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Agenda. Why is the Pension Investor different?. The journey, the destination or both?. Saver or Investor?. Tailored Solutions. Managing the journey to the destination with confidence. Rank in order of importance What is the most important investment-related decision facing pension savers?.

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Agenda

Agenda

Why is the Pension Investor different?

The journey, the destination or both?

Saver or Investor?

Tailored Solutions

Managing the journey to the destination with confidence


Question

Rank in order of importance

What is the most important investment-related decision facing pension savers?

Question

1.) Investment manager hired

  • 2.) Asset allocation decision

3.) Understanding my risk appetite

4.) Timing the market


Why the pension investor is different

Why the Pension Investor is different

  • Investment Manager – difference between best and worst over 20 years x% :(Lipper Survey of UK managers)

  • Asset allocation decision – need for risk and the need for protection

  • Understanding my risk appetite – a plan with conviction

  • Timing the market – 10 Years to 16.09.2011

    Annualised Return 4%*

    Annualised Return if missed best 10 days -3%

    Annualised Return if missed worst 10 days18%

* 6 of the top 10 days over the last decade were in 2008


Why the pension investor is different1

Why the Pension Investor is different

The Pension Investor – the last of the long term investors

Behavioural Economics – greatest risk to adequacy of benefits

Risk must be taken when appropriate – investment time horizon – growth assets

Risk must be reduced when appropriate – benefit drawdown time horizon; orderly and strategically


The destination

The Destination

  • Time is a natural smoother of volatility

  • But…… Pension investors must not step off the journey

  • Risk reduction can be strategically scheduled – via lifestyling

  • Typical fund mix in the accumulation phase with a strategic Lifestyling strategy will deliver

Example75% Growth Assets

25% Defensive Assets

Only if…….


Member activated switching activity

1000

900

800

700

600

500

400

300

200

100

0

Jul

Jul

Oct

Oct

Oct

Jan

Jan

Apr

Jan

Apr

Feb

Mar

Jun

Feb

Mar

Jun

Sep

Dec

Sep

Dec

Sep

Nov

Nov

Nov

May

May

Aug

May

Aug

Member activated switching activity

Stepping Off The Journey

2005

2007

2008

2009

Source: Irish Life Corporate Business


Agenda 3733254

Both …

  • Recognise that risk appetite and time horizon (age) are not necessarily linked

  • Behavioural economics explores the difference between ‘savers’ and ‘investors’

  • Research suggests that pension savers evolve from one to the other

  • How do we:-Segment our client base

    Monitor the behaviour

    Ensure movement between segments

  • Ultimately as part of the drive for retirement income adequacy:-

    Risk is required

    Risk must be desired and understood

    Risk must be appropriate

    Is one starting point the solution…..


Pension savings the evolution

Pension Savings – The Evolution

Has come a long way – but further to go …

  • Consensus Funds that removed

  • Single Manager Risk

  • Asset Allocation Risk

  • Stock Selection Risk

Tailored

Lifestyle Solutions

Single Manager

Active Managed Fund


Types of investment risk for pension investors

Types of Investment Risk for Pension Investors

Danger to Pension Investor

Investment

strategy

Risk

Invested contributions will not keep pace

with earnings inflation and the real value

of retirement savings will fall

Inflation

Growth Assets

Volatility Management & Defensive Assets

The value of the retirement fund could fall

sharply due to investment market volatility

Capital

Fluctuation of annuity rates leading to uncertainty about the amount of retirement income receivable

Pension

Conversion

Fixed Interest /Bond Fund


Tailored solutions

Tailored Solutions

  • Evolution of growth assets – diversification

  • Evolution of volatility management

  • Evolution of defensive assets – match the benefit drawdown

  • Manage risk through diversification of

    • Asset Class

    • Investment Style (indexed & alpha)

    • Investment Manager

  • Building long term strategic growth asset allocations

  • Managing the Destination via the Journey


Evolution of growth assets

Evolution of Growth Assets

Private

Equities

Infrastructure

Equities

Global

Equities

Forestry

Corporate

Bonds

Indexed

Commodities

High Yield

Equities

Hedge Fund

Emerging Markets

European Property

Small Cap

Equities

Currency

  • Access a wide range of asset classes - efficiently & effectively


Evolution of volatility management

Evolution of Volatility Management

  • Access genuine sources of alpha generation by:-

    - Identify skilled managers

    - Select genuine alpha strategies

    - Monitor and understand performance drivers

    - Tactically allocate between strategies

    - Carry out due diligence on operational and investment process


Evolution of defensive assets

Evolution of Defensive Assets

  • Bond Fund

    • Country

    • Credit

    • Duration exposure

  • Cash Fund

    • Counterparty risk

  • Structured Products

    • Capital Guarantees

    • CPPI


Agenda 3733254

Long Term Strategic Growth Asset Allocation

International Property 5%

Tactical Trading Strategies 5%

Relative Arbitrage 5%

Event Driven 5%

Equity Long/Short 5%

Managed Futures 5%

Commodities 5%

Small Cap Equities 5%

Emerging Market Equities 10%

Developed World Equities

50%


Long term strategic balanced asset allocation

Long Term Strategic Balanced Asset Allocation

International Property 5%

Tactical Trading Strategies 5%

Relative Arbitrage 5%

Event Driven 5%

Equity Long/Short 5%

Managed Futures 5%

Commodities 5%

Small Cap Equities 5%

Emerging Market Equities 10%

Government Bonds 25%

Developed World Equities 25%


Agenda 3733254

Efficient Frontier:Illustration of Expanding the Risk/Return Frontier

Range of possible portfolios when alternative asset classes are added to opportunity set

3

Range of possible portfolios when alpha generation is added and we assume some of the managers will deliver

2

Expected Return

1

Range of possible portfolios when restricted to standard asset classes

Typical Managed Fund

Objective is to move up and/or left, i.e. higher return and/or lower risk

Risk


Conclusion

Conclusion

Recognise that for some investors the ‘journey’ matters and dictates actions

Segment clients by risk appetite

Provide solutions to meet these segments

Facilitate satellite investment options outside their ‘core’ requirement


Question1

Question

What do you now think an appropriate allocation to growth (equities) assets is?

1.)0%

  • 2.)Up to 25%

3.)Up to 50%

4.)50%+


A principled framework for investing

Investing intelligently is about controlling the controllable.

You can’t control whether the funds you invest in will outperform the market today, next week, month or next year; in the short run your returns will always be hostage to the market and its whims

A Principled Framework for Investing !

But you can control:

  •  Your Expectations, by using realism, not fantasy, to forecast your returns

 Your Risk, by deciding how much of your assets to put at risk in the stock market, by diversifying and by rebalancing

 Your own behaviour


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