INVESTMENT MARKET UPDATE UBC FACULTY PENSION PLAN MIKE LESLIE, FACULTY PENSION PLAN NEIL WATSON, LEITH WHEELER FEBRUARY 11, 2015
Presenters Mike Leslie Executive Director, Investments Faculty Pension Plan Neil Watson Vice President Leith Wheeler Investment Counsel Pg 2
Agenda Introductions Plan Fund Weightings & Asset Mix Fund Returns Investment Market Update Question Period Pg 3
Plan s Fund Weightings as of December 31, 2014 Foreign Equity Fund 5.0% Bond Fund 2.8% STIF 2.0% GIC's 0.7% Canadian Equity Fund 7.4% Balanced Fund 82.1% *Total Assets $1.93 Billion Pg 4
Balanced Fund Policy Asset Mix as of January 15, 2015 Canadian Real Return Bonds 8.0% Canadian Real Estate 10.0% Canadian Equities 20.0% US Equities 6.0% Fixed Income 32.0% Global Equities 24.0% * Global Equities includes investments in both U.S. Equities and Non-North American Equities Pg 5
Fund Rates of Return* (to December 31, 2014) Fund 1 Yr. 5 Yrs. 10 Yrs. Balanced Fund 11.4% 9.6% 7.4% Bond Fund 9.6% 5.8% 5.5% Canadian Equity Fund 10.7% 10.0% 9.2% Foreign Equity Fund 16.2% 14.0% 6.3% Short Term Investment Fund 1.1% 1.0% 2.0% *Before Fees Pg 6
Proposed Agenda Review of 2014 Outlook for 2015 Questions? UBC Faculty Pension Plan Feb-15 Pg 7
Review of 2014 UBC Faculty Pension Plan Feb-15 Pg 8
Return of a Balanced* Portfolio Annualized Returns December 31, 2014 1 Year 4 Years Since June 30, 2007 10 Years Balanced Portfolio* 10.4% 7.8% 4.8% 6.3% CPI 1.5% 1.5% 1.4% 1.7% * 5% Cash, 35% Bonds; 30% Canadian Equities, 15% U.S. Equities (C$), 15% International Equities (C$). Index Returns. UBC Faculty Pension Plan Feb-15 Pg 9
Review of 2014 Returns Q1 Q2 Q3 Q4 1 Year Canadian Equities 6.1% 6.4% -0.6% -1.5% 10.6% U.S. Equities (C$) 5.8% 1.6% 6.2% 8.6% 24.0% International Equities (C$) 4.6% 0.5% -1.2% -0.2% 3.7% Bonds 2.8% 2.0% 1.1% 2.7% 8.8% UBC Faculty Pension Plan Feb-15 Pg 10
A Divergent Global Economy Leading Economic Indicators 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 2012 2013 2014 US Average (Japan, China, Germany, UK, Canada) Since early 2014, the U.S. economy diverged significantly from the rest of the world UBC Faculty Pension Plan Feb-15 Pg 11
Interest Rates Reversed Course and Moved Down Last Year Canada Bond Yields 2012 2013 2014 Overnight Lending Rate 1.00% 1.00% 1.00% 5 Year 1.38% 1.94% 1.41% 10 Year 1.80% 2.75% 1.87% 30 Year 2.36% 3.23% 2.35% UBC Faculty Pension Plan Feb-15 Pg 12
Foreign Currencies Currency Performance vs. U.S. Dollar 2014 Euro -12.0% U.K. Pound -5.9% Canadian Dollar -8.6% Japanese Yen -12.1% U.S. dollar increased versus major currencies in 2014 UBC Faculty Pension Plan Feb-15 Pg 13
Review of Global Markets in 2014 Performance In 2014 Stock Market Local Currency Canadian Dollars United States 13.7% 24.0% Canada 10.6% 10.6% Pacific (Ex. Japan) 5.7% 8.6% Japan 9.6% 4.7% United Kingdom 0.5% 3.2% Europe (Ex. U.K.) 6.6% 1.9% MSCI World 9.8% 14.5% Emerging Markets 5.2% 6.7% UBC Faculty Pension Plan Feb-15 Pg 14
S&P/TSX Composite Index Sector Performance 2014 As of December 31, 2014 Consumer Staples 49.1% Information Technology 35.1% Health Care Consumer Discretionary 30.3% 29.1% Industrials 21.9% Utilities Telecommunication Services Financials S&P/TSX Composite Total Return 16.1% 15.5% 13.8% 10.6% Materials Energy -4.8% -2.6% -10% 0% 10% 20% 30% 40% 50% UBC Faculty Pension Plan Feb-15 Pg 15
Oil: We Have Seen This Volatility Before March 1999 June 2004 UBC Faculty Pension Plan Feb-15 Pg 16
Previous Oil Price Declines 120.0% Weekly WTI Oil Price Changes (YoY Comparison) 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% 2003 Bottom: -25.2% -80.0% 1998 Bottom: -46.0% 2009 Bottom: -64.0% 2014: -50.2% UBC Faculty Pension Plan Feb-15 Pg 17
