Investment Strategy. January Funding Review

Transcription

1 Investment Strategy January 2011

2 Table of Contents Title I. Introduction & Overview II. Background III. Strategic Investment Plan IV. Investment Governance V. Concluding Observations VI. Appendix Slide Number

3 I. Introduction and Overview The purpose of this presentation is to provide information on the structure and oversight of the WSIB investment strategy for the Insurance and LRI Funds The Funds are invested in a diverse range of asset classes and investment strategies In early 2008, the WSIB began a multi-year Strategic Investment Plan to further reduce the annual volatility of investment returns the Plan seeks further diversification by adding additional asset classes and investment strategies the Plan is expected to be fully implemented by 2015 The Strategic Investment Plan offers a clear value proposition: reduced investment return variability reduced variability in the UFL increased investment program flexibility WSIB s investment governance has adapted to oversee the new strategies 3

4 II. Background 4

5 WSIB Insurance and LRI Funds Total Assets = $13 Billion (assets as at Sept. 30, 2010) INSURANCE FUND ($11.9 billion market value) Fund for injured worker, survivor benefits and related health care & work reintegration costs Also covers administrative expenses of WSIB LOSS OF RETIREMENT INCOME ( LRI ) FUND ($1.1 billion market value) Fund for injured worker benefit post-age 65 Approximately 130,000 current accounts Workplace Safety and Insurance Act requires assets to be invested in accordance with the Ontario Pension Benefits Act ( PBA ) and associated regulations 5

6 Investments (assets as at Sept. 30, 2010) Insurance Fund LRI Fund Public Equities Public Bonds Real Estate Total Return Infrastructure Domestic, U.S., International & Global equities Domestic bonds (federal, provincial, agency, municipal & corporate bonds) Domestic real estate Hedge funds Balanced risk funds Infrastructure funds $7.0 billion $4.5 billion $0.8 billion $0.7 billion (funded in Q4/10) See Glossary in Appendix for definitions 6

7 WSIB Insurance Fund Investment Returns Average investment return over last 15 years (as of Dec 2009) was 7.6% meeting our long-term target of 7% Range of returns (volatility) was high Highest return was +18.4% Lowest return was -15.5% Year Investment Return % % % % % % % % % % % % % % % 7

8 III. Strategic Investment Plan ( SIP ) 8

9 Strategic Investment Plan - Background Objective for Strategic Investment Plan: Reduce portfolio volatility while maintaining 7% long-term return target Research & Oversight: Research from strategic investment consultant, leading investment management organizations & leading investment funds Input, direction and review by Investment Committee ( IC ) Reviews with Board of Directors ( BoD ) Joint IC/BoD educational sessions Annual approval of Investment Governance Policy, Statement of Investment Beliefs & Statement of Investment Policies and Procedures ( SIPP ) Annual review of SIPP by Ministry of Labour Key strategy elements: Increase Diversification Add Currency, Infrastructure and Total Return to bonds, equities and real estate Employ modern investment techniques Hedge currency risk to reduce short-term volatility of returns Short selling to earn returns in down as well as up markets Utilize derivatives and leverage to better balance risk 9

10 Strategic Investment Plan - Overview Investment Portfolio 2008 Asset Allocation: 65% Public Equity 30% Bonds 5% Real Estate WSIB Requirements Practical Constraints Strategic Plan Target Asset Allocation: 25% Public Equity 30% Bonds 15% Real Estate 15% Total Return 15% Infrastructure Target: Return: 7%+ annual Volatility: 13% annual Issues: Too much volatility from Public Equities Limited diversity of return sources Deliver target returns with less volatility Reduce risk contribution from public equities Vision Portfolio (Ideal State) Views and beliefs Liquidity Prudence Risk factors Implementation Target: Return: 7%+ annual Volatility: 9% annual (a 30% risk reduction) Achieves: Less volatile total fund returns Reduced risk contribution from public equity More diversified sources of return 10

11 Results in a more balanced program 100% Where the risk is coming from: Past and Future 80% 60% 40% 2008 Asset Mix Strategic Investment Plan Asset Mix 20% 0% -20% The Strategic Investment Plan mix allocates risk in a more balanced way More return sources narrow the range of total fund annual returns 11

12 Why balancing sources of return/risk is important HIGHER RETURN LOWER RETURN CASH LOWER RISK Theory BONDS REAL ESTATE EQUITY HIGHER RISK Investment theory states that investments with higher risk should generate higher returns Reality (WSIB returns over the past 15 years) CASH BONDS REAL ESTATE EQUITY Return 4% 8% 11% 7% Risk (Volatility) 1% 4% 5% 14% Even with good theory, there are no certainties, so diversification is the best strategy 12

