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Asset Allocation Solutions for Pension & Insurance Companies. John McLaughlin Head of Multi Asset Solutions. May 2010 | For professional investors only. This material is not suitable for retail clients. Getting the balance right. Liabilities. Bonds. Equities.
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Asset Allocation Solutions for Pension & Insurance Companies
John McLaughlin
Head of Multi Asset Solutions
May 2010 |For professional investors only. This material is not suitable for retail clients
Liabilities
Bonds
Equities
Is a traditional balanced approach the answer?
1
Static diversification is not enough
You must also rebalance dynamically
Simple static diversification provides protection as the tech bubble collapses June 2000 – April 2006
Simple static diversification offers little protection in the current down turn April 2006 – June 2009
*Diversified Index: 50% MSCI AC World TR $,10% HFRI Fund of Funds Composite TR $, 7% JPM EMBI Global Composite TR $, 10% ML Global High Yield TR $, 10% FTSE EPRA/NAREIT Developed TR $, 3% LPX50 TR $, 10%DJ UBS Future Commodity Index ER $. Rebalanced on monthly basis. Source: Thomson DataStream, Schroders. Updated 30th June 2009.
2
Equity
Illiquidity
Term
Credit
Volatility
Skill
Equity
Private Equity
Property
Infra-structure
High Yield
Com-modities
Hedge Funds
Currency
Dynamic multi-asset investing
Say ‘No’ to the traditional approach
No Benchmark
Asset type
Risk source
Investment vehicle
Easy to say, not so easy to do ….. successfully
Schroders asset allocation model
Asset allocation is hard to do well
Quarterly
Monthly
Daily
Cyclical Market Forum
Global Asset Allocation Committee
Fund Management & Analysis
Fund Managers & Analysts
40+ Senior Fund Managers / Analysts
5 Independent Multi-Asset Specialists
22 Fund Managers and Analysts
Equity
163
Gather Information
Determine Investment Policy
Construct Portfolios
Fixed Income
53
Alternatives
67
Risk Management
InvestmentStrategy
16 quants and derivative experts
5 macro economists
Models & economic cycle analysis
Optimisation, risk analysis, hedging
Specialist resources are necessary - lots of them
Source: Schroders, 31 December 2009
*Team of 30 includes portfolio management, quant analysis, research, trading and support
4
Getting ideas into the portfolio – the Schroders way
5 Voting Members
Global Asset Allocation
Global Asset Allocation
Alan Brown, Keith Wade, Johanna Kyrklund,
Committee (monthly)
Committee
Simon Doyle and Richard Coghlan
Sponsor
Sponsor
Co
Co
-
-
Sponsor
Sponsor
Long High
Long High
vs.
vs.
Cash
Cash
Johanna Kyrklund
Johanna Kyrklund
Alan Brown
Alan Brown
Yield Debt
Yield Debt
Long
Long
vs.
vs.
US
US
Keith Wade
Keith Wade
Johanna Kyrklund
Investment
Investment
Government
Government
Grade
Grade
Bonds
Bonds
Short Equities
Long Equities
vs.
vs.
Cash
Cash
Keith
Wade
Richard Coghlan
Long Pacific
Long Can $
vs.
vs.
Australian $
US Equities
Richard Coghlan
Simon Doyle
Basin Equities
Long
Long
vs.
vs.
G3
G3
Johanna Kyrklund
Johanna Kyrklund
Keith Wade
Emerging
Emerging
Currencies
Currencies
Market
Market
Currencies
Currencies
Source: Schroders, for illustration only
5
Getting “Bang for your Buck”
Source: Lipper Hindsight, February 2010
The right tools also make a big difference
Quantitative framework
Cyclical model1
Valuation model2
Momentum model3
1 Source: Congressional Budget Office (CBO), Thomson DataStream, Schroders
2 Source: Thomson Datastream. Normalised Earnings yield minus bond yield
3 Source: Thomson Datastream. Equity year on year return
Solution 1: Global Asset Allocation
Proof that the processes and the resources work!
Investment Features
Benefits
Ann. strategy return: 9.80%Ann. strategy volatility: 6.41%Ann. LIBOR return: 2.93%Ann. excess return: 6.87%
Source: Schroders. Chart shows monthly performance for the Global Tactical Asset Allocation portfolio. The Strategy was operating on a live basis in a managed account with £4 million of Schroder seed capital from January 2008 until April 2009.
Performance shown is past performance. Past performance is not necessarily a guide to future performance. The value of investment can go down as well as up and is not guaranteed.