Review of 2014 Investment returns were extremely strong to start the year - Stocks and Bonds both performed well S&P/TSX Composite - Interest rates fell after clear direction from the U.S. Federal Reserve concerning unwinding of Quantitative Easing 48,000 47,000 46,000 45,000 - U.S. Economy continued to improve (e.g. housing, consumer spending) 44,000 43,000 42,000 - Optimism that Europe was improving 41,000 40,000 - Energy stocks were very strong 39,000 38,000 Dec-14 Nov-14 Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 May-14 Apr-14 Mar-14 Feb-14 Jan-14 Dec-13 UBC Faculty Pension Plan Feb-15 Pg 18
Review of 2014 Market concerns increase as year progresses - Concerns about growth in Emerging markets 48,000 S&P/TSX Composite - Ukraine/Russia (slower growth in Northern Europe) 47,000 46,000 45,000 - Deflation fears in Europe 44,000 43,000 - Unrest in Middle East 42,000 41,000 - Weak commodity prices and end of year collapse in Energy prices 40,000 39,000 - Decoupling globally as U.S Economy continues to improve 38,000 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 2013 2014 2015 Portfolio Return 13.6% 10.4%??? UBC Faculty Pension Plan Feb-15 Pg 19
Our Outlook for the Next 3-5 Years UBC Faculty Pension Plan Feb-15 Pg 20
Bonds We Are in a Very Low Interest Rate Environment 20.0% Government of Canada 30 Year Bond Yield From December 1961 to January 2015 18.0% 17.7% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 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 Dec-14 UBC Faculty Pension Plan Feb-15 Pg 21
Divergent Monetary Policy Expectations 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 - Central Bank, Total Assets (in US$ Trillion) 2005 2007 2009 2011 2013 2015 2017 Japan UK Europe US Divergent economic growth is driving divergence in monetary policy. During 2015, Europe and Japan will be ramping up asset purchases, China and several other major economies will likely be cutting rates the U.S. Federal Reserve will likely be alone in raising rates. UBC Faculty Pension Plan Feb-15 Pg 22
Canada Yield Curve Forecast Current (23Jan2015) 1 Year Forecast Our Long Term Forecast Overnight Lending Rate 0.75% 0.61% 2.50% 2-Year 0.53% 0.76% 2.70% 5-Year 0.78% 1.06% 2.90% 10-Year 1.44% 1.53% 3.05% 30-Year 2.02% 2.07% 3.20% UBC Faculty Pension Plan Feb-15 Pg 23
Market Rally Has Been Supported by Earnings 230 210 190 170 150 130 110 90 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 S&P 500 Forward Earnings S&P 500 Price Index Source: Bloomberg May 31, 2009 to Dec 31, 2014 indexed to 100 UBC Faculty Pension Plan Feb-15 Pg 24
Stock Markets Remain Reasonably Priced 28 S&P 500 Price to Earnings Multiple 26 24 22 20 18 16 14 12 10 8 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Source: Bloomberg Long Term Forward Price to Earnings Average 16.6x UBC Faculty Pension Plan Feb-15 Pg 25
The Long View Stocks Remain Attractive S&P/TSX Composite Valuation Dividend Yield and Price Earnings Ratio over 15 Years 6 35 5 Dividend Yield 30 Trailing P/E Ratio 4 25 3 20 2 15 1 10 0 5 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-14 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-14 Dividend Yields Remain Attractive Valuations are Not Stretched (but Not Cheap) Source: Bloomberg UBC Faculty Pension Plan Feb-15 Pg 26
Bonds versus Stocks: Which has a Better Yield? December 31, 2014 Bond Yields Canada Corporate 5 Year 1.41% 2.31% 10 Year 1.87% 3.47% 30 Year 2.35% 4.15% Dividend Yields TSX Composite 2.9% S&P 500 2.0% MSCI EAFE 3.1% UBC Faculty Pension Plan Feb-15 Pg 27
Don t Forget Market Timing Is Very Hard To Do! 10 Year Annualized Returns As of December 31 Last 4 Years 2010 2000 1990 1980 TSX Composite 5.2% 4.2% 10.6% 3.7% 9.1% S&P 500 (C$) 20.1% -4.5% 17.9% 9.0% 5.6% MSCI EAFE (C$) 8.9% -3.0% 9.4% 13.9% 11.1% Best Performer UBC Faculty Pension Plan Feb-15 Pg 28
Conclusion UBC Faculty Pension Plan Feb-15 Pg 29
Themes in 2015 Low interest rates remain Quantitative easing in the U.S. has ended. The pace and timing of interest rate increases will be gradual. U.S. Continues to be Strong Improving labour market, healthier consumer Energy and manufacturing renaissance Aftershocks from dramatic decline in oil Reduced capital expenditures by Energy companies Net positive for consumers lower gas prices, more disposable income Gradual improvement in Europe Additional stimulus provided to jump start economy UBC Faculty Pension Plan Feb-15 Pg 30
