Customized Approaches to Multi-Asset Portfolios

Transcription

1 Customized Approaches to Multi-Asset Portfolios

2

3 The Investment Landscape Has Changed New Challenges Require New Solutions Institutional investors are facing increasingly challenging economic, regulatory and governance conditions Focus is shifting towards holistic investment solutions More emphasis on specific investor objectives A better balance of sources of risk and return Increased appetite for alternative strategies Increased demand for one-stop shop multi-asset class solutions Every investor is unique with different investment objectives 3

4 Proliferation of New Solutions and Investment Ideas Where Does One Even Begin? 4

5 Tailoring Portfolios to Better Meet Investment Objectives Four Case Studies of Actual PH&N IM Client Experiences 1. Improving on the Traditional 60:40 Balanced Fund 2. Reducing risk while maintaining return for an Endowment Fund 3. De-Risking a Pension Plan 4. Diversified Growth Funds 5

6 Improving on the Traditional 60:40 Balanced Fund Traditional Balanced Portfolio Improved Balanced Portfolio Universe Bonds 35% Canadian Equities 35% Universe Bonds 35% High Yield Bonds 3% Cash 2% Canadian Equities 30% Cash 5% International Equities 13% U.S. Equities 13% Emerging Market Equities 4% Global Equities (Quantitative) 13% Global Equities (Fundamental) 13% 1. Move from regional to global approach for equities 2. Dedicated emerging market equity allocation 3. Dedicated high yield bond allocation Image representative of the PH&N Balanced Pension Trust strategic asset class exposures Source: RBC GAM 6

7 Why Global Instead of Regional? Expanded Opportunity Set Increases Added Value Potential Hyundai $27 Daimler $112 Peugeot $11 Astra $12 Honda $73 Automobile Industry Top 20 Companies Porsche $12 Mazda $16 Tesla $32 HD $13 Fuji $34 Toyota $236 Ford $72 Kia $16 Fiat $17 Nissan $37 Renault $27 GM $67 VW $37 BMW $49 Suzuki $16 US EAFE EM Global Approach: Broader opportunity set Ability to add value through geography Regional Approach: Reduced breadth limits selection Some regional markets are more efficient Values in billions CAD Source: RBC GAM, MSCI. As of December 31,

8 Why Allocate to Emerging Market Equities? Large, Compelling Opportunity Largest Emerging Markets Stocks* Developed vs. Emerging Markets Performance Top 10 Stocks Market Cap (in Billions) Country Sector Samsung $164 South Korea Info Tech Taiwan Semiconductor $148 Taiwan Info Tech Tencent Holdings $141 China Info Tech Alibaba Group $113 China Info Tech China Mobile $96 China Telecom China Construction Bank $80 China Financials Naspers $76 South Africa Cons. Disc Baidu $72 China Info Tech Industrial & Commercial Bank China $62 China Financials Bank of China $49 China Financials Source: RBC GAM, e-lab, as of December 31, 2015, Factset * MSCI Emerging Market Index 8

9 Why Allocate to High Yield Bonds? Attractive Yield and Risk Profile YieldtoMaturity 10 Year Rolling Annualized Volatility 9% 8% 8.53% 20% Equities* High Yield Bonds* Investment Grade Bonds* Yield to Maturity (%) 7% 6% 5% 4% 3% 2% 2.01% 6.23% 10-yr Annualized Volatility 15% 10% 5% 1% 0% Universe Bonds North American High Yield Global High Yield 0% Source: FTSE TMX Global Debt Capital Markets Inc, Bloomberg, PH&N IM, December 31, 2015 *Disclosures available in the Appendix 9

10 Endowment: Reducing Risk while Maintaining Return

11 Canadian Endowment Portfolio Reducing Risk While Maintaining Return Existing Asset Mix Canadian Equities 20% Global Equities 40% Initiated dialogue with client to better understand specific objectives: Desire to maintain expected return supporting spending policy Universe Bonds 40% Desire to reduce downside risk and improve capital preservation Modeled Expectations Simulated Return: 5.8% Expected Volatility: 9.7% 12-month Downside*: -14.4% Portfolio Yield**: 2.5% Constrained by existing client SIP&P Customized modelling to create asset allocation decision framework * 12-month Downside is the CVaR 95, which is the expected loss during the worst 5% of simulated outcomes, as determined by the capital market assumptions. See appendix for modeling assumptions. Simulated performance data is for illustrative purposes only and not indicative of actual results. ** Weighted average dividend yield and fixed income yield to maturity at December 31,

