october 2017, mexico city how to integrate a strategy with a long … · 2018-10-22 · mexican...

The content of this document is approved by Pioneer Global Investments Limited, a member of the Amundi group ('PGIL') for use with AMAFORE conference attendees only, on an individual

basis in Mexico only and shall be treated confidentially. It may not be distributed by the recipient to any third party or to the public.

How to integrate a strategy with a long term view

today and be able to achieve proper retirement goals

Francesco Sandrini, Head of Multi Asset Securities Solution, PhD

October 2017, Mexico City

I The content of this document is approved by Pioneer Global Investments Limited, a member of the Amundi group ('PGIL') for use with AMAFORE conference attendees only, on an individual basis in Mexico only and shall

be treated confidentially. It may not be distributed by the recipient to any third party or to the public.

Agenda

1. Demographic Trend Shaping

2. …In a Strenuous Financial Markets Environment

3. Dealing with the Challenge Today

4. How to Proceed?



01DEMOGRAPHIC TRENDS SHAPING



16%of Worldwide

Population

12%of Worldwide

Population

8%of

Worldwide

Population

Source: United Nations, Department of Economic and Social Affairs. World Population Prospects, the 2015 Revision compared to the 2013 Edition. Icons designed by Freepik.

The World is Getting Older and Living LongerGlobal Proportion of People Aged 65 and Above

Globally, the number of elderly people is forecast to increase and account for a larger share of the

world population. In addition, life expectancy is expected to grow from 71 years in 2015 to 77 in

2050 (rising by 1 year more compared to the 2013 United Nations forecast).

2015 2030 2050

71Yr 77Yr74YrWorld Life Expectancy at Birth World Life Expectancy at Birth World Life Expectancy at Birth

610 Million

People 65+

995 Million

People 65+

1,559 Million

People 65+



Source: United Nations, Department of Economic and Social Affairs. World Population Prospects, the 2015 Revision compared to the 2013 Edition. Icons designed by Freepik.

More Pensioners Living Longer and Less Workers to

Support their Retirement

2015 2030 2050

7 to 1 5 to 1 3.5 to 1

While the old-age population is increasing, the number of working people to support their pensions

is expected to decline. In 2050 there should be 3.5 working people per pensioner (deteriorating

from the 2013 forecast of 4 to 1). These demographic trends will pose great challenges to the

public pension and healthcare systems.

0 1 2 3 4 5

Australia

France

Germany

Italy

Japan

Spain

UK

US

2015 2030

Global Ratio of Workers (24-65 years) to

Pensioners (>65 years)Number of Working Age (20-64) People

per Pensionable Person (>65) by Country



- 20 40 60 80 100

Australia

France

Germany

Italy

Japan

Spain

UK

US

Transfers

Work

Capital

$

$

$

Income Sources of People Aged Over 65, %

Source: OECD, Pensions at a Glance, 2015 and 2013. Data as at 2013 or latest available. Note: Income from work includes both earnings (employment income) and income from self-employment. Capital income includes private pensions as

well as income from returns on non-pension savings. Transfers include public and occupational transfers. The net replacement rate is defined as the individual net pension entitlement divided by net pre-retirement earnings, taking into account

personal income taxes and social security contributions paid by workers and pensioners. It measures how effectively a pension system provides a retirement income to replace earnings, the main source of income before retirement. This indicator

is measured in percentage of pre-retirement earnings.

Implication: Pensioners Could Need Additional Sources

of Income

58%

68%

50%

80%

40%

90%

29%

45%

Pensioners are already sourcing income from work and capital to supplement their pension. With

expected reforms in pension systems, we believe this trend is set to continue.

$

$

$

$

$

Net Replacement Rate



US Household Expenditures by Type and Age Medical Care vs Total Inflation in US

0 10 20 30 40

Housing

Health care

Transportation

Food

Entertainment

Pensions & SocialSec.

Other(1)

Share (% of total)

Age 55–64 Age 65–74 Age 75 and older

In the retirement phase, the share of expenditure for Housing and Health care increases and

represents around 50% of average household costs. 70% of people turning age 65 can expect

to use some form of long-term care at some point1.

Source: Consumer Expenditure Survey 2015, U.S. Bureau of Labor Statistics. Other (1) includes clothing, cash contributions, alcohol, tobacco, personal care products and services,

reading, education, life and personal insurance, and miscellaneous expenses. 1 Source: U.S. Department of Health and Human Services. The graph on the right is updated at

December 30, 2016.

50

70

90

110

130

150

170

190

210

230

1996 2001 2006 2011 2016

100 =

Dec 1

996

Medical Care CPI Total CPI

Risk of Rising Costs: Particularly for Health Care and Housing



Mexican demographics in line with worldwide trend− Increased life expectancy and decreasing nativity rate to continue into first half of 21st century

− Aging of population has led to significant increase in pensioners

− +56% from 2007-2017

− Number of pensioners expected to accelerate for foreseeable future

Source: Consejo Nacional de Población Envejecimiento del a Población de Mexico (Reto del siglo XXI) 2004, 5to Informe de Gobierno .

Changing Demographics of Mexico

Challenge of the 21° Century

72

74

76

78

80

-

10

20

30

40

50

2020 2030 2040 2050

Life E

xpecta

ncy

(yrs

)

Po

p o

f +

60

yrs

old

(M

M)

Projected aging population with life expectancy

Population of +65 yrs old (LHS) Life Expectancy (RHS)

3,101 3,235 3,407 3,596 3,757 3,920 4,0914,299 4,490

4,728 4,848

0

1000

2000

3000

4000

5000

6000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Beneficia

ries (

Thousa

nd

s)

Growing number of Pensioners

IMSS ISSSTE



02…IN A STRENUOUS FINANCIAL MARKETS ENVIRONMENT



Annualized Return (1987-2017) of a Traditional

Balanced Portfolio (50% U.S. Bond, 50% U.S. Equity)

Return Drivers:

Source: Bloomberg. Indices considered are Barclays U.S. Aggregate Bond TR Index

for U.S. Bond and Morgan Stanley North America TR Index for U.S. Equity. Data as at

September 2017.

