PERFORMANCE FACTSHEET JUNE 2018

Transcription

1 PENSION INVESTMENT APPROACHES PERFORMANCE FACTSHEET JUNE 2018 This information is for UK financial adviser use only and should not be distributed to or relied upon by any other person.

2 AT THE HEART OF OUR GROUP PENSION PROPOSITION IS OUR CORE INVESTMENT OFFER A CHOICE OF STRAIGHTFORWARD PENSION INVESTMENT APPROACHES INCORPORATING DYNAMIC ASSET ALLOCATION, AND REFLECTING DIFFERENT ATTITUDES TO RISK AND REWARD. OUR PENSION INVESTMENT APPROACHES Our Adventurous, Balanced and Cautious Pension Investment Approaches were launched in Underpinning our Pension Investment Approaches are our Pension Portfolio Funds One to Four, which were also launched in 2006 and have a performance track record of over ten years. In the last five years leading up to retirement, we move customers investments into specific funds for the preretirement phase. These funds are the Scottish Widows Pension Portfolio Five Fund, the Scottish Widows Pension Protector Fund and the Scottish Widows Cash Fund. ADVENTUROUS BALANCED CAUTIOUS Periods of market volatility highlight the need to look to protect accumulated funds as members approach retirement. This factsheet demonstrates how our Pension Investment Approaches aim to help smooth out volatility in the final years to retirement, by charting the experience at various points in the lifestyling journey. A KEY LINK TO STATE STREET Our Pension Investment Approaches are composed of Pension Portfolio Funds and specialised funds for the pre retirement phase. The equity component used for the Pension Portfolio Funds comes from key fund links to State Street Global Advisors (SSGA), an acknowledged leader in institutional investing. Institutions worldwide have entrusted SSGA with 1.95 trillion to manage on their behalf as at 31st ch The bond component is managed by Aberdeen Standard Investments. All the equity and bond components of the Pension Portfolio Funds are invested on a passive basis. 15 years before retirement, each approach gradually switches into funds that have historically been less volatile. Five years from a member s selected retirement date, we will start to automatically adjust their plan so that it will be invested in one of three ways, depending on whether they will want to purchase an annuity, keep their pension money invested (including taking withdrawals as an income), or take a cash lump sum. We offer a smoothed approach to lifestyle switching, which ensures a reassuringly predictable transition between funds. 1

3 BELOW IS AN ILLUSTRATION SHOWING HOW OUR PENSION INVESTMENT APPROACHES GRADUALLY MOVE BETWEEN FUNDS, INCREASING EXPOSURE TO LOWER RISK INVESTMENTS AS THE MEMBER MOVES CLOSER TO THEIR CHOSEN RETIREMENT AGE. We offer three different retirement outcomes, designed to prepare a member s pension investment in its last five years for whichever retirement choice they expect to make. In addition to the original retirement outcome designed for those planning to buy an annuity, we have added an outcome for those who plan to encash their fund, and an outcome for customers who will want flexible access and plan to move into a suitable product so they can stay invested. The underlying funds used for each of these three outcomes are covered below. ADVENTUROUS Targeting Annuity in Pension Portfolio 1 (PP1) PP1 into PP2 PP2 into PP3 PP3 into Pension Protector & Cash ADVENTUROUS Targeting Encashment in Pension Portfolio 1 (PP1) PP1 into PP2 PP2 into PP3 PP3 into PP5 ADVENTUROUS Targeting Flex Access in Pension Portfolio 1 (PP1) PP1 into PP2 PP2 into PP3 and PP5 Highest risk Term to retirement Lowest risk Term to retirement Pension Portfolio One (PP1) Pension Portfolio Two (PP2) Pension Portfolio Three (PP3) Pension Portfolio Four (PP4) Decreasing levels of risk Pension Protector Pension Portfolio Five (PP5) Cash 2