12 Canadian Endowment Portfolio Reducing Risk While Maintaining Return Existing Asset Mix Implemented Asset Mix Canadian Equities 20% Global Equities 40% Canadian Equities 20% Global Equities 20% Universe Bonds 40% Universe Bonds 30% Multi-Strategy Absolute Return 10% Low Volatility Global Equities 20% Modeled Expectations Simulated Return: 5.8% Expected Volatility: 9.7% 12-month Downside*: -14.4% Portfolio Yield**: 2.5% Modeled Expectations Simulated Return: 5.8% Expected Volatility: 7.9% 12-month Downside*: -10.8% Portfolio Yield**: 2.6% * 12-month Downside is the CVaR 95, which is the expected loss during the worst 5% of simulated outcomes, as determined by the capital market assumptions. See appendix for modeling assumptions. Simulated performance data is for illustrative purposes only and not indicative of actual results. ** Weighted average dividend yield and fixed income yield to maturity at December 31,

13 Low Volatility and Absolute Return Reduce Downside Risk Improved Capital Preservation 0% -2% -4% Existing Asset Mix Implemented Asset Mix >90% of existing portfolio drawdown risk is equity risk -6% -8% -10% -12% -10.8% Low volatility equities and absolute return improve downside risk by 25% -14% -16% -14.4% Multi-Strategy Absolute Return Global Equities Universe Bonds Global Low Volatility Equities Canadian Equities Better balance of risk for the same expected return * Risk Budget of the return according to the Annual CVaR 95 which is the average loss during the worst 5% of historically observed outcomes. See appendix for modeling assumptions and disclosures This example is for illustrative purposes only and not intended to be representative of the performance of any actual or future investments. 13

14 Why Low Volatility Equity Strategies? Market-Like Returns with Lower Risk 80% 60% Rolling 12-Month Returns MSCI World Minimum Volatility index MSCI World Index Upside (95 th percentile) 24.5% 29.5% Average 8.4% 8.4% Downside (5 th percentile) -12.5% -21.6% Volatility 12.2% 16.6% 40% 12-Month Rolling Returns 20% 0% -20% Debt Ceiling -40% -60% MSCI World Minimum Volatility Index (USD) MSCI World Index (USD) Tech Bubble Financial Crisis Source: Bloomberg 14

15 Why Absolute Return Strategies? Lower Volatility and Less Downside Risk 80% 60% Rolling 12-Month Returns HFRI FoF Conservative Index MSCI World Index Upside (95 th percentile) 15.3% 29.5% Average 6.2% 8.4% Downside (5 th percentile) -3.2% -21.6% Volatility 6.7% 16.6% 40% 12-Month Rolling Returns 20% 0% -20% Early 1990 s Recession -40% -60% HFRI FoF Conservative Index (USD) MSCI World Index (USD) Tech Bubble Financial Crisis Source: Bloomberg 15

16 Pension Plan De-Risking

17 Pension Plan De-Risking Aligning Portfolio with Plan End State 100% Initial Portfolio Transition Portfolio End State Portfolio Asset Allocation 90% 80% 70% 60% 50% 40% 30% FTSE TMX Long Term Overall Bond Index Return-Seeking Assets Duration-Matched Customized FTSE TMX Canada Benchmark Return-Seeking Assets Customized Portfolios by Demographic Cohort Liability Cash Flow Benchmarks Enhanced Cash Overlay Strategy 20% 10% 0% Return-Seeking Assets 17

18 Liability Cash Flow Profile by Cohort Distinguishing Between Term and Nature Pensioners Shorter Term Investment Horizon Liquidity for Annuity Purchases Lower Risk Tolerance Active Members Longer Term Investment Horizon Appetite for Active Management Higher Risk Tolerance Cash Flow Active Member Cash Flows Pensioner Cash Flows Source: PH&N IM Year 18

