Aon Hewitt: Alternative Investments
Alternatives the Alternative way to a better Balanced Portfolio
NZAM who are we? Fund of Hedge Funds established 1991. Privately owned. $600 mio funds under management. 480 clients mostly private but also institutional. Net returns 8.12% p.a. worst year -8.64% (1994). Recently appointed Sir John Anderson as Advisory Chairman and Jonathan Mason as a Non-Exec Director.
What is an Alternative Investment? Investments that are not traditional bond, equity or property investments. It s a meaningless name they are better described as diversifying investments. They are not a replacement, they are an additional, diversifying source of return. The largest categories of Alternatives are: Commodities Private/Venture Equity Hedge funds Alternatives can also include collectibles such as art, coins and classic cars. Focus on the most liquid and diverse hedge funds.
Hedge Funds A hedge fund is a fund that aims to achieve absolute returns - it seeks to generate profits for investors irrespective of market conditions. Hedge funds invest in equities, fixed income, currencies and commodities. Hedge funds can profit from falling markets by going short (selling securities) or by using derivatives to hedge portfolios. Hedge funds are designed to manage risk risk free is 100% cash; not 100% invested. Hedge fund managers interests are aligned with their investors. This is a skill-based business and skill costs. The focus should be after fee returns.
Global Trends in Alternative Investing 10% 3% 28% 4% 14% 34% 53% 13% 31% Alternatives Equities Fixed Income Cash Distressed Debt Private/Venture Capital Hedge Funds Energy/Nat Resources Private Real Estate The survey covered 835 endowments in 2013 managing US$448 billion and was conducted by Commonfund Institute and the National Assn of College and University Business Officers
Houston we have a problem - The Prospects for the Traditional Balanced Fund Source: BCA The benefits of diversification are widely accepted concept but there is very little diversification remaining in the traditional balanced fund it is dominated by the equity risk premium. Alternatives provide crucial diversification.
Equity Markets the party s getting late.
.and the punchbowl s empty!
Equities are rich but bonds are worse. 10
It s looking good for hedge funds. 11
Balanced Fund Sources of Return Equities the equity risk premium or beta. Bonds primarily credit risk and duration risk. The equity risk premium completely dominates bond/equity portfolios that is not balance. Alternatives components of the above but also alpha the return derived from manager skill independent of markets.
After Fee Returns since 1999 Jan 1999-31 Dec 2014 Annualised Return Volatility Drawdown Correlation to HFRI Global Shares (MSCI World Local) 4.08% 14.32-50.77% 0.68 Global Bonds (Citi World BIG in NZD Hedged) 7.92% 2.80-2.35% -0.14 Hedge Funds (HFRI FOF 100% Hedged to NZD) 7.78% 5.42-17.88% -
After Fee Returns in crisis markets "Tech Wreck" Annualised Return Volatility Drawdown Correlation to HFRI Global Shares (MSCI World Local) -16.69% 17-51.86% 0.23 Global Bonds (Citi World BIG in NZD Hedged) 10.55% 2.61-1.11% -0.14 Hedge Funds (HFRI FOF 100% Hedged to NZD) 4.26% 5.08-4.95% - Global Financial Crisis Annualised Return Volatility Drawdown Correlation to HFRI Global Shares (MSCI World Local) -24.57% 18.24-50.77% 0.74 Global Bonds (Citi World BIG in NZD Hedged) 9.54% 3.62-0.74% 0.06 Hedge Funds (HFRI FOF 100% Hedged to NZD) -2.61% 8.36-17.88% -
After Fee Returns post GFC Post-GFC Annualised Return Volatility Drawdown Correlation to HFRI Global Shares (MSCI World Local) 17.25% 12.54-17.22% 0.81 Global Bonds (Citi World BIG in NZD Hedged) 7.50% 2.40-2.35% -0.13 Hedge Funds (HFRI FOF 100% Hedged to NZD) 7.37% 4.04-6.30%