13 Investment Volatility (risk) Strategic Investment Plan reduces range of expected annual return outcomes 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% expected range with SIP asset mix 13

14 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 How would the SIP mix have performed over the last decade? 20 Rolling 3-Year Returns SIP Mix WSIB Actual The SIP mix is designed to deliver the same return as the current mix, but with lower volatility 5 0 Annual volatility reduction is evident during the two market crashes experienced in the last decade -5 Past returns for the SIP mix are simulated and for illustrative purposes only. Future results could vary significantly

15 Investment Strategy Transition The SIP is a multi-year program of deliberate and measured changes to the asset mix Implementation is attentive to evolving market and economic conditions A measured approach is prudent when undertaking large strategy shifts time diversification is particularly important when market and economic conditions are unsettled smaller transaction sizes reduce trading costs time permits a more selective approach when building portfolios in real estate and infrastructure Projected Transition of WSIB Asset Mix est proj proj. Bonds 30% 34% 34% 30% 30% Equities 65% 57% 52% 38% 25% Total Return 0% 3% 7% 15% 15% Real Estate 5% 6% 6% 10% 15% Infrastructure 0% 0% 1% 7% 15% 15

16 IV. Investment Governance 16

17 Investment Governance Key components of WSIB s investment governance Governance in practice: three fiduciary levels WSIB Documentation Framework Governance Roles & Responsibilities WSIB Board of Directors & Investment Committee Members 17

18 Governance: The system (process, customs, policies, laws) by which corporations are directed and controlled A well articulated governance structure specifies the distribution of decision-making rights and responsibilities among different participants including associated policies and processes Investment governance has become high-profile worldwide Regulators have downloaded detailed oversight to the plans themselves (pension industry self-regulation) 18

19 Governance in practice: three fiduciary levels Governing Governing Fiduciaries Create the governance structure Develop a delegation and reporting system Decide long-term policies and monitor their outcomes Governing Fiduciaries include BoD & IC WSIB IC external advisors strengthen policy development and oversight Managing Operating Source: Russell Investment Group Managing Fiduciaries Implement policies Decide issues and monitor outcomes Medium-term horizon Managing Fiduciaries include IC & roles within Investment Division Operating Fiduciaries Implement strategies Day-to-day decision-making and monitoring Operating Fiduciaries include the custodian and external investment managers and roles within Investment and Finance Divisions WSIB s virtual resourcing model leverages use of leading external investment organizations for research and implementation with internal direction & oversight 19

20 Fiduciary Documentation Framework the WSIB Investment Policy Manual Principles Statement of Investment Beliefs Provides the strategic framework Answers why questions A guide to making policy decisions Policies Investment Policies Investment Governance Policy Statement of Investment Policies & Procedures Other investment policies Asset Class/Strategy Structure Implementation # of Mgrs, return & risk targets, etc Manager Mandates Objectives, policies, regulations, etc. Operating, monitoring, compliance 20

21 WSIB Investment Governance Responsibilities Level/Body Government of Ontario (The Minister of Labour is accountable for WSIB to the Government of Ontario) Board of Directors (Governing Fiduciaries) Investment Committee of BoD (Governing & Managing Fiduciaries) WSIB Investment Staff (Managing & Operating Fiduciaries) WSIB Finance Division (Operating Fiduciaries) Responsibility Appoints WSIB Board Members Reviews Statements of Investment Policies and Procedures Other requirements as provided for in the Memorandum of Understanding between the WSIB and the Minister of Labour Retains ultimate authority and fiduciary responsibility for the administration of the investments of the WSIB Funds Approves Investment Beliefs, Investment Governance Policy and SIPPs Appoints IC members Receives IC Minutes and Investment Updates Monitors the activities of the Investment Committee, appointed agents, fund performance Approves Investment Policies, investment manager hires & allocations Receives investment updates, strategy reviews, etc Deliberates on, and approves Investment staff recommendations Directs & reviews research to develop strategy & policies Conducts investment research Presents investment recommendations to IC Implements investment program under BOD and IC direction/oversight Negotiates contractual terms & conditions for agents Monitors investment managers & other investment agents Undertakes investment administration, compliance, securities lending administration, proxy voting administration, cash transfers & cash management 21

22 Board of Directors and Investment Committee ( IC ) Board Member IC Member IC External Advisor Steve Mahoney ex officio Chair David Marshall President/CEO Morgan McCague IC Chair Marlene McGrath IC Vice-Chair Retired SVP Asset Mix and Risk, Ontario Teachers' Pension Plan Vice President, Human Resources, International Operations, 3M Canada Lea Ray VP Finance, Warner Bros. Canada Larry Burnett Consultant, Teamsters Local Union 938 and Teamsters Administration Services Estelle Caines Director of Access Services -Lake of the Woods Child Development Center Pat Dillon Business Manager Building & Construction Trades Council - Ontario Louis Girard Consultant, Instructor Global Logistics and Supply Chain Solutions Humber-Guelph Sari Sairanen National Health & Safety Director - CAW Maureen Farrow Economist Economap Paul Grise Retired CIO HOOPP Pension Plan Don Walcot Retired CIO Bell Investment Mgmt 22

23 V. Concluding observations Strategic Investment Plan increases diversification in order to reduce portfolio volatility provides more stable return stream for funding a multi-year phased implementation provides prudent time diversification, cost management and is responsive to market conditions WSIB s governance structure is strong and consistent with industry practices 23

24 VI. Appendix 24

25 Investment Committee Chair & External Advisor Background Morgan McCague (WSIB BoD Member and Chair of IC; formerly IC External Advisor) Senior Vice President, Asset Mix and Risk, retired, Ontario Teachers Pension Plan Board Current directorships with GCAN Insurance Company, First Coverage and Excel Funds BA Economics - Loyola of Montreal, Investment Dealers Association (Level I and II), NYSE Registered Representative Course, University of BC Mortgage Lending & Brokerage Course, Canadian Futures Course, CBOE Course on Options & Futures, Directors Education Program Rotman School of Management Maureen Farrow (IC External Advisor) President of Economap Inc., specialist in applied economics, forecasting, and policy development WSIB Funding Review Advisory Committee Member Member of the Pension Investment Committee of McGill University Director - The Equitable Life Insurance Company of Canada, WorkSafeBC Investment Committee Member, British North American Committee Member, a Fellow of the Institute of Management Consultants B.Sc. Honours in Economics from Hull University, England, undertook Post Graduate work at York University Paul Grise (IC External Advisor) Chief Investment Officer, retired, HealthCare of Ontario Pension Plan (HOOPP) Certified General Accountant, CFA (L1) Don Walcot (IC External Advisor) Chief Investment Officer, retired, Bell Canada Investment Management Investment advisory memberships with McConnell Foundation, York University, Colleges of Applied Art and Technology (CAAT), AIM/Trimark and Imperial Tobacco MBA University of Western Ontario, BA McGill University, CFA 25

26 Investment terminology Active currency: Investment through taking positions in currencies rather that bonds and equities. Balanced risk funds: Mandates within the Total Return Strategy that represent a diversified portfolio of market exposures that are adjusted through the use of leverage, such that each market has a similar risk weighting in the portfolio. Currency hedge: A portfolio of currency positions that offset foreign currency exposures in an underlying investment. Derivative: A contract or security with value or payment obligations based or derived from another asset. For example the S&P 500 futures contract is a derivative whose value is based on the S&P500 stock index. EAFE: Europe, Australasia, Far East. Represents the 21 largest developed economies outside of the U.S. and Canada. Hedge fund: Investments strategies, generally using equities and bonds, that employ short sales to reduce a portfolio s general exposure to the market. Returns tend to be driven by a manager s skill rather than the general direction of the market. Infrastructure: Investments in physical assets that have a steady income stream due to contracts, regulation or natural barriers to entry. Leverage: Debt-like financing techniques that amplify an investment s risk and return relative to the capital invested. In corporations and real estate, leverage is accomplished through debt. In other investment strategies leverage is obtained through the borrowing of securities (for short sales) or through derivatives that require a small proportion of the principal to be advanced (margin). Rolling returns: The technique of showing periodic investment returns, say annual returns, updated for each month over a historical period, such that each month s return represents 12 months return ending as at that particular month. Shorting: Investing through the borrowing and selling of securities that are viewed negatively or for purposes of risk management. This contrasts with long-only investing in which securities are purchased when viewed positively. SIP: Strategic Investment Plan. SIPP: Statement of Investment Policies and Procedures (as required under the Pension Benefits Act). Total Return Strategy: Utilizes a broad range of public markets investments combined with modern investment techniques (derivatives, leverage and shorting) in discretionary mandates. A combination of Balanced Risk funds and Hedge funds. Vision portfolio: An unconstrained mathematically optimal portfolio of market and active return sources that illuminates the limits of the possible; provides a stretch target for continuous improvement. 26