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HOT TOPICS SEMINAR LEADING OPINION | Investing to secure your members’ retirement. SECTION 1. ECONOMIC LANDSCAPE. Question 1. What were the main themes of 2013, in the context of: Our economic environment (what drove beta) ; and Asset manager strategies (what drove alpha) ?.
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HOT TOPICS SEMINAR LEADING OPINION | Investing to secure your members’ retirement
SECTION 1 ECONOMIC LANDSCAPE
Question 1 What were the main themes of 2013, in the context of: • Our economic environment (what drove beta); and • Asset manager strategies (what drove alpha)?
Economic Environment 2013 – another year of: risk ON risk OFF Could we expect the same for 2014?
Does this look familiar? Despite initial expectations ALSI in 2012 = 26.7% Strong 2nd half Source: Bloomberg
2013 ended with new highs Many thought 2013 would disappoint, but ALSI = 21.4% Another strong 2nd half Source: Bloomberg
2013 ended with new highs MSCI World Index = 27.4% (in $), 20% stronger than EM Good year for global equities Source: Bloomberg
Asset class performance... ... in Rands over periods to 31 December 2013
Weak Rand Depreciated by 26%
Tapering QE • 18 December 2013 | Bernanke announces $10bn cut in January 2014 to monthly purchases
Interest rates have no where to go... Short term interest rates in the UK, US & EU ...but UP Source: I-Net Bridge, Investec Asset Management
... as seen with the ‘Fragile Five’ • Turkey announces a 5.5% increase to rates (28 Jan 2014)… • …hours later (29 Jan 2014) the SARB announces an “unexpected” increase of 0.5% Source: Bloomberg, Investec Asset Management
Manager Watch™ Survey https://www.alexanderforbes.co.za/business/Asset%20Consulting%20Surveys/Annual%20Retirement%20Fund%20Survey%202013.pdf
Strategies | Balanced funds • Primary drivers of performance are typically: • Asset allocation • Global vs. Local • Asset classes within global & local • Asset strategy • Value/momentum, market cap, low volatility etc. for equities • Duration, credit, market timing & trading etc. for fixed income • Sector allocation in each asset class • Security selection
Global allocations Source: Investment Solutions
Global equities allocations Source: Investment Solutions
Global equities was the place to be Source: Investment Solutions
Key point for long term investors Regardless of managers’ views, all of the global balanced managers (as per AF Manager Surveys) managed to deliver CPI + 5% performance over the 1, 3, 5 & 10 year periods on a per annum basis
Strategies | Equity funds • Main sources of performance are: • Manager style/strategy • Sector allocation • Market risk • Security selection
Large performance range of shares Source: Investment Solutions
Strategies | Bond funds • Main sources of performance are: • Portfolio positioning • Credit yield pick-up • Managing the portfolio term (duration) • Trading • Other sources: convexity optimisation, carry trades, convertible bonds.
Bonds, a tough place to be Source: Bloomberg
Question 2 Tapering of quantitative easing is one of the main economic events to play out in 2014 – what are the possible effects?
Scale of QE is unprecedented Fed expanded its balance sheet from ~$800 billion to ~$4 trillion! Source: Federal Reserve
Tapering has started Going from $85 billion to $65 billion per month!
How will pension funds be affected Christine Romans, Chief Business Correspondent for CNN, described ‘tapering’ as the most important driver of US defined contribution (‘DC’) pension plans!
Anticipate volatility & uncertainty • Negative views • Large decline in equity markets • Large losses on bond portfolios • Large losses in EM (e.g. SA) • If this happens: • Fed has already exhausted all policy measures • Compound with global economic risks • Positive views • QE has stabilized the US economy, managed unemployment & galvanized economic growth • Tapering already priced in – equity markets to deliver moderate but positive growth while bond prices remain stable Reality is likely to lie somewhere between these two extremes!
Retain a well diversified strategy • Trustees should not try to time tapering through asset allocation / manager selection • Specialist approach • Balanced approach • Offshore allocations: • QE – ‘search for yield’ • Yields in developed nations normalising • Developing & EM – may suffer outflows
Understand the asset allocation • Stochastic asset liability modeling – can help to derive a long term strategic asset allocation to provide growth within acceptable risk levels & protect principle objectives • Cash over long term - imprudent
Keep a eye on your asset manager Regulation 28 dictates that boards of trustees should: “understand the changing risk profile of assets of the fund over time, taking into account comprehensive risk analysis” Trustees remain responsible for compliance even when asset management, for example, is outsourced
Interest rate risks & value of advice DC FUNDS • Volatile rates implies volatile annuity prices • Focus on income affordability rather than accumulated capital • When to annuitize? DB FUNDS • Fund liabilities increased significantly as interest rates fell on the back of QE • Liability driven investments (‘LDI’) helped “In a perfect world we could separate the effects of the economy and QE, but this simply is not feasible. Still, we think that QE at a minimum has accelerated the demise of some pensions...Unfortunately, things got so bad for some pension funds that they never had a chance to stick around to see the “long run”.” UBS strategist Boris Rjavinski
In conclusion “Given the unprecedented scale of the Fed’s QE program it is impossible to reliably predict exactly how markets will react to tapering” AF’s views • No free “free lunches” – will be some risk for investors • Diversified portfolios designed to target suitable liability related objectives, e.g. RR in DC funds • Engage with asset managers – how have they positioned their portfolios for tapering? • Encourage members to seek advice
Question 3 The history of asset managers
How does SA fare globally? 0.7% of world GDP Source: WEF Global Competitiveness Report 2013/2014, Investment Solutions
How does SA fare globally? Less than 2% of global AUM Source: World Bank (2012), Investment Solutions
How does SA fare globally? 53rd out of 148 countries in global competitiveness Source: WEF Global Competitiveness Report 2013/2014, Investment Solutions
How does SA fare globally? Financial services industry ranks 3rd SA ranks 1 out of 144 for Regulation of Securities Exchanges Source: WEF Global Competitiveness Report 2013/2014, Investment Solutions
How does SA fare globally? 2012 - Towers Watson Top 500 list of global managers 1965 - the first unit trusts in SA, by 2012 - R1 trillion in assets 2012 - Pension assets as a percentage of GDP
Size of industry SA Equity Market – capitalisation over time • JSE listed in 2006 • 17th biggest exchange by market cap (2012) and most liquid emerging market** • SA ranks 2nd out of 144 for availability of financial services & financing through local equity markets* *WEF Global Competitiveness Report 2013/14 ** World Federation of Exchanges Source: JSE, Investment Solutions
Concentration of the industry Market share of 5 biggest asset managers in each country AUM by SA 2000 – just under R1.1 trillion 2012 – more than R3.8 trillion Highly concentrated Source: World Bank, Black Rock, Investment Solutions
Size of the industry Life insurance companies losing market share
Dominant players Largest managers overtime Source: Investment Solutions, Alexander Forbes
Dominant players Top 10 asset managers & growth rates over the past 10 years Foreign firms have found it difficult to break into SA market
Dominant players • Market share of black-owned & managed firms over time: • Showing growth of AUM • Slower growth of market share Source: Investment Solutions
Challenges • Firms • Increasing cost of regulatory compliance • NT’s call for lower fees • Market volatility & shrinking of funds • Longevity of firms relies on skill, luck (timing of entering the industry) & patient investors • Investors • Refine rigorous & robust manager selection process
SECTION 2 INVESTMENT STRATEGIES
Question 4 Have life stage strategies delivered appropriate results in view of their intended objectives?