). In-plan annuity additions were flat. Prevalence Currently Available Plans for 2013 Among Those Not Already Offering Online modeling tools retirement planning 61% Online modeling tools retirement planning 14% 44% Distributions from plan/auto payment 37% Distributions from plan/auto payment 6% 18% In-plan managed accounts with drawdown feature 19% In-plan managed accounts with drawdown feature 6% 20% Annuities outside the plan 13% Annuities outside the plan 3% 16% In-plan managed payout funds 12% In-plan managed payout funds 2% 12% In-plan Annuity 10% In-plan Annuity 1% 14% Ability to transfer assets to a DB plan to receive annuity 3% Ability to transfer assets to a DB plan to receive annuity 5% Already offer Very likely in 2013 Somewhat likely in 2013 * 2013 Aon Hewitt Hot Topics in Retirement 20

21 Fiduciary Implications The selection of an annuity provider for benefit distributions from an individual account plan satisfies the requirements of section 404(a)(1)(B) of ERISA if the fiduciary complies with the following criteria Criteria for selection process includes: 1. Engaging in objective, thorough, analytical search 2. Assessing insurers future claim paying abilities 3. Considering all fees relative to benefits under contract 4. Assessing whether insurer is financially viable at time of selection 5. Consulting with expert(s) to assist with assessment as necessary 21

22 Projected Income by Age All Options Expected, Downside, and Upside Scenarios $80,000 Annual Income for All Options 50th Percentile $70,000 $60,000 Annual Income $50,000 $40,000 $30,000 $20,000 $10,000 $ Age 4% Systematic Withdrawal GMWB Age 65 Annuity Managed Account Annual Income for All Options 5th Percentile Annual Income for All Options 95th Percentile $35,000 $180,000 $30,000 $160,000 $140,000 Annual Income $25,000 $20,000 $15,000 $10,000 Annual Income $120,000 $100,000 $80,000 $60,000 $40,000 $5,000 $20,000 $ $ Age Age 4% Systematic Withdrawal GMWB Age 65 Annuity Managed Account 4% Systematic Withdrawal GMWB Age 65 Annuity Managed Account 22

23 Projected Account Balance (Bequest) by Age All Options Expected, Downside, and Upside Scenarios $1,000,000 $900,000 $800,000 Account Balance for All Options 50th Percentile Account Balance $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $ Age 4% Systematic Withdrawal GMWB Age 65 Annuity Managed Account Account Balance for All Options 5th Percentile Account Balance for All Options 95th Percentile $450,000 $3,500,000 $400,000 $3,000,000 $350,000 Account Balance $300,000 $250,000 $200,000 $150,000 $100,000 Account Balance $2,500,000 $2,000,000 $1,500,000 $1,000,000 $50,000 $500,000 $ $ Age Age 4% Systematic Withdrawal GMWB Age 65 Annuity Managed Account 4% Systematic Withdrawal GMWB Age 65 Annuity Managed Account 23

24 Percentile of Income by Age All Options Multiple of Final Pay, Inflation-Adjusted 4% Systematic Withdrawal Age 65 Annuity 100% 100% 90% 90% Annual Income as a % of Final Pay (adjusted for inflation) 80% 70% 60% 50% 40% 30% 20% 10% Annual Income as a % of Final Pay (adjusted for inflation) 80% 70% 60% 50% 40% 30% 20% 10% 0% % Age Age 5% to 10% 10% to 25% 25% to 50% 50% to 75% 75% to 90% 90% to 95% 5% to 10% 10% to 25% 25% to 50% 50% to 75% 75% to 90% 90% to 95% GMWB Managed Account 100% 100% 90% 90% Annual Income as a % of Final Pay (adjusted for inflation) 80% 70% 60% 50% 40% 30% 20% 10% Annual Income as a % of Final Pay (adjusted for inflation) 80% 70% 60% 50% 40% 30% 20% 10% 0% % Age Age 5% to 10% 10% to 25% 25% to 50% 50% to 75% 75% to 90% 90% to 95% 5% to 10% 10% to 25% 25% to 50% 50% to 75% 75% to 90% 90% to 95% 24

25 Our Advisory Position Generally supportive of Lifetime Income options DC plans will become critical source for generating retirement income Product landscape has evolved Major corporations have began to implement these solutions Government has provided solid fiduciary guidance and support Initial concerns are being mitigated Greater fee transparency and improved portability through middleware Lower counterparty risk through better risk structures Design changes through integration with target date funds Sponsors need to continue assessing these options Contemplate non-insurer and insurer solutions Need to assess the right time to add these options Assess any short term and long term fiduciary implications 25

26 Retirement Income Implementation Plan Process Steps Phase One: General Overview, Scoping and Asset Class Decision Making Phase Two: Product Analysis and Review Phase Three: Final Fiduciary Analysis, Product Manufacturer Meeting and Finalist Interviews Phase Four: Recordkeeping and Product Implementation Goals and Objectives Review the current market and trends Understand the asset classes Focus on optimal plan design and participant needs Determine most suitable asset classes for further review Understand detailed due diligence on asset classes Review of products and nuances Focus on plan demographics and need Understand Safe Harbor guidance and fiduciary implications Review benchmarking rules and participant disclosures Contemplate future on-going due diligence requirements Meet with income providers and select best solution(s) Focus on Participant Experience and Integration Review Participant Communication Discuss Rollout Strategy Review and understand timeframe for Record-keeper implementation 26

27 Closing Remarks Bob Penter, CFA

28 Question & Answer Questions may be submitted at any time during the web seminar by typing the question in the "Ask a Question" text field and clicking "Submit." Questions will be answered live as time permits during the question and answer session. 28

29 Our next investment strategy update call is scheduled for Wednesday, August 21, at 10 a.m. CDT. 29