Dec-98 Nov-99 Oct-00 Sep-01 Aug-02 Jul-03 Jun-04 May-05 Apr-06 Mar-07 Feb-08 Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Aug-13 Jul-14 Value of Portfolio Adding Hedge Funds to a Traditional 60/40 Balanced Fund Global Perspective. $2,300.00 $2,100.00 $1,900.00 $1,700.00 $1,500.00 $1,300.00 $1,100.00 $900.00 $700.00 $500.00 60% Equity, 40% Bond 60% Hedge, 40% Bond 40% Equity, 40% Bond, 20% Hedge Equity = MSCI WORLD FREE - Net - Local Bond = Barclays Capital Aggregate Bond Index Hedge = HFRI Fund of Funds Composite Index
Jan-99 Aug- Mar Oct- May Dec- Jul-02 Feb- Sep- Apr- Nov- Jun- Jan-06 Aug- Mar Oct- May Dec- Jul-09 Feb- Sep- Apr- Nov- Jun- Jan-13 Aug- Mar Oct- Value of Portfolio (NZD) Adding NZAM to a Traditional 60/40 Balanced Fund NZ Perspective. $3,500.00 60% Equity, 40% Bond $3,000.00 $2,500.00 60% NZAM, 40% Bond 40% Equity, 40% Bond, 20% NZAM $2,000.00 $1,500.00 $1,000.00 $500.00 NZAM is Net of fees Equity = MSCI WORLD FREE - Net(unhedged to NZD) Bond = Citi World BIG $-
Return p.a Hedge Funds - A Superior Risk Adjusted Return 9.00% 8.00% Maximum Drawdown/Return Plot Sep 1991- Sept 2014 7.00% 6.00% 5.00% 4.00% 3.00% NZAM Global (Net) Cash Global Equities (NZD) 2.00% 1.00% 0.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% Maximum Decline
Conclusions Hedge funds provide critical diversification benefits to balanced portfolios. They have attractive stand alone risk/return characteristics. They reduce overall portfolio volatility. The timing is right neither bonds nor equities have much left to give. NZAM is ready to help.
Alternative Investments Do you have the tools to fix the roof when the sun is shining? Prepared by Aon Hewitt Retirement Investment Consulting
Agenda Exposure to Alternatives in NZ Why is it low? Product Structure Products Performance April 2015 21
Exposure to Alternatives Global Pension Funds Endowments and Charities KiwiSaver Funds April 2015 22
Global Pension Assets Asset Allocation Scheme 1995 1999 2003 2007 2014e Cash 6% 3% 1% 2% 2% Equities 49% 61% 51% 55% 42% Bonds 40% 30% 36% 28% 31% Other 5% 6% 12% 15% 25% Source:Towers Watson April 2015 23
Endowments and Charities The largest endowments have average allocations of: 13% US Equity, 17% Non-US Equity, 11% Fixed Interest and Cash 23% Hedge Funds, 20% PE/VC, 16% Real Assets Endowments with over $1 billion AUM allocate 59% to alternative investments, the average endowment allocates just less than 30% [CFA Society, 2013] April 2015 24
Endowments and Charities The predominant focus of both types of funds rests on diversification away from traditional asset classes to alternative asset classes. The outlook over the next three years is likely to be one of diversification from core asset classes into alternatives, with real estate, infrastructure, private equity and hedge funds attracting the strongest interest. Scheme Endowment s Foundations Equity 33% 39% Fixed Income 14% 13% Cash 2% 2% Real Estate 5% 3% Infrastructure & Commodities 10% 8% Alternatives (Hedge Funds and PE) Source: DHR International 2012 36% 35% DHR surveyed and reported on a total of 118 endowments and foundations, representing a total market value of $420.9 billion. April 2015 25
KiwiSaver Schemes Allocation to Alternatives Balanced Funds Scheme Benchmar k Actual AMP Capital 7% 4% Commodities/Infrastructure ANZ 0% - 10% 0% Kiwi Wealth 0% 0% Aon Nikko 18% 19% Multi-Strategy/Options ASB 0% 0% BNZ 0% 0% Fidelity/Grosven or 0% 0% Mercer 14.5% 12% Alternatives, Infrastructure and Natural Resources Fisher Funds 0% 0% Westpac 0% - 15% 6% Westpac Alternative Investments Trust April 2015 26
KiwiSaver Schemes Estimated KiwiSaver Market Asset Allocation at 31/12/14 Sector Weight Cash & NZ Bonds 33.4% Overseas Bonds 19.5% NZ Shares 8.2% Australian Shares 5.0% International Shares 27.8% NZ Property 2.7% International Property 1.9% Other 1.4% Total 100.0% Source: Morningstar April 2015 27
Why is exposure in NZ so low? Performance of traditional asset classes Consultants Complexity Fees Products April 2015 28
Performance of a typical Balanced Fund 240 220 Annualised return of 14% over the last 6 years 200 180 160 140 120 100 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 April 2015 29