4 BALANCED Targeting Annuity in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into Pension Protector & Cash BALANCED Targeting Encashment in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into PP5 BALANCED Targeting Flex Access in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into PP4 and PP5 Highest risk Term to retirement Lowest risk Term to retirement Pension Portfolio Two (PP2) Pension Portfolio Three (PP3) Pension Portfolio Four (PP4) Pension Protector Decreasing levels of risk Pension Portfolio Five (PP5) Cash CAUTIOUS Targeting Annuity in Pension Portfolio 3 (PP3) 100% in PP4 PP4 into Pension Protector & Cash CAUTIOUS Targeting Encashment in Pension Portfolio 3 (PP3) 100% in PP4 PP4 into PP5 CAUTIOUS Targeting Flex Access in Pension Portfolio 3 (PP3) 100% in PP4 PP4 into PP4 and PP5 Highest risk Term to retirement Lowest risk Term to retirement Pension Portfolio Three (PP3) Pension Portfolio Four (PP4) Pension Protector Pension Portfolio Five (PP5) Decreasing levels of risk Cash 3

5 ASSET ALLOCATIONS AS AT 30TH JUNE 2018 STRATEGIC ASSET ALLOCATION FOR MULTI-ASSET PENSION PORTFOLIO FUNDS USED IN PIAs PP1 PP2 PP3 PP4 KEY: UK equities Overseas developed markets equities Emerging markets equities Corporate bonds Source: Scottish Widows, as at 30/06/2018 ASSET ALLOCATION UPDATE AS AT 30TH JUNE 2018 There were no strategic asset allocation changes to the Pension Portfolio funds during the second quarter of Further details on the governance process are covered in The Reassurance of Ongoing Governance section. 4

6 MARKET COMMENTARY FOR THE PERIOD 1ST APRIL 2018 TO 30TH JUNE 2018 The second quarter of 2018 was characterised by increasing trade tensions, particularly between the US and China, which had a ripple effect throughout markets. The UK and the US share markets recorded strong growth, while equities in China and other emerging markets posted losses. Central bank activity was divergent, with the US Federal Reserve (Fed) hiking rates, the Bank of England (BoE) holding steady but signalling hawkishness, and Europe and Japan remaining relatively accommodative. The UK had some of the strongest equity performance of the period, with the blue chip FTSE 100 Index recording its best quarter since 2010, gaining 9.58% in total returns (GBP). Most of the gains were recorded in April, and to a lesser extent May, as sterling weakness contributed to a favourable environment for those firms with international exposure. The more domestically focused mid-cap FTSE 250 also had a good quarter, with a total return of 8.07%, supported by higher energy prices. June saw UK equities lagging the global average, however, as hawkish rhetoric from the BoE and uncertainty around the Government s ability to strike a Brexit deal kept investors wary. Economic growth was slightly higher than expected; first-quarter GDP growth of 0.2% compared to estimates of 0.1%, supported by household spending. In continental Europe, political headlines led to restrained performance, with the FTSE Developed Europe ex-uk recording a total return of 3.73%. The results of the Italian elections in ch carried through until May, as two Eurosceptic parties worked to form and gain approval on a coalition government; uncertainty in Germany also troubled markets, as Angela Merkel faced a leadership crisis over the issue of migration. First-quarter economic growth reported in June was 0.4%, in line with estimates but down from 0.7% in the previous quarter. Amid slower growth, the Eurozone found itself facing trade tensions on two fronts, as Brexit remained unresolved and the US president turned his attention to auto imports. The European Central Bank signalled it would end its asset purchase programme but keep rates unchanged through mid- 2019, which investors interpreted as remaining accommodative. The FTSE North America Index gained 10.05% (total returns in sterling terms). Overall, the performance of US equities was robust, amid higher market volatility. The strong gains were aided by a record period for share buybacks, as corporations used their new tax savings to buy back their own shares, rather than invest in capital expenditure. Investors kept a close watch on the summit between the US and North Korean leaders, and the ongoing rhetoric against China, which extended to Europe and Canada over the quarter. Overall, the US economic picture remained positive, prompting the Fed to hike its target rate again in June. Canadian stocks remained resilient despite trade tensions, hitting a record high near the end of June. Elsewhere, the FTSE Developed Asia Pacific ex Japan had a total return of 4.35%, while the FTSE Emerging kets Index fell by 2.38% (both in sterling terms). Emerging Europe, Asia, and Latin America had the biggest losses, dragged down by Brazil and China in particular. The latter country has been at the centre of trade tensions with the United States; the next round of tariffs is due to take effect from 6th July. The FTSE Japan had a total return of 3.24% in sterling terms, despite net outflow from foreign investors and a strengthening yen (which traditionally hinders equity performance). Turning to fixed-interest investments, the yield on the US 10-year Treasury ended the quarter slightly higher than where it started (the price was lower), after coming down off highs of more than 3.0%. The yield on the 10-year UK Gilt generally followed the trajectory of its US counterpart, while German benchmark bonds dropped sharply at the end of May. The UK index-linked market fell slightly, with prices down by 1.0% over the quarter. Investment-grade corporate bonds dropped back by 0.9%, while riskier high-yield corporate bonds only declined marginally. On a global basis, corporate bonds dropped by 1.59% in sterling terms, according to data sourced from Financial Express. The information contained in this update has been derived from sources which we consider to be reasonable and appropriate. It may also include our views and expectations, which cannot be taken as fact. Investment markets and conditions can change rapidly and, as such, the views expressed in this update should not be taken as statements of fact nor be relied on when making investment decisions. Forecasts are opinions only, can not be guaranteed and should not be relied on when making investment decisions. 5

7 HOW HAVE THE PENSION INVESTMENT APPROACHES PERFORMED? The chart below demonstrates how the Pension Investment Approaches have performed so far. In relation to the other Pension Investment Approaches, the Adventurous Approach generally provided greater growth while the market was rising, and the Cautious Approach fell less while the market was falling. PERFORMANCE SINCE LAUNCH FOR MEMBERS WHO HAVE NOT YET ENTERED THE LIFESTYLING PERIOD* % Jun 18 Adventurous (Targeting Annuity) Balanced (Targeting Annuity) Cautious (Targeting Annuity) Source: Scottish Widows, Lipper for Investment Management, on a bid-to-bid basis, total return, tax default, in s. As at 30th June *Lifestyling period begins 15 years prior to selected retirement age. Pensions are a long-term investment. The retirement benefits your clients receive from their pension plan will depend on a number of factors including the value of their plan when they decide to take their benefits which isn t guaranteed, and could go down as well as up. The value of their plan could fall below the amount(s) paid in. Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise. Investors may not receive back the full amount originally invested. 6

8 Each Approach is benchmarked against an appropriate ABI sector: Approach Adventurous Pension Investment Approach Balanced Pension Investment Approach Cautious Pension Investment Approach Benchmark Flexible Investment Sector Mixed Investment 40%-85% Shares Sector Mixed Investment 20%-60% Shares Sector Discrete Performance as at 30th June Fund Scottish Widows Pension Portfolio One (Initial fund for Adventurous) Scottish Widows Pension Portfolio Two (Initial fund for Balanced) Scottish Widows Pension Portfolio Three (Initial fund for Cautious) 06/02/2006 to 30/06/2018 Q Q Percentage growth Q Q Q Q Q Q Q Q Scottish Widows Pension Portfolio Four Scottish Widows Cash Scottish Widows Pension Protector ABI Sector Percentage growth 06/02/2006 to 30/06/2018 Q Q Q Q Q Q Q Q Q Q Flexible Investment Sector Mixed Investment 40%-85% Shares Mixed Investment 20%-60% Shares Source: Scottish Widows, Financial Express, on a bid-to-bid basis, total return, tax default, in s. As at 30th June Pensions are a long-term investment. The retirement benefits your clients receive from their pension plan will depend on a number of factors including the value of their plan when they decide to take their benefits which isn t guaranteed, and could go down as well as up. The value of their plan could fall below the amount(s) paid in. Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise. Investors may not receive back the full amount originally invested. 7

9 The charts below and overleaf demonstrate how the Balanced Approach (Targeting Annuity) has performed since launch for investors who were 15 years from retirement in June 2006, and who retired on 30th June Approximately 80% of members in a Pension Investment Approach are in the Balanced Approach, which is why this has been selected for the example. For comparison, the charts also show the average return of two ABI sectors for the same period. MEMBER 15 YEARS FROM RETIREMENT AT JUNE 2006 BALANCED in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into Pension Protector & Cash Term to retirement % Jun 18 Scottish Widows Balanced Approach ABI UK Mixed Investment 40%-85% Shares Pension Sector ABI UK Global Equities Pension Sector Source: Scottish Widows, Lipper for Investment Management as at 30th June 2018, on a bid-to-bid basis, total return, tax default, in s. Pensions are a long-term investment. The retirement benefits your clients receive from their pension plan will depend on a number of factors including the value of their plan when they decide to take their benefits which isn t guaranteed, and could go down as well as up. The value of their plan could fall below the amount(s) paid in. Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise. Investors may not receive back the full amount originally invested. 8

10 MEMBER WHO RETIRED ON 30TH JUNE 2018 BALANCED in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into Pension Protector & Cash % Jun 18 Scottish Widows Balanced Approach ABI UK Mixed Investment 40%-85% Shares Pension Sector ABI UK Global Equities Pension Sector Source: Scottish Widows, Lipper for Investment Management as at 30th June 2018, on a bid-to-bid basis, total return, tax default, in s. Pensions are a long-term investment. The retirement benefits your clients receive from their pension plan will depend on a number of factors including the value of their plan when they decide to take their benefits which isn t guaranteed, and could go down as well as up. The value of their plan could fall below the amount(s) paid in. Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise. Investors may not receive back the full amount originally invested. 9

11 OUTLOOK As we head into the third quarter, there are a number of key themes that could have an impact on global markets. The effect of the US dollar and trade tensions The US Federal Reserve is well ahead of other major global central banks in tightening monetary policy, both raising rates and running down its balance sheet, while US tax reform and dollar repatriation by large US firms adds to the scarcity of dollars abroad; this is helping to strengthen the US dollar. The European Central Bank (ECB), Bank of Japan and Bank of England have been slower to tighten policy, but a stronger dollar has global ramifications as the US remains the world s lynchpin economy. More expensive money makes investors warier of risky assets. Equity markets entered a new, more volatile phase after the sell-off in February 2018, and we expect this to continue. Tighter dollar funding has hit emerging markets (EM), where borrowers face a rise in the cost of servicing dollar debts. EM assets look likely to remain under pressure in the short term. This provides the fundamental backdrop against which markets have had to digest a range of political risks. Escalating tensions over global trade have become a major source of investor uncertainty, with markets clearly reacting to shifts in the tone of the debate between the US and China. It is tempting to conclude that a trade war harms everybody and therefore policymakers will rationally draw back from the most damaging increases in tariffs and other trade restrictions. But it is becoming clear that the US has lost patience with the trade deficits it incurs under the current system and is serious about securing meaningful adjustments. We expect uncertainty over trade will continue to dog markets until and unless some broader agreement is reached, in particular between the US and China and the Eurozone respectively. Higher oil prices Oil prices have gradually risen since the low point of around USD30 a barrel in early 2016, almost tripling towards USD80 a barrel, as the OPEC cartel of oil producing nations has been fairly successful in enforcing production curbs in an environment of strengthening global demand. We think oil prices will be further supported by the Trump administration s re-imposition of sanctions on Iran and reduced supply from Venezuela, struggling with a deeper economic crisis. Higher oil prices act like a tax hike on consuming countries, and are a headwind to growth. The impact on the US is likely to be swamped by the real tax cuts taking effect there, but the Eurozone and Japan will face more of a drag, while higher oil prices will be another factor dragging down consumer emerging market economies including China and India. The outcome of Brexit discussions The Brexit process remains a fundamental short-term driver for UK markets. The pound sterling and UK equity markets tend to react negatively to signs that negotiations are heading for a harder Brexit that moves further away from existing trade arrangements, as this is seen as likely to be more economically harmful. The UK government was holding key internal discussions on their desired approach at time of writing. We expect the debate will continue to be a key driver for UK markets until greater certainty on the outcome emerges. That may allow the Bank of England to return to raising interest rates, perhaps more quickly than the market is currently pricing in. The Eurozone seems unable to shake off home-grown political risks, as concerns over the stability of the German government coalition arose almost as soon as worries over the formation of a Eurosceptic Italian government faded, which themselves came hot on the heels of tensions over Catalonian independence. How much European integration is desirable, and what form it takes, seems likely to be a question that will continue to roil Europe s domestic and international politics and markets. A flatter yield curve It is sometimes interesting to think about what hasn t changed, and in that light we think the ongoing stability of most longer-dated government security yields is worth mentioning. Most notably, US 10-year Treasury yields have drifted down even as the Fed has hiked rates and the market looks ahead to wider deficits (and more bond issuance), flattening the yield curve. We think ongoing asset purchases by the ECB and the Bank of Japan are helping suppress yields. But global central bank net purchases will probably turn negative around the end of the year as the ECB winds up its programme. We remain on guard against the possibility of a sharper rise in yields, which could hit equity and credit markets. 10

12 THE REASSURANCE OF ONGOING GOVERNANCE The Scottish Widows Pension Investment Approaches (PIA) use an ongoing governance process with input from independent specialists. A key part of this process is to carry out regular reviews to identify any potential asset allocation changes that we believe would ensure the portfolios continue to meet their aims. Our approach is to keep our customers needs in mind and help them to achieve their long-term objectives. Recent years have seen considerable change within investment markets and the pension industry, and the PIA have responded to both, continuing our commitment to the best interests of our customers. From time to time, we have implemented strategic asset allocation changes to improve and maintain the effectiveness of the portfolios in meeting client objectives. Throughout this period of change, we have maintained a strong governance capability to monitor all aspects of our multiasset proposition. The purpose of this review was to maintain and improve the effectiveness and performance of the PIA, ensuring they are optimally set up to deliver good results while adhering to their defined risk profiles. Looking forward, we are committed to regularly reviewing the PIA and how they are invested, from both medium and long-term perspectives. We will continue our own ongoing monitoring and full governance reviews, based on modelling from specialists such as Moody s Analytics. Since the launch of the PIA, we have strived to maintain them as a low-cost, transparent investment proposition, with a belief that over a long time horizon the most efficient pension customer outcomes will result from a growth strategy that is predominately invested in equities, followed by a long (15-year) period of gradual de-risking. We believe that the PIA continue to offer very good value for investors. Our specialist Asset Allocation Team was established in One of the team s most important roles is to review and identify medium-term opportunities for all our multi-asset investment options, including the PIA. This medium-term analysis happens on an ongoing basis. The results of our most recent full PIA review, using stochastic modelling tools provided by Moody s Analytics, were presented to and approved by our Unit Linked Investment Management (ULIM) Committee. ULIM s role is to govern all Scottish Widows unit-linked funds, ensuring they meet our commitments to customers. Key changes from the 2017 review included: The corporate bond allocation was diversified by reducing the sterling bond exposure and introducing an allocation to global corporate bonds (hedged back to sterling). The overseas equity component remains unhedged. The removal of index-linked gilts from Pension Portfolios Three and Four, in favour of corporate bonds. A small allocation to emerging markets was introduced to Pension Portfolio Four, aligning the global equity structure of Pension Portfolio Four with that of the other Pension Portfolios. 11

13 HOW A PENSION INVESTMENT APPROACH INVESTMENT GLIDEPATH WORKS 5 years from retirement the glidepath diverges Level of Risk 15 years from retirement level of risk starts to fall Up to 5 years from retirement the glidepath is the same, regardless of which retirement outcome has been chosen Years to Retirement Retirement Targeting Flexible Access Targeting Annuity Targeting Encashment Please note that this graph indicates how the overall level of risk changes at different stages, not the likely performance of an investment. WILL WE EVER USE DIFFERENT INVESTMENTS? Yes if, as part of our investment fund review process, we think it would be of long-term benefit to our customers, we may decide in future to alter the asset classes or funds used by our PIAs. Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number /18