19 Customized Implementation by Cohort Duration, Credit and Liquidity Requirements Are Different Retired Members Objective: Hedge Interest Rate Risk Active Members Objective: Outperform Liabilities While Controlling Risk Duration: 10.9 yrs. Incremental Yield % Duration: 22.7 yrs. Incremental Yield 1, % Source: Bond Lab. All information as at December 31, Over liabilities. 2 Includes an assumed 3.0% of additional return from the overlay component on 21% of the portfolio. 19

20 Enhanced Cash Overlay Strategies Increasing Return While Efficiently Maintaining Long Duration Overlay Strategies 21% Enhanced Cash Strategies Short-Term Credit Strategies Performance Targets* Cash + 1.5% to 2.0% Derivatives Overlay Multi-Strategy Absolute Return Cash + 4.0% to 6.0% Direct Lending Cash + 8.0% to 10.0% Enhanced Cash Overlay: Invest in a portfolio of diversified strategies designed to beat cash Duration Matched Long Bonds Use bond forwards to achieve desired duration * Performance targets are for illustrative purposes only and meant to be representative of a typical return expectations for the average strategy. Actual performance will differ from expected performance depending on the specific strategy and manager. 20

21 Diversified Growth Funds

22 Diversified Growth Funds Simplifying Asset Mix Decisions and Manager Structure Traditional Return-Seeking Portfolio Diversified Growth Fund Canadian Equities 40% Large Cap Equities 20% Low Volatility Equities 20% Small Cap Equities 10% Emerging Market Equities 10% Global Equities 60% Liquid Alternatives 20% Global Credit 20% Total return focused benchmark What makes a DGF different? Manager selects asset classes Dynamic asset allocation Source: PH&N IM This example is for illustrative purposes only and not intended to be representative of any actual or future investments. Risk management & tail hedging 22

23 Conclusion Every institutional investor faces a unique situation based on their specific investment objectives, regulatory and governance frameworks There is no universal solution to every investment problem Take the necessary time to properly evaluate your specific situation Get your service providers working for you! 23

24 Appendix

25 Disclosures Why a Target Allocation to High Yield Bonds Universe Bonds is represented by the FTSE TMX Canada Universe Bond Index North American High Yield is represented by BoA/Merrill Lynch BB US High Yield Index Global High Yield is represented by BoA/Merrill Lynch Global High Yield Constrained Index Investment Grade Bonds is represented by BoA/Merrill Lynch US Broad Market Index (USD) High Yield Bonds is represented by BoA/Merrill Lynch US High Yield Index Equities is represented by S&P 500 Index (USD) Enhanced Cash Overlay Strategies Enhanced Cash Strategy represented by: 70% FTSE TMX Canada Short Term Corporate Bond index 10% BofA ML High Yield Master II Index (USD) 10% PH&N Mortgage Pension Trust 7% MSCI World Index (CAD) 3% S&P/TSX Composite Index 25

26 Capital Market Assumptions for Modelling Analyses Asset Class Representative Data Series Expected 10-yr Compound Return Expected Annual Volatility Universe Bonds FTSE TMX Canada Universe Bond Index 2.1% 3.8% Canadian Equities S&P/TSX Composite Index 6.8% 17.7% Global Equities MSCI World Index (CAD) 7.2% 16.5% Global Low Volatility Equities RBC QUBE Low Volatility Global Equity Fund (CAD)* 6.4% 11.5% Multi-Strategy Absolute Return HFRI Fund of Funds Composite Index (USD) 6.0% 8.0% Inflation Canadian CPI (Non-Seasonally Adjusted) 2.0% 1.5% *Simulated data used prior to fund inception. This information is meant for investors with sophisticated investment knowledge sufficient to fully understand the risks and limitations of simulated performance data. Simulated performance data is for illustrative purposes only and not indicative of actual results. Please refer to the simulation disclosure at the end of this presentation for complete disclosure notes and simulated performance information. Assumptions represent the views of PH&N IM s forward-looking best estimates of the expected long-term return, volatility and correlations of these asset classes. These assumptions are used for the purposes of illustrating and understanding the potential risk-reward trade-off of different portfolio decisions. Investors should be aware of the limitations using forward-looking assumptions in that there is absolutely no guarantee that future performance will occur according to any ex-ante expectation. 26

