Investment Report Standard Life Good to Go Default Growth Fund Active Plus III Report Q3 2017 Corporate Investment Proposition 1
Good to Go Good to Go, our auto-enrolment proposition for small to medium sized employers (SMEs), aims to provide a high quality solution for employers and members, at the same time as making it as easy as possible for employers to comply with legislation. Built using our Group Flexible Retirement Plan (GFRP), our solution offers SMEs the same full bodied proposition which hundreds of larger employers have already benefited from. At the heart of this proposition is our flagship default (or low-involvement) investment option the Strategic Lifestyle Active Plus III Profile. This profile is one of our range of strategic lifestyle profiles that are actively managed to meet members changing retirement benefit needs, providing the future-proofing and flexibility previously unique to target dated funds. During the profile s growth phase, members will be invested in the Standard Life Active Plus III Pension Fund one of the middle risk level fund options in our Corporate Investment Proposition. This fund is a multi-asset risk based fund with a strategic asset allocation designed to generate the highest possible return for a defined level of risk. It is managed by Standard Life Investments, working in conjunction with Moody s Analytics (previously known as Barrie & Hibbert), who are world-leading experts in risk modelling solutions. As part of our Corporate Investment Proposition, the Strategic Lifestyle Active Plus III Profile is supported by a robust governance and monitoring framework to ensure that the funds continue to perform in line with our expectations. This document is the investment report for the Standard Life Active Plus III Pension Fund. As a reminder, the other key benefits of Good to Go are: Group Flexible Retirement Plan (GFRP) Standard Life s GFRP works for all types of members - from those who want and need the support of a strong default investment option to those who want more flexibility in fund choice or even to upgrade to a Group Self Invested Personal Pension (GSIPP). Flexible contributions for our GFRP Some providers have put a limit on annual contributions. Standard Life hasn t. Having flexible contributions means our GFRP also works for higher earners and those who want to pay in more (although legislative annual allowance rules do still apply). Our GFRP gives easy access to income drawdown, so members can choose whether to buy an annuity or take income drawdown as an optional upgrade (legislative rules apply). Simple and transparent charges With a single transparent total annual fund charge for members, Standard Life keeps it simple. For example, the absence of a per contribution member charge avoids there being a significant disparity between what members of different ages will pay. Depending on the size of the scheme, a monthly scheme management fee (paid by the employer) may apply to ensure we can continue to offer a high quality solution within the future charge cap that will apply from April 2015. Additional charges will apply if a member upgrades to GSIPP. Continual focus on making it easy Standard Life s proposition is designed and tested to meet the needs of employers, with support in place if any help is needed. Ongoing communication support As well as providing support for mandatory employee communications, Standard Life helps employers build awareness among members about auto-enrolment as well as with ongoing engagement, with a suite of ready-made campaigns. Award winning service We have a track record in providing excellent customer service through our experienced customer service staff and investment in technology - providing peace of mind for employers. Established risk controls Managing financial risks since 1825, Standard Life has well established and robust controls in place to take good care of members money. A leader in the market Standard Life is a market leader in workplace pensions in the UK, providing and administering solutions for a large number of SME and FTSE 100 companies. Access to 250+ funds after auto-enrolment In addition to a quality default investment option, after joining members can access our full range of over 250 funds. If they upgrade to a GSIPP, they can access more than 13,000 investment options. Therefore, Good to Go is also suitable for people who want more investment choice. As with any investment the value of any of these funds can go up or down and may be worth less than was invested. You can find out more about our Good to Go proposition at www.standardlifeworkplace.co.uk
Contents 1 Environment and Activity 3 Risk 4 Risk and Return Characteristics 6 Performance 8 Standard Life Active Plus III Pension Fund 9 House view