Conclusion Inflation We expect inflation to remain around 1-2% p.a. Consumer and Government Debt U.S. consumers in good shape High levels of Canadian consumer debt Strength & Recovery We expect nominal GDP growth of 2-3% with continued recovery in the U.S. Other economies around the globe will experience slower growth 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-15 Pg 31
2015 UBC Faculty Pension Plan Forum Wednesday, May 20, 2015 Commons Block Ballroom, Marine Drive Residence 2205 Lower Mall 10:15 a.m. to 1:00 p.m. E-mail RSVP by April 30 to pensions@hr.ubc.ca Pg 32
FPP Pension Forum Presentation begins at 10:30 a.m. Plan performance in 2014 Review 2014 and 2015 Initiatives Information Tables & Guest Exhibitors 11:30 a.m. to 1:00 p.m. New to the Plan table Retirement UBC Retirement & Survivor Benefits Faculty Relations Service Canada Pg 33
Thank you! Questions? Pg 34
APPENDIX Pg 35
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-15 Pg 36
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, 1856-2009 UBC Faculty Pension Plan Feb-15 Pg 37
Long Term Asset Class Returns $90,000 Investment Results (Growth of $100 from December 1949 to December 2014) Value of $100 (Annualized Rate of Return) US Equities in $C: $112,162 (11.4%) Canada Equities: $47,113 (9.9%) $9,000 Bonds: $11,329 (7.6%) T-Bills: $3,160 (5.5%) $900 Inflation $1,022 (3.6%) $90 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 UBC Faculty Pension Plan Feb-15 Pg 38
Investing Outside Canada Offers Access to More Types of Companies Diversification Top 3 Sector Weights As of December 31, 2014 TSX S&P 500 MSCI EAFE Financials 35.7% Information Technology 19.7% Financials 25.9% 25% 20% 15% TSX S&P 500 MSCI EAFE Energy 21.9% Financials 16.7% Industrials 12.6% 10% Materials 10.6% Health Care 14.2% Consumer Discretionary 12.4% 5% Total 68.2% Total 30.9% Total 50.9% 0% Health Care Information Technology UBC Faculty Pension Plan Feb-15 Pg 39
Canada Expected Path of Policy Rates Following the surprise Bank of Canada rate cut in January 2015, the risks of additional easing have increased substantially. We now expect that another rate cut from the Bank of Canada is on balance more likely than not, provided that the price of oil remains materially below the Bank of Canada s $60/barrel oil price assumptions. 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% Q4 2014 Current (23Jan2015) Leith Wheeler Forecast 0.00% Current End 2015 End 2016 End 2017 Q4 2014 Current (23Jan2015) Leith Wheeler Forecast Current 1.00% 0.75% 1.00% End 2015 1.02% 0.57% 0.61% End 2016 1.20% 0.44% 1.00% End 2017 1.42% 0.55% 2.50% UBC Faculty Pension Plan Feb-15 Pg 40
Global Market Performance in 2014 MSCI Country Performance ($Cdn) Israel 33.9% USA (S&P 500) 24.0% New Zealand 17.1% Denmark 15.8% Hong Kong 14.6% Belgium 13.6% Singapore 12.4% Ireland 11.6% Switzerland 9.0% Finland 8.3% Australia 5.4% Netherlands 5.3% Japan 4.7% Spain 4.0% United Kingdom 3.2% Sweden 0.8% Italy -1.3% France -1.7% Germany -2.2% Norway -15.0% Austria -23.4% Portugal -32.6% Greece -34.5% MSCI World 14.5% UBC Faculty Pension Plan Feb-15 Pg 41 Canada - TSX Composite 10.6%
Despite Volatility, Another Solid Year of Investment Performance 120 115 110 S&P 500 (USD): +13.7% TSX Composite: +10.6% 105 100 95 Despite volatility in the second half of the year, both U.S. and Canadian markets delivered double digit returns 90 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 UBC Faculty Pension Plan Feb-15 Pg 42
The Long View Stocks Remain Attractive 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% Gov't of Canada 10 Year Bond Yield TSX Earnings Yield Source: FactSet, TD Securities Bond yields continue to edge lower, increasing the attractiveness of stocks UBC Faculty Pension Plan Feb-15 Pg 43