Why is exposure in NZ so low? Consultants Complexity Fees Products April 2015 30
Product Structure New Zealand vehicle (PIE) New Zealand based manager NZ$ hedged Multi strategy Multi manager April 2015 31
Products Domestic Products Milford Active Growth Fund Salt Long/Short Fund Global Products AMP Capital Global Multi-Asset Fund (PIE) Nikko Multi-Strategy (PIE) Nikko Option (PIE) Mercer Liquid Alternatives (PIE) NZAM Alpha (PIE) Standard Life GARS (SICAV) April 2015 32
Domestic Products Milford Active Growth Fund Has an Absolute Return benchmark/objective 10% p.a. Multi-Sector 10% Global Fund, 20% Cash & Bonds, 70% Domestic Equity (25% Aus) Global Fund includes one global long/short manager and 1 global macro manager Long equity and bonds A Growth Fund with high domestic equity exposure April 2015 33
Domestic Products Salt Long/Short Fund Has an Absolute Return benchmark/objective OCR + 5% p.a. At end February it had 51 Long positions and 29 Short positions Over the course of February, the Fund held 105 different positions. 65 of these went up and 40 fell High volatility, low correlation Single manager, single strategy April 2015 34
Global Products AMP Capital Global Multi-Asset Fund Has an Absolute Return benchmark/objective CPI + 5.25% p.a. Two managers AMP Capital Multi-Asset Fund Schroder Real Return Fund Traditional and alternatives sources of return Diversified fund April 2015 35
Global Products Nikko Multi-Strategy Fund Has an Absolute Return benchmark/objective Cash + 2.5% p.a. Managed by JP Morgan 40 underlying managers Long redemption period High Fees Multi-manager, multi strategy April 2015 36
Global Products Nikko Option Fund Has an Absolute Return benchmark/objective Cash + 4% p.a. Single strategy Sells options on long term government bonds Low correlation with equity/bond markets High volatility NZ manager April 2015 37
Global Products Mercer Liquid Alternatives Fund Has an Absolute Return benchmark/objective Cash + 3% - 5% p.a. Target correlation with equities <0.4 Target volatility 5% - 7% Multi-manager (23), multi strategy April 2015 38
Global Products NZAM Alpha Fund Has an Absolute Return benchmark/objective Cash + 4% p.a. Correlation with equities = 0.06 Volatility 4% - 6% Multi-manager (<20), multi strategy New Zealand manager April 2015 39
Global Products Standard Life GARS Fund Has an Absolute Return benchmark/objective Cash + 5% p.a. Single-manager, multi strategy Traditional and alternative strategies SICAV April 2015 40
GARS performance attribution Stock Selection Security Selection -0.10% Market Beta Global Equity 0.52% Global REITs 0.52% Global Equity Oil Majors -0.09% Chinese Equity -0.16% Directional Strategies Long US Dollar vs Euro 1.22% Australian Short-term Interest Rates 1.21% Short UK Real Yield -0.83% Short US Duration -0.93% Relative Value US Equity Technology Sector vs US Equity Small Cap 0.97% European v US and Japanese Duration 0.71% Asian Basket vs US Variance -0.11% Global Miners vs Swiss Equity -0.97% GARS total 6.4% April 2015 41
GARS traditional v advanced sources of return April 2015 42
Performance dispersion The spread between first and fourth quartile performers has averaged 19.6%. The spread has tended to be higher in times of market stress. Over the period 1990 2012, only 21% of first-quartile performers in one year remained first-quartile performers in the next. Conversely, 23% of bottomquartile performers made the top quartile the next year. April 2015 43
Recap Globally, exposure to Alternatives is increasing Exposure to Alternatives among NZ investors is low Lack of product is an issue but so is lack of demand April 2015 44
Contact List Guy Fisher Investment Consultant Aon Hewitt +64.4.819.4054 guy.fisher1@aonhewitt.com Greg Lee Actuary & Principal Aon Hewitt +64.9.362.9825 greg.lee@aonhewitt.com April 2015 45
Aon Hewitt: Alternative Investments