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Estimating Future Investment Earnings Today

Estimating Future Investment Earnings Today. Martin Cassell, CFA. CEO & CIO. Questions to Address. How can future investment earnings be estimated? Why does the earnings rate matter? Does history matter? How can rolling time periods help manage results? Is there a disclosure statement?

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Estimating Future Investment Earnings Today

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  1. Estimating Future Investment Earnings Today Martin Cassell, CFA CEO & CIO

  2. Questions to Address • How can future investment earnings be estimated? • Why does the earnings rate matter? • Does history matter? • How can rolling time periods help manage results? • Is there a disclosure statement? • Of course, please see the statement at the end of this presentation for important disclosure information

  3. Forecasting Earnings • Key components affecting an earnings forecast • Forecast period. • Investment portfolio balance. • Purchase yield of investment portfolio. • Investments maturing. • Reinvestment rate of cashflows.

  4. Possible Forecasting Inputs • Purchase Yield to Maturity • Market Yield to Maturity • Historical Returns • Market Benchmark Return • Inflation Rate • Implied Forward Rates

  5. Investment Balance • Investment Balance • Establish the beginning investment balance • Market value • Book value • Accrued Interest • Include any potential contribution/withdrawals

  6. Current Portfolio Income • Income from existing securities • Sum the securities maturing during the forecast period. • Calculate the weighted average purchase yield of the current portfolio. • Purchase Yield = Yield to Maturity at time of purchase • Multiply the securities remaining in the portfolio by the weighted average purchase yield to calculate the income forecast.

  7. Forward Rates Source: Bloomberg, LLP

  8. Reinvestment Income • Income from reinvestment of maturities • Calculate the average number of days until reinvestment of the maturity of securities. • Forecast a reinvestment rate for security maturities • Gov’t forward rates • Corporate forward rates • Blended forward rates • Multiply the dollar amount of the maturing securities by the reinvestment rate. • Multiple the above value by the fraction time period of the left on the horizon period.

  9. Total Portfolio Income • Total Portfolio Income • Add existing portfolio income to the reinvestment income to calculate the total portfolio income forecast.

  10. Interest Earnings Forecast

  11. The Earnings Rate Matters • The earnings rate helps to estimate the growth of the portfolio • The growth of the portfolio helps to pay for future liabilities • Underestimating the earnings rate can create a funding shortfall • What is the appropriate time period for earnings? • Does history have a roll in forecasting future earnings?

  12. Developing A Rolling Return Estimate • Incorporating historical return information and future earnings estimate • Seeking an effective estimate of future returns

  13. Required Future Return • For a given discount rate, what do we need to earn in the future? • What rate of return do we need to earn for a given discount rate?

  14. Finding an Reasonable Discount Rate The 3 year historical return and the 2 year future return estimate have an expected return of about 3%

  15. Rolling Return Estimates A combination of historical returns and estimated future earnings may help provide a relatively stable and effective tool to help a pool manage funding of future liabilities.

  16. Conclusions • Forecasting is an estimate, not an absolute • Known facts can help improve your forecast - better than a SWAG • It is always prudent to be conservative in your forecast • Past performance does not guarantee future results

  17. The Future is Clear

  18. Biographies Martin Cassell, CFA CEO, Chief Investment Officer Martin Cassell is the chief executive and investment officer at Chandler Asset Management and is a principal of the firm. Mr. Cassell is responsible for defining, planning, and directing company programs. He heads implementation of the firm’s investment strategies and portfolio risk management. He designed the proprietary quantitative models that drive our investment process, establishing duration, structure, and asset allocation throughout client portfolios. Mr. Cassell joined Chandler Asset Management in 1991 from the City of San Diego where he managed a $1 billion fixed income portfolio. He began his investment career in 1987 managing portfolios at World Savings and Loan. Mr. Cassell received his B.S. in finance from California State University, Hayward. He is a member of the CFA Society of San Diego and holds the designation of Chartered Financial Analyst. He is also a member of the California Association of Joint Power Authorities (CAJPA) finance committee. Jayson Schmitt, CFA Senior Vice President, Portfolio Manager Jayson Schmitt is a senior vice president and portfolio manager at Chandler Asset Management. He has been instrumental in the development and integration of quantitative analytic tools for the portfolio management process. Prior to joining Chandler Asset Management in 1995, Mr. Schmitt was employed as a financial analyst with USA Federal Credit Union in San Diego, managing a $100 million liquidity book. His responsibilities there also included asset/liability management. Mr. Schmitt earned his B.A. in economics from San Diego State University. He is a member of the CFA Society of San Diego and holds the designation of Chartered Financial Analyst.

  19. Disclosures DISCLOSURES Past performance is not indicative of future results, which may vary. There is no guarantee that any opinion, forecast, or objective will be achieved. The information herein is provided for informational purposes only and should not be construed as a recommendation of any security, strategy or investment product, nor as an offer or solicitation for the purchase or sale of any financial instrument. The financial model described in this presentation has been prepared using a hypothetical portfolio and assumptions provided by the author for the purposes of demonstrating the model. References to specific securities, issuers and market sectors are for solely illustrative purposes of the model presented herein. This presentation contains the current opinions of the author, which are subject to change without notice. Any statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts and assumptions are inherently limited and should not be relied upon as an indicator of future results. Unless otherwise noted, Chandler is the source of the tables, graphs, performance data and characteristics contained in this presentation.

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