27 Capital Market Assumptions for Modelling Analyses Correlations Universe Bonds Universe Bonds 1.0 Canadian Equities Canadian Equities Global Equities Global Equities Global Low Vol Equities Global Low Vol Equities Multi-Strategy Absolute Return Multi-Strategy Absolute Return Inflation Inflation Assumptions represent the views of PH&N IM s forward-looking best estimates of the expected long-term return, volatility and correlations of these asset classes. These assumptions are used for the purposes of illustrating and understanding the potential risk-reward trade-off of different portfolio decisions. Investors should be aware of the limitations using forward-looking assumptions in that there is absolutely no guarantee that future performance will occur according to any ex-ante expectation. 27

28

29

30

31 Disclaimer This presentation is intended for institutional investors only. This document has been provided by Phillips, Hager & North Investment Management (PH&N IM) for information purposes only and may not be reproduced, distributed or published without the written consent of PH&N IM. It is not intended to provide professional advice and should not be relied upon in that regard. PH&N IM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by PH&N IM, its affiliates or any other person as to its accuracy, completeness or correctness. We assume no responsibility for any errors or omissions. The views and opinions expressed herein are those of PH&N IM as of the publication date and are subject to change without notice. This information is not intended to be an offer or solicitation to buy or sell securities or to participate in or subscribe for any service. No securities are being offered, except pursuant and subject to the respective offering documents and subscription materials, which shall be provided to qualified investors. This document is for general information only and is not, nor does it purport to be, a complete description of an investment in any RBC, PH&N or BlueBay funds. If there is an inconsistency between this document and the respective offering documents, the provisions of the respective offering documents shall prevail. Commissions, trailing commissions, management fees and expenses all may be associated with the funds mentioned in this presentation. Please read the offering materials for a particular fund before investing. The performance data provided are historical returns, they are not intended to reflect future values of any of the funds or returns on investment in these funds mentioned in this presentation. Further, the performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. The unit values of non-money market funds change frequently. For money market funds, there can be no assurances that the fund will be able to maintain its net asset value per unit at a constant amount or that the full amount of your investment in the fund will be returned to you. Mutual fund securities are not guaranteed by the Canada Deposit Insurance Corporation or by any other government deposit insurer. Past performance may not be repeated. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Simulated results are achieved by means of the retroactive application of a back-tested model designed with the benefit of hindsight. The back-testing of performance also differs from actual account performance because an actual investment strategy may be adjusted any time, for any reason, including a response to material, economic or market factors. As trades have not actually been executed, the results may have under-or-over compensated for the impact of certain market factors, such as lack of liquidity. Some relevant events or conditions may not have been considered in the assumptions and actual events or conditions may differ materially from assumptions. The amount of risk associated with any particular investment depends largely on the investor s own circumstances. Investors should consult their professional advisors/consultants regarding the suitability of the investment solutions mentioned in this presentation. This document may contain forward-looking statements about general economic factors which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement. All opinions in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility. PH&N IM is a division of RBC Global Asset Management Inc. (RBC GAM Inc.). RBC GAM Inc. is the manager and principal portfolio adviser of the Phillips, Hager & North (PH&N) investment funds. RBC GAM Inc. is registered with the various securities commissions of Canada as a portfolio manager, which permits it to provide discretionary investment management services to its clients, and as an exempt market dealer which permits it to act as a dealer for prospectus exempt trades in certain circumstances. RBC GAM Inc. is also registered as an Investment Fund Manager in Ontario, British Columbia, Quebec and Newfoundland and Labrador and as a Commodity Trading Manager in Ontario. Each of RBC GAM Inc. and BlueBay Asset Management LLP (BlueBay) is a wholly-owned subsidiary of Royal Bank of Canada, and an affiliated company and may be considered as related issuers and/or connected issuers under applicable securities legislation. / Trademark(s) of Royal Bank of Canada. Used under licence. RBC Global Asset Management Inc., IC

32 VANCOUVER Waterfront Centre, 20 th Floor 200 Burrard Street Vancouver, British Columbia V6C 3N5 Canada T TORONTO 22 nd Floor 155 Wellington St. West Toronto, Ontario M5V 3K7 Canada T MONTRÉAL 6 th Floor, North Wing 1 Place Ville Marie Montréal, Québec H3B 1Z5 Canada T