Post on 27-Dec-2015
transcript
Architects of Financial Prosperity
Investment Management Consultants
Underlying Causes of Pension Deficits
Investment Risk
April 19, 2023
Investment Risk
April 19, 2023 22
DISCLAIMER
This presentation is directed only to the client for whom it is intended. The underlying data has been obtained from sources considered to be reliable but its accuracy and completeness cannot be assured. This presentation is for informational purposes only and is not intended to be an offer, solicitation, or recommendation with respect to the purchase or sale of any security or a recommendation of the services supplied by any money management organization. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation. Past performance results are not necessarily indicative of future performance.
Investment Risk
April 19, 2023 3
The many faces of “Risk”:
Actuarial Assumptions Impact on Liabilities Running out of money Variability of Return Negative Returns Underperformance Style Characteristics Quality of Names in Portfolio
Investment Risk
What is it?– It’s not just volatility...– It’s the absence of fiduciary education around
duty of care and duty of loyalty when it comes to investments.
Not understanding the shape and “math” of the liabilities
– Duration– Liquidity– Actuarial assumptions
April 19, 2023 4
Investment Risk
April 19, 2023 5Inversiones para Fiduciarios 5
Pension PlanExpected Benefit Payments
(Based on Target Liability Assumptions with Normal Cost)
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
2008
2011
2014
2017
2020
2023
2026
2029
2032
2035
2038
2041
2044
2047
2050
2053
2056
2059
2062
2065
2068
2071
2074
2077
2080
2083
2086
2089
2092
2095
2098
2101
2104
2107
Years
Am
ou
nt
Investment RiskInvestment Risk
April 19, 2023 6
Curves of Convergence(000)
0,000
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Market Value 8.5% 6.8% 5.0%
Assets
Future Spending
The “End” Game: “A fund’s liabilities should dictate the shape of its assets...
Investment Risk
Investment Risk
Leads to…Not setting appropriate asset allocation policyNot rebalancingNot optimizing yieldNot watching costsRunning out of money altogether
April 19, 2023 7
Investment Risk
Investment Risk reflected in the Pension Arena– Didn’t move along the asset allocation continuum
April 19, 2023 8
(5.0) 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
Asset Class Risk/Reward
Projected Risk
Pro
ject
ed R
etur
n
US Large Cap
US Sm/Mid Cap
Non-US Dev Mkts Non-US Emer Mkts
US Fixed
US TIPS
US High Yield
Non-US Fixed
Real Estate
Private Equity
Hedge FoF
Cash Equivs
Commodities/ Natl Res
Investment RiskInvestment Risk
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Rat
e of
Ret
urn
Time
Variability Tolerance Range
8%
Investment Risk
April 19, 2023 10
Desired Investment Growth
Investment A
Investment B
Time
Return
Investment RiskInvestment Risk
April 19, 2023 11
5
6
7
8
9
10
11
12
13
14
15
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
1 Year 3 Years 5 Years 10 Years
Provides portfolio diversificationCan enhance returns and/or lower risk
Investment Risk
Not enough diversification– US-Centric
Equities Fixed Income
– Alternative investments as alpha generators, rather than as diversifiers
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Investment RiskInvestment Risk
April 19, 2023 13
Asset ClassReturns SD Return SD Return SD Return SD
EquitiesUS Large 8% 19% 8.85% 16.40% 8.88% 21% 7.60% 18%
US Small/Mid 10% 29% 9.85% 22.70% 7.92% 23%Non-US Dev 8.75% 22% 9.2 20.10% 9.29% 24.68 7.58% 20%
Non-US Emerging 9.8 32.90% 7.99% 27.75%Fixed Income
US 5% 4.30% 5.25% 4.50% 5.28% 4.65% 3.25% 4.25%TIPS na na 4.90% 6% 2.98% 5.60%
US High Yield na na 7% 11.50% 5.35% 12.50%Non-US na na 5.15% 9.60% 2.84% 9.50%
AlternativesPrivate Equity 12% 34% 12% 34% 8.78% 30.60%Real Estate 7.25% 17.50% 7.60% 16.50% 6.41% 16.95%Natural Resources 9% 18% 5.50% 15% 3.23% 17.90%Hedge Funds 6.50% 9.70% 6.90% 10% 5.53% 10%
2013Return Expectations Over Time: The Pursuit of 8%2004 2007 2009
Investment RiskInvestment Risk
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2004 2007 2009 2013 2013Equities
US 50% 44% 50% 43% 27%Non-US 10% 7% 15% 39% 25%
Fixed IncomeUS 40% 1% 25% 0% 24%
Non-US 0% 8%Alternatives 0% 48% 10% 18% 16%
Total 100% 100% 100% 100% 100%
Expected Returns 7.5% - 8.5% 8.2 7.8 8.2 6.7%
Expected Volatility 11.5% - 15.5% 12.4 14.3 20.6 12.1%
Return Expectations Over Time: The Pursuit of 8%