8
Schroder ISF US Small & Mid Cap 9%
Schroder ISF QEP Global Quality 7%
Schroder ISF QEP Global Active Value 6%
Schroder ISF European Special Situations 3%
Schroder ISF Emerging Markets 3%
Schroder ISF Asian Equity Yield 3%
Schroder ISF European Equity Alpha 2%
Schroder ISF European Allocation1%
Passive Equity Derivatives 10%
Equity like returns with 2/3 the risk of equities
Equities 44%
A smoother path of returns over time
Schroder ISF Emerging Market Debt Absolute Return 6%
PIMCO Emerging Market Bond Fund 5%
Em. Market Debt 11%
Schroder AS Commodity Fund 4%
Schroder ISF Global Energy 4%ETFS Gold 2%
Commodities 10%
Strategic
Schroder ISF Global High Yield 6%
Bluebay High Yield Fund 3%
High Yield Bonds 9%
Schroder ISF Asia Pacific Property Securities 3%
Invista Foundation Property Trust REIT 1%
Property 4%
International Public Partnerships 2%
HSBC Infrastructure Company Ltd Ordinary1%
Infrastructure 3%
JP Morgan Highbridge Statistical Market Neutral Fund 2%
Absolute Return 2%
Private Equity* 2%
Private Equity 2%
Schroder ISF EURO Corporate Bond 3%
Vanguard Inv Grade Credit Fund 3%
Inv. Grade Bonds 6%
Time
Tactical
Schroder ISF Global Convertible Bond 4%
Convertibles 4%
CPI +5%
Externally Sourced
Cash 8%
Cash 8%
Global Equities
Diversified Growth Fund
Source: Schroders as at 26 February 2010. Please note that this is indicative exposure only and may change, subject to market conditions and outlook
*Private Equity includes allocation to Schroder PEFOF IV plus 1 listed externally managed fund. Total may not sum to 100 due to rounding
9
Targets cash + 4% p.a. over rolling 5 year periods
Maintains a beta of less than 0.5 to equities
Full ongoing governance responsibility
Manager selection
New asset classes as appropriate
Transparent fees
Return from Dec 07 to Dec 09: +5.8% p.a.
Solution 3: Diversified Completion Fund
Fully managed access to alternative investments
Asset Allocation as at 1 March 2010
Source: Schroders, as at 1 March 2010
10
Solution 4: Global Dynamic Balanced Fund
Limiting the downside
Schroder Global Dynamic Balanced Fund
Calendar Year Performance
Return %
Avoiding bursting of tech bubble
Avoiding worst of credit crunch
Source: Schroders, Datastream as at 31st December 2009. Backtested performance until 31st December 2008, live performance from 1st January 2009. Live performance is gross of fees using NAV for I shares. The simulated results must be considered as no more than approximate representation of the strategy’s potential performance. They are the result of back-testing quantitative research results, which are based on a number of assumptions. There are a number of limitations on the retroactive reconstruction of any performance results based on simulations. Past performance is not a guarantee of future results
11
New solutions: Real assets fund
The ‘real’ answer to future inflation?
Commodities*
Rent of shelter
Durable goods
Source: Bureau of Labour Statistics, Data Stream, Schroders. *Food and beverages & non durables less food and beverages
12
Accumulation Period
Monthly drawdown payments
from Year 11 to Year 25.
Coupons are deducted from the NAV
Maximum allocation to growth assets
No drawdown distribution
Bonus Payout*
Final NAV is paid out to the investor.
A proportion of the Bonus Payout
will be incrementally protected
if the NAV of the fund is high.
Protected Drawdown
Payments set at 5% p.a.
of highest recorded NAV
during the accumulation period
New solutions: DC pensions market
‘Pension Plus’ – your retirement supplement
NAV
Highest NAV
100%
Inception
Year 10
Year 25
* Subject to market conditions
Source: Schroders
13
Matching liabilities – bonds or swaps?
A Comparison
Bonds for liability coverage
Swaps for liability coverage
Liabilities
Liabilities
Liability coverage
Bonds
LDI Swaps
Swaps
Backing assets
Bonds
Growth assets
Equities
Source: Schroders, for illustration only
:
Liability Driven InvestmentReducing liability risks - using swaps rather than bonds
Liabilities
Dynamic Allocation
Portfolio Structure
Swap Overlay
Cash Holdings
Cash
Return Generating Assets
Portfolio Management
Interest rates fall / Inflation rises
Cash Buffer
Interest rate and inflation swaps
Return Generating Assets
85%
10%
5%
Interest rates rise / Inflation falls
Note: Percentages shown above for illustration only. Actual amounts depend on the structure of the hedge
Source: Schroders, for illustration only
:
Schroders LDI – the third generation solutionPlatform structure and managementLiabilities
Dynamic Allocation
Portfolio structure
Liability management
Cash Holdings
Collateral
Return Generating Assets
Portfolio management
Cash movement
Synthetic credit
Return generating assets
Cash Fund
Collateral
Longevity swaps
IRS and inflation hedge
Cash movement
Say ‘No’ to a traditional balanced approach; say ‘Yes’ to dynamic asset allocation
17
This presentation is for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Schroders has expressed its own views and opinions in this document and these may change. Information herein is believed to be reliable but Schroder Investment Management Ltd (SIM) does not warrant its completeness or accuracy. This does not exclude or restrict any duty or liability that SIM has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system
The forecasts stated in the presentation are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic, and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today's date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change
Issued in July 2009 by Schroder Investment Limited, 31 Gresham Street, London EC2V 7QA. Registration No 2015527 England
Authorised and regulated by the Financial Services Authority
Important information