Environment and Activity Environment Global equities delivered another quarter of positive performance, driven by encouraging economic news world-wide. Corporate earnings growth continued upwards, while consumers in the US and Europe remained upbeat. Central banks indicated their intention to slowly reduce the level of monetary stimulus currently deployed. This would mean raising interest rates (in the US and, potentially, the UK) and reducing quantitative easing (in the US and, perhaps, Europe). Meanwhile, emerging market equities were once again the standout performer, lifted by a weak US dollar, improving economic growth and recovering earnings. Activity Strategic Asset Allocation We review the Strategic Asset Allocation (SAA) for the Active Plus III Fund every quarter, with the aim of ensuring that we continue to meet investors long-term interests. Following the most recent review, no changes were made to the SAA model. Government bonds ended the quarter where they began. In the US, lower-than-expected inflation, Korean tensions and damaging hurricanes all encouraged risk-aversion, before vague plans around tax reform managed to unsettle US Treasury markets. The most extreme turnaround in interest rate expectations was in the UK gilt market, resulting in a sharp underperformance against other markets. As government bond yields rose (prices fell) in September, corporate bond markets lost some of the performance generated in the first two months, though overall returns were positive for the quarter. UK commercial real estate delivered positive performance during the third quarter. In keeping with recent trends, rental income was marginally ahead of capital growth in terms of returns. Industrials were the strongest performers, supported by favourable supply/demand dynamics, as well as the structural shift to online retailing. There was some improvement in sentiment towards the retail sector. However, the bankruptcy of Toys R Us served as a reminder of the threat to traditional bricks & mortar retailers from internet shopping. 1 Corporate Investment Proposition
Environment and Activity Tactical Asset Allocation In terms of our Tactical Asset Allocation (TAA), we retained an overweight position in equities (versus the SAA) and an underweight allocation to bonds. We expect the positive economic growth environment and a gradual tightening of monetary policy to benefit equities over the next six to 12 months. Over the same period, we expect developed bond markets to offer only flat to negative returns. We made the following TAA changes over the period. Increased our allocation to Asia Pacific equities to reflect positive economic growth data coming from China, where GDP growth has been moving back up towards 7%. Commodity prices have also picked up. Reduced the allocation to US equities the reflationary backdrop remains positive albeit President Trump s policies are proving harder to implement than expected. The potential for further upside is therefore somewhat limited. We remain overweight versus the SAA. In addition, we have listed below some of the main TAA positions held during the period. Underweight position in UK equities the UK economy has been surprisingly resilient and the UK consumer has kept spending, despite negative wage growth when inflation is taken into account. However, we retain a cautious outlook on the UK economy going forward. We are mindful of supply side constraints to growth as well as the structural shift of Brexit. Overweight exposure to European equities GDP growth expectations for 2017 have increased, Eurozone unemployment continued to fall, inflation has picked up beyond expectations while business and consumer sentiment reached new highs. Meanwhile, political risks have somewhat diminished, although we are cognisant of the recent Catalonian dispute and upcoming Italian elections early next year. Overweight position in emerging markets, both in equities and bonds we have a positive stance on global growth, as well as seeing support from improving commodity prices and strength in the Chinese economy. Overweight position in Japanese equities we see falling unemployment levels but little wage pressure. Much of the improved profitability is stemming from firms increase in technology investment. Japan is set for its longest continuous run of economic growth since 2001, a sign that the reforms implemented by President Abe may be coming to fruition. Changes to underlying funds Any changes to the weightings of the underlying funds were as a result of the changes in TAA carried out over the review period. Corporate Investment Proposition 2