Challenging Market Backdrop Reduces Return PotentialWe Expect a 20% Probability of Negative Returns Over a 3 Year Horizon

47%

53%

Bond Contribution Equity Contribution

8.03% p.a.

− EPS Growth

− Multiple

Expansion

− Carry

− Yield Compression

Source: Amundi Asset Management. Data as 13 October 2017. For illustrative purposes

only This is not a recommendation to buy or sell any particular security. Based on Pioneer

Investments’ 3 Year Forward Annualized Return for US Bond and US Equity. US Bond is a

proxy for the US Aggregate Bond Index (combines 20% US Corporate IG and 80% US

Government).

Amundi Asset Management 3 Year Forward

Annualized Return of a Traditional Balanced Portfolio

(50% U.S. Bond and 50% U.S. Equity)

50% US Equity - 50% US Bond

3 Years Forward Looking Distribution

0.0% 0.2% 0.7%

3.0%

6.4%

12.2%

15.5%

19.1%

15.9%

11.5%

7.2%

4.5%

2.6%

0.9%0.1% 0.2%

0%

5%

10%

15%

20%

25%

-10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

20% Probability of Negative

Returns



Policy actions of Central Banks has distorted asset prices, thus impacting the

nature of market, liquidity and credit risks

Source: Amundi Asset Management. For Illustrative Purposes Only.

The Risk Paradigm is Expected to Change in the Era of

Debt Deleveraging

Market Risk

(Volatility,

TE, VaR)

Credit Risk Liquidity

Risk

Last 20 Years

Market Risk

(Volatility,

TE, VaR) Credit

Risk

Liquidity

Risk

Next 10 Years



Distortions from QE: massive risky asset reflation with prolonged negative short

term rates

-6

-4

-2

0

2

4

6

8

10

12

0

200

400

600

800

1000

1200

1400

1600

1800

2000

31

/01/1

962

31

/01/1

963

31

/01/1

964

31

/01/1

965

31

/01/1

966

31

/01/1

967

31

/01/1

968

31

/01/1

969

31

/01/1

970

31

/01/1

971

31

/01/1

972

31

/01/1

973

31

/01/1

974

31

/01/1

975

31

/01/1

976

31

/01/1

977

31

/01/1

978

31

/01/1

979

31

/01/1

980

31

/01/1

981

31

/01/1

982

31

/01/1

983

31

/01/1

984

31

/01/1

985

31

/01/1

986

31

/01/1

987

31

/01/1

988

31

/01/1

989

31

/01/1

990

31

/01/1

991

31

/01/1

992

31

/01/1

993

31

/01/1

994

31

/01/1

995

31

/01/1

996

31

/01/1

997

31

/01/1

998

31

/01/1

999

31

/01/2

000

31

/01/2

001

31

/01/2

002

31

/01/2

003

31

/01/2

004

31

/01/2

005

31

/01/2

006

31

/01/2

007

31

/01/2

008

31

/01/2

009

31

/01/2

010

31

/01/2

011

31

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012

31

/01/2

013

31

/01/2

014

31

/01/2

015

31

/01/2

016

31

/01/2

017

Real Short Rates US: US equities, US HY

Real Short Rates US HY Bonds Equities US (lhs)

Real R

ate

s

Source: Amundi Asset Management and Bloomberg as of 31 July 2017



Source: Amundi Asset Management. Deutsche Bank. Data from 7 April 2001 to

21 December 2016.

Lower Trading Volumes in Sovereign Bonds and Credit Sectors

Impact of Quantitative Easing (QE)

Lower trading activity of securities under the scope of QE

Consensus investor positioning on QE trades

Crowded trades at risk of being unwound simultaneously leading to liquidity pressures

-

2

4

6

8

10

12

14

16

12mo Average Daily Trading Volume in Treasuries,Pct of Market Size

Treasury: -70%

Source: Amundi Asset Management. Deutsche Bank. Data from 31 January 2005 to

31 December 2016.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

12mo Average Daily Trading Volume,Pct of Market Size

HY IG

HY: -30%

IG: -50%



Facing the Income Dilemma from Short to Long RunHow to escape the spyral?

Subduedinterestrates

Credit and Liquidity

Risk

IncreaseLeverage

Low Productivity

Containedwage and Inflation

dynamics

Abundantliquidity via

QE



03DEALING WITH THE CHALLENGE TODAY



Source: Mercer Melbourne Global Pension Index 2015.

Implication: Governments Pushed to Reform

Their Pension Systems

Many countries have already reformed their pension systems. Nevertheless there

continues to be significant room for improvement. Investors should prepare in advance

for potential changes in their pension entitlements.

CANADAB

CHILEB

BRAZILC

UNITED STATESC

SOUTH AFRICAC

CFRANCE

DKOREA

DINDIA

SINGAPOREC+

DJAPAN

DINDONESIA

DCHINA

ADENMAR K

ANETHERLANDS

BUNITED KINGDOM

C+

IRELAND

BFINLAN D

BSWEDEN

POLANDC

AUSTRIAC

ITALYC

SWITZERLANDB

AUSTRALIