INVESTMENT MARKET UPDATE UBC FACULTY PENSION PLAN

Transcription

1 INVESTMENT MARKET UPDATE UBC FACULTY PENSION PLAN MIKE LESLIE, FACULTY PENSION PLAN NEIL WATSON, LEITH WHEELER FEBRUARY 12, 2014

2 Presenters Mike Leslie Executive Director, Investments Faculty Pension Plan Neil Watson Vice President Leith Wheeler Investment Counsel 2

3 Agenda Introductions Plan Fund Weightings & Asset Mix Fund Returns Investment Market Update Question Period 3

4 Plan s Fund Weightings as of December 31, 2013 Foreign Equity Fund 4.4% Bond Fund 3.3% STIF 2.3% GIC's 0.8% Canadian Equity Fund 7.2% Balanced Fund 82% *Total Assets $1.75 Billion 4

5 Balanced Fund Policy Asset Mix Canadian Real Return Bonds 8.0% Canadian Real Estate 10.0% Canadian Equities 20.0% Fixed Income 32.0% Hedge Fund 3.0% Global Equities* 21.0% US Equities 6.0% * Global Equities includes investments in both U.S. Equities and Non-North American Equities 5

6 Fund Rates of Return* (to December 31, 2013) Fund 1 Yr. 5 Yrs. 10 Yrs. Balanced Fund 13.8% 9.8% 7.1% Bond Fund -3.6% 5.9% 5.2% Canadian Equity Fund 20.3% 13.8% 9.5% Foreign Equity Fund 36.8% 12.9% 5.3% Short Term Investment Fund 1.4% 1.0% 2.2% *Before Fees 6

7 Proposed Agenda Review of 2013 Outlook for 2014 Questions? UBC Faculty Pension Plan Feb-14 Pg 7

8 Review of 2013 UBC Faculty Pension Plan Feb-14 Pg 8

9 Return of a Balanced* Portfolio Annualized Returns December 31, Year 4 Years Since June 30, Years Balanced Portfolio* 13.6% 7.6% 4.0% 7.5% CPI 1.2% 1.7% 1.4% 1.8% * 5% Cash, 35% Bonds; 30% Canadian Equities, 15% U.S. Equities (C$), 15% International Equities (C$). Index Returns. UBC Faculty Pension Plan Feb-14 Pg 9

10 Review of 2013 Returns Q1 Q2 Q3 Q4 1 Year Canadian Equities 3.3% -4.1% 6.3% 7.3% 13.0% U.S. Equities (C$) 12.9% 6.5% 3.0% 14.3% 41.5% International Equities (C$) 7.3% 2.5% 9.2% 9.3% 31.3% Bonds 0.7% -2.4% 0.1% 0.4% -1.2% UBC Faculty Pension Plan Feb-14 Pg 10

11 Interest Rates are Materially Higher than Last Year Canada Bond Yield Year 1.38% 1.94% 10 Year 1.80% 2.75% 30 Year 2.36% 3.23% UBC Faculty Pension Plan Feb-14 Pg 11

12 Foreign Currencies Performance vs. Canadian Dollar 2013 Euro +11.7% U.K. Pound +9.0% U.S. Dollar +6.9% Japanese Yen -11.9% Currency Added to Performance in 2013 UBC Faculty Pension Plan Feb-14 Pg 12

13 Stock Market Performance by Region Last Year Performance in 2013 ($Cdn) United States 41.5% Europe (Ex. U.K.) 36.5% Japan 35.9% United Kingdom 29.0% Pacific (Ex. Japan) 12.8% Emerging Markets 4.1% MSCI World 35.4% UBC Faculty Pension Plan Feb-14 Pg 13

14 Global Market Performance in 2013 MSCI Country Performance ($Cdn) Greece 61.5% Finland 56.1% Ireland 50.9% USA (S&P 500) 41.5% Germany 40.4% Spain 40.4% Netherlands 40.4% Belgium 36.4% Japan 35.9% Switzerland 35.4% France 35.1% Denmark 33.9% Sweden 33.1% United Kingdom 29.0% Italy 28.7% Austria 21.3% New Zealand 19.0% Hong Kong 18.8% Portugal 18.7% Israel 18.6% Norway 17.0% Australia 11.4% Singapore 8.7% MSCI World 35.4% UBC Faculty Pension Plan Feb-14 Pg 14 Canada - TSX Composite 13.0%

15 S&P/TSX Composite Index Sector Performance Year to December 31, 2013 Health Care 72.1% Consumer Discretionary 43.0% Industrials 37.5% Information Technology 37.3% Financials 23.7% Consumer Staples 23.6% Energy 13.6% Telecomm. Services 13.1% S&P/TSX Composite Index 13.0% Utilities -4.1% Materials -29.1% -45% -25% -5% 15% 35% 55% 75% UBC Faculty Pension Plan Feb-14 Pg 15

16 Price of Gold $2,000 Gold Price (US$/ounce) $1,800 $1,600 $1,400 Gold and Precious Metals Sub-Sectors TSX Weight Dec.31/12 = 11.7% TSX Weight Dec.31/13 = 6.0% $1,200 $1,000 $800 $600 $400 $200 $- UBC Faculty Pension Plan Feb-14 Pg 16

17 Review of 2012 Optimism at beginning of the year Stocks did well - Minimal bond returns Mid-Year, Investors focused on Europe s problems and fled equities for Government Bonds (Canadian & U.S.) and $ U.S. At year end confusion in U.S. over its debt and deficit Slowdown in China? 2012 Portfolio Return 7.2% UBC Faculty Pension Plan Feb-14 Pg 17

18 Review of 2013 Optimism at beginning of the year Strong growth in corporate profits Something of a U.S. manufacturing renaissance Stocks did well; flat bond returns Mid-Year, Investors focused on Fed s discussion regarding potential reduction of monetary stimulus (tapering) Increased bond yields, weak bond returns Slowdown in emerging markets (China) Improved confidence in Japan Stocks continued to do well At year end, Fed lays out a roadmap for the end of quantitative easing. Signs of improvement in Europe Strong equity returns UBC Faculty Pension Plan Feb-14 Portfolio Return 13.6%?? Pg 18

19 Our Outlook for the Next 3-5 Years UBC Faculty Pension Plan Feb-14 Pg 19

20 Dec-60 Dec-62 Dec-64 Dec-66 Dec-68 Dec-70 Dec-72 Dec-74 Dec-76 Dec-78 Dec-80 Dec-82 Dec-84 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Yield Bonds We Are Still in a Very Low Interest Rate Environment Government of Canada 30 Year Bond Yield From December 1961 to December % 18.0% 17.7% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% UBC Faculty Pension Plan Feb-14 Pg 20

21 The U.S Fed s Tapering Program The U.S. Federal Reserve provided a clear road map for how long tapering will take at policy meeting in December 2013 Previous indications were that they expected to have finished their bond buying program by summer of 2014 On December 18 th they announced the program will most likely continue until the end of 2014 They also indicated they have the ability to keep rates low well past the previous threshold of a 6.5% unemployment rate In January 2014, they reduced the amount of stimulus to $65 billion/month UBC Faculty Pension Plan Feb-14 Pg 21

22 What Does This Mean For Interest Rates? The Fed s announcements have effectively put a cap on how high interest rates can rise in 2014 Threat of significant increases has been pushed out to 2015 (likely later in the year) As long as short term rates are anchored close to zero, there is a ceiling as to how high mid and long term interest rates can increase There is a risk that the Fed dramatically accelerates tapering but that threat is muted by the slow recovery we continue to witness in the U.S. We believe rates will gradually trend upwards but that a sudden spike is unlikely Canadian Rates Are Heavily Influenced By Policy South of the Border UBC Faculty Pension Plan Feb-14 Pg 22

23 Canada Yield Curve Forecast Dec 31/13 Yield Our Longer Term Forecast (3-5 Years) BOC Overnight Y Bond Y Bond Y Bond Y Bond UBC Faculty Pension Plan Feb-14 Pg 23

24 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Market Rally Has Been Supported by Earnings S&P 500 Forward Earnings S&P 500 Price Index Source: Bloomberg May 31, 2009 to Dec 31, 2013 indexed to 100 UBC Faculty Pension Plan Feb-14 Pg 24

25 Stock Markets Remain Reasonably Priced S&P 500 Price to Earnings Multiple Source: TD Securities Based on forward operating earnings Long Term Forward Price to Earnings Average 15.4x UBC Faculty Pension Plan Feb-14 Pg 25

26 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 The Long View Stocks Remain Attractive 6 S&P/TSX Composite Valuation Dividend Yield and Price Earnings Ratio over 15 Years 40 5 Dividend Yield Trailing P/E Dividend Yields Remain Attractive Source: Bloomberg Valuations are Not Stretched UBC Faculty Pension Plan Feb-14 Pg 26

27 Bonds versus Stocks: Which has a Better Yield? December 31, 2013 Bond Yields Canada Corporate 5 Year 1.94% 3.18% 10 Year 2.75% 4.27% 30 Year 3.23% 4.93% Dividend Yields TSX Composite 2.9% S&P % MSCI EAFE 2.9% UBC Faculty Pension Plan Feb-14 Pg 27

28 Don t Forget Market Timing Is Very Hard To Do! 10 Year Annualized Returns As of December 31 Last 3 Years TSX Composite 3.4% 4.2% 10.6% 3.7% 9.1% S&P 500 (C$) 18.8% -4.5% 17.9% 9.0% 5.6% MSCI EAFE (C$) 10.6% -3.0% 9.4% 13.9% 11.1% Best Performer UBC Faculty Pension Plan Feb-14 Pg 28

29 Conclusion UBC Faculty Pension Plan Feb-14 Pg 29

30 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Stocks Climbing a Wall of Worry 41,000 40,000 39,000 38,000 37,000 36,000 35,000 S&P/TSX Index % Tapering/Higher Interest Rates Slowdown in China Europe s Financial Mess Unsolved U.S. Fiscal Problems Unrest in Middle East 34,000 Reduction in Monetary Stimulus UBC Faculty Pension Plan Feb-14 Pg 30

31 The Wall of Worry: Why Up and Over Not Down and Out? Low interest rates. Even with tapering, rise in bond yields expected to be muted No labour or commodity inflation Improvement in U.S. consumer spending Retail sales Auto sales Housing starts Gradual improvement in Europe 1% growth in Euro zone China slower, but still growing 6-7% UBC Faculty Pension Plan Feb-14 Pg 31

32 Conclusion Inflation We expect inflation to remain around 1-2% p.a. Consumer and Government Debt Bulk of consumer de-levering in U.S. behind us. Housing market improving. High levels of Canadian consumer debt Strength & Recovery We expect nominal GDP growth of 2-3% with continued recovery in the U.S. Gradual improvement in Europe and Emerging Markets stable Return Potential Bond returns look like they will be 1-2% p.a. Equity returns in Canada & the U.S. around 7% p.a. UBC Faculty Pension Plan Feb-14 Pg 32

33 2014 UBC Faculty Pension Plan Forum Wednesday, May 21, 2014 Cecil Green Park House 10:45 a.m. to 1:00 p.m. RSVP by April 30 to or call

34 FPP Pension Forum Presentation begins at 11:00 a.m. Plan performance in 2013 Review 2013 and 2014 Initiatives Information Tables & Guest Exhibitors 10:45 a.m. to 1:00 p.m. New to the Plan table Retirement UBC Retirement & Survivor Benefits mypension & FPP Calculators Faculty Relations Service Canada 34

35 Thank you! Questions? 35

36 APPENDIX 36

37 Potential Long Run Equity Returns 10 Year Returns Based on Starting Period P/E Multiple P/E Multiple Range 10 Year Return 25x 50x 1.5% 16.6x 25x 8.1% 12.5x 16.6x 10.7% 10x 12.5x 13.3% 8x 10x 14.8% 7x 8x 16.5% Source: Bloomberg UBC Faculty Pension Plan Feb-14 Pg 37

38 Government Bond Market Return Expectations 10 Year Returns Based on Starting Period Yield to Maturity Starting Yield 10 Year Average Return 2-4% 2.5% 4-6% 5.6% 6-8% 6.9% 8-10% 11.1% Source: Long US rates, UBC Faculty Pension Plan Feb-14 Pg 38

39 Long Term Asset Class Returns $100,000 Investment Results (Growth of $100 from December 1960 to December 2013) Value of $100 (Annualized Rate of Return) US Equities in $C: $90,451 (11.2%) Canada Equities: $42,616 (9.2%) $10,000 Bonds: $9,643 (7.4%) T-Bills: $3,132 (5.5%) $1,000 Inflation $1,007 (3.7%) $ UBC Faculty Pension Plan Feb-14 Pg 39

40 Emerging Markets Underperformed in 2013 MSCI Country Performance ($Cdn) Greece 61.5% Taiwan 9.1% Egypt 8.2% Malaysia 7.7% Korea 3.9% China 3.6% Poland 2.6% Russia 0.8% Mexico 0.2% Philippines -2.7% India -3.8% Hungary -5.8% South Africa -6.2% Thailand -14.6% Brazil -16.0% Colombia -21.1% Chile -22.0% Indonesia -23.5% Turkey -26.8% Peru -29.9% MSCI Emerging Markets 4.1% UBC Faculty Pension Plan Feb-14 Pg 40

41 TSX Valuation vs. Earnings Growth 2013 Change in 2013 Change in 2013 Valuation Earnings Calculated Fwd PE/ Fwd EPS/ Total Return Fwd PCF/ Fwd PFFO Fwd CF/ Fwd FFO TSX Composite 12.4% -2.5% 12.7% All stocks ex-gold and PMs 11% 9% 20.9% Gold and PM 41% -63% -48.1% Energy ex Pipelines 9% 11% 20.6% Pipes and Utilities -3% 7% 3.1% Industrials 19% 7% 27.2% Consumer Disc 17% 12% 31.9% Consumer Staples 13% 3% 17.0% Health Care 2% 9% 11.3% Financials ex REITs 11% 14% 26.4% REITs & REOCs -15% 6% -9.5% Technology 16% 31% 52.2% Telecom 8% -1% 6.6% Source: Factset UBC Faculty Pension Plan Feb-14 Pg 41

42 Investing Outside Canada Offers Access to More Types of Companies Diversification Top 3 Sector Weights As of December 31, 2013 TSX S&P 500 MSCI EAFE Financials 35.3% Information Technology 18.6% Financials 25.6% 20% 18% 16% 14% 12% TSX S&P 500 MSCI EAFE Energy 24.8% Financials 16.2% Industrials 12.9% 10% 8% Materials 11.8% Health Care 13.0% Consumer Discretionary 11.9% 6% 4% Total 71.9% Total 47.8% Total 50.4% 2% 0% Health Care Information Technology UBC Faculty Pension Plan Feb-14 Pg 42

43 Equity Exposure for the Balanced Fund as at December 31, 2013 Europe 13.0% UK 4.9% Pacific - EX Japan 0.4% Emerging Markets 1.3% Others 0.3% Japan 2.3% Canada 40.9% US 36.9% 43

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