Risk Unlike traditional managed funds, which aim to outperform the peer group, the risk based funds do not have a specific performance benchmark. Instead the strategic asset allocations aim to provide the maximum expected return for a given level of risk over the 10 year time horizon. To ensure the funds continue to perform in line with customer expectations, we feel it is important to report on both the risk and return characteristics of the funds; not just for each fund in isolation, but as a range. The chart below shows the volatility (standard deviation) of each of the five funds within the Active Plus range since their launch in March 2012. The volatility of the FTSE* All Share Index has been provided for reference only, this is not the benchmark for any of the funds. Active Plus Funds Fund volatility as at 30 September 2017 FTSE All Share Active Plus V Active Plus IV Active Plus III Active Plus II Active Plus I 0 2 4 6 8 10 12 % Source: Financial Express All figures shown have been annualised using monthly data from March 2012 to September 2017. Fund volatility figures are calculated using pension fund prices (net of charges) on a bid-bid basis, in pounds sterling ( ), with income reinvested. * FTSE is a trade mark jointly owned by the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited ( FTSE ) under licence. The FTSE All Share Index is calculated solely by FTSE. FTSE does not sponsor, endorse or promote this product and is not in any way connected to it and does not accept any liability in relation to its issue, operation and trading. All copyright in the index values and constituent list vests in FTSE. FTSE All Share Index is a trade mark of FTSE. 3 Corporate Investment Proposition
Risk and Return Characteristics This section illustrates the risk and return characteristics of the Active Plus range from launch (March 2012) to end September 2017. The graph below compares the difference between the risk and return of the Active Plus funds to a range of simple portfolios constructed from four assets that would be traditionally used by UK investors; UK equities, global equities, UK government bonds and global government bonds. These portfolios are represented by the blue line on the chart below. The blue line displays the historic risk and return characteristics of over 100 sample portfolios, ranging from a 100% allocation to equities (split evenly 50:50 between global and UK equities) at one end (red dot) to a 100% allocation to government bonds (green dot; 50:50 split between global and UK government bonds) at the other, and all the possible combinations in between. It is widely recognised that over the longer term, investment in equities should achieve a better return than a portfolio of bonds but this comes with a higher level of risk. In this example we can see that over the period under review, equities have outperformed bonds but with increased volatility and that the various combinations of the four assets delivered different risk/return outcomes. Active Plus Funds Risk vs Return 12 100% Equities % Annualised Return 10 8 6 4 Active Plus IV Active Plus III Active Plus II Active Plus I Active Plus V c.50% Equities / 50% Government Bonds 2 100% Government Bonds 0 0.0 2.0 4.0 6.0 8.0 10.0. % Annualised Risk (Standard Deviation) Source: Standard Life Investments; FTSE All Share Index and BofAML UK Gilts All Maturities Index, MSCI All Countries World Index and BOFA ML Global Government Index monthly return data denominated in GBP was sourced from Datastream from 01/03/2012 to 30/09/2017; Active Plus annualised performance was based on monthly net of fees prices. The FTSE All-Share Index is calculated solely by FTSE International Limited ( FTSE ). FTSE does not sponsor, endorse or promote this fund. All copyright in the index values and constituent list vests in FTSE. FTSE is a trade mark jointly owned by the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE under licence. All Share is a trade mark of FTSE. Equivalent default fund charge assumed to be 0.75% p.a. Corporate Investment Proposition 4
Risk and Return Characteristics (continued) What does this mean? By applying our robust investment process, we aim to deliver outperformance on a riskadjusted basis, i.e. the portfolios appearing to the left and above the theoretical efficient frontier. Historically, this has been the case for all funds, but due to an extreme upwards movement in the efficient frontier in Q2 and Q3 2016, Active Plus V is no longer achieving this aim. The significant upwards movement was largely due to the impact of the sterling returns of both overseas equities and bonds. While we have been impacted by the exceptional market circumstances we witnessed during this period, we remain confident in our ability to deliver outperformance on a riskadjusted basis over the longer term. 5 Corporate Investment Proposition
Performance Global equities delivered another quarter of positive performance, despite geopolitical concerns on the Korean peninsula and hurricanes in the US. Encouraging economic news from around the world drove markets, while corporate earnings growth remained on an upward trend. Against this backdrop, central banks indicated that they would soon look to tighten monetary policy. Elsewhere, government bonds ended the quarter where they began, while corporate bonds posted a positive return despite falling back in September. Unlike traditional balanced funds that aim to outperform their peer group, the Active Plus funds do not have a specific benchmark. Instead, their strategic asset allocation aims to provide the maximum expected return for a given level of risk over a 10-year time horizon. In order to allow investors to assess how the funds are performing, we have included a comparative index in the performance sections. We have used representative indices based on the strategic asset allocation of each fund and these are gross of charges. For multi-asset funds such as the Active Plus range, both asset allocation and stock selection decisions influence relative performance (as does the annual management charge). Over the quarter, there was a small negative contribution from asset allocation and a small positive from stock selection. Within asset allocation, our overweight exposure to European equities proved positive as did the underweight position in corporate bonds. The underweight position in UK equities detracted over the quarter, however, this was offset by the overweight position in emerging market equities. Within stock selection the key positive contributors this quarter were UK, Japanese and emerging market equities. Exposure to European and US equities was negative, while absolute return - via the Global Absolute Return Strategies (GARS) Fund - delivered a neutral return. In the UK equity portfolio, mining companies Anglo American and Glencore boosted returns as commodity prices rallied. Johnson Matthey was also positive, gaining market share in its automotive catalysts business and progressing with battery technology for electric vehicles. Shares in tour operator Thomas Cook also advanced, despite tightening consumer disposable income, demonstrating a robust business model. The Japanese equity portfolio made a positive contribution to performance. Mitsui Mining and Smelting was one of the leading contributors during the period. The market looked favourably on its micro-thin copper foil for high-end smartphones, as well as the recovery of the copper mining business of its partner Caserones. Elsewhere, Recruit Holdings reported better-than-expected earnings underpinned by domestic revenue growth and the expansion of its global HR technology businesses. The GARS Fund component was neutral in performance terms. After a strong rally early in the quarter, global sovereign bonds retreated in September (yields rose) as major central banks spoke more earnestly about withdrawing monetary support and raising interest rates. Consequently, our Australian and US interest rates strategies delivered negative returns. On a more positive note, our UK inflation strategy contributed positively. UK inflation expectations retreated in July after figures revealed inflation was below forecast. Our corporate bond strategies also performed well, helped by a positive backdrop for strong corporate earnings and renewed talk of tax reform in the US. Corporate Investment Proposition 6
Performance (continued) The European equity portfolio made a negative contribution towards overall returns. Irish low-cost airline Ryanair detracted from performance because of lower fares and flight cancellations. Meanwhile, Merck, the pharmaceutical and chemicals company, delivered poor results in its materials division because of robust competition and currency pressure. Telecommunications equipment maker Nokia also fell amid weaker demand from customers and concern that it may need to cut more costs to stabilise margins. Our position in Newell Brands, where sales disappointed slightly in the second quarter of 2017, negatively affected our US equity allocation. Lighting systems provider Acuity Brands also declined during the period, as customers delayed renovation decisions until there is greater clarity on tax reforms. In other developments, Kraft Heinz saw its share price fall amid concerns about the impact of the Amazon/Wholefoods link-up on the packaged foods sector. There were also doubts as to whether the company would be able to find a willing acquisition target. 7 Corporate Investment Proposition
Standard Life Active Plus III Pension Fund Performance Comparison as at 30 September 2017 Figures quoted are calculated, net of fees, on an offer to offer basis over periods to 30 September 2017, with gross income reinvested. The Comparative Index shown makes no allowance for charges. 10 8 7.88 7.45 7.30 8.06 6.65 6.36 6 4 2.93 2.92 2 1.87 2.28 0.77 0.87 0.94 1.20 0 Q4 2016 Q1 2017 Q2 2017 Q3 2017 1 Year 3 Years p.a. Fund Comparative Index 5 Years p.a. Source: Standard Life Investments (Fund) and Thomson Reuters Datastream (Comparative Index) Note: Past performance is not a guide to future performance and the value of units can go down as well as up. The Comparative index is made up of representative indices based on the strategic asset allocation of the fund and do not take into account any out-performance targets. Note - as a result Global Absolute Return Strategies is currently represented by 6 month LIBOR. Asset Allocation Defensive Assets Growth Assets Asset Class Underweight % Strategic Asset Allocation % Overweight % Cash -0.25 4.10 - UK Gilts - 4.90 - Sterling Corporate Bonds -2.50 10.80 - Sterling Corp 1-5Yrs Bonds -1.00 10.80 - UK Equities -1.25 14.70 - US Equities - 13.30 1.00 European Equities - 5.70 2.00 Japanese Equities - 4.10 1.50 Asia-Pacific Equities - 3.30 0.50 Emerging Markets Equities - 3.30 0.25 Sterling Hedged High-Yield Bonds - 2.80 - UK Direct Commercial Property -1.25 6.30 - Global Absolute Return Strategies - 13.90 - Global REITS - 2.00 0.50 Emerging Market Debt - 0.00 0.50 Portfolios not re-balanced daily. Due to market fluctuations the Fund Composition may vary from the Strategic Asset Allocation. Corporate Investment Proposition 8
House view Very Heavy Heavy Neutral Light Very Light Equities Bonds Alternatives Global Emerging Markets European ex-uk US UK Developed Asian Equities Japanese The following denotes a change: increase and decrease UK US Euro-zone Japanese Japanese yen European real estate North American real estate UK real estate Global commodities US dollar Euro UK sterling Asia Pacific real estate Cash UK Equities Neutral UK economic growth expectations are weakening and Brexit remains a longer-term threat. Sterling remains the primary driver of the relative attractiveness of UK companies with overseas exposure. US Equities Neutral The market is expensive on multiple valuation metrics and monetary policy is neither a headwind nor tailwind. European ex-uk Equities Heavy Corporate earnings are improving following a widespread pickup in economic growth across the region. Japanese Equities Neutral The market looks more attractive given easy monetary policy and fiscal stimulus. Developed Asian Equities Neutral The improvement in the global economy provides support but Chinese policy tightening risks curbing property demand. Global Emerging Markets Equities Heavy Global growth improvements support the asset class, especially key sectors such as Asian technology. UK Bonds Neutral The interest rate outlook remains mixed while the economy faces both higher inflation and slower economic activity. Regulatorydriven flows support yields but there are valuation concerns. US Bonds Light Tighter labour markets and rising wages give the Federal Reserve the rationale to continue adjusting monetary policy. Euro-zone Bonds Light Bonds are not well supported, as the improvement in activity across more economies allows the ECB to plan policy tightening. Japanese Bonds Light An absence of yield makes this asset class relatively unattractive. Cash Light With global yields still extremely low, we see better opportunities in risk assets. Foreign Exchange Neutral, $,, The major currencies are within broad valuation ranges. The yen can act as a diversifier against the risk of a decline in global activity or a serious political shock. UK Real Estate Neutral The UK real estate cycle is at a mature stage and there is limited expected capital growth. Income remains attractive, although risks are elevated should conditions turn recessionary or political uncertainty grows. North American Real Estate - Neutral The US market has low vacancies across most sectors and markets, although the sizeable retail sector is coming under more pressure. European Real Estate - Neutral Stronger economic growth and low levels of new supply support European real estate but valuations are not compelling. Asia Pacific Real Estate - Neutral Income returns are driven by modest rental growth, supported by low vacancies and healthy tenant demand. Global Commodities Neutral While the slow improvement in global growth supports commodities, they are very sensitive to Chinese policy tightening. 9 Corporate Investment Proposition
Find out more For more information speak to your usual Standard Life contact. www.standardlifeworkplace.co.uk Standard Life Assurance Limited is registered in Scotland (SC286833) at Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH. Standard Life Assurance Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. www.standardlifeaberdeen.com 2017 Standard Life Aberdeen, images reproduced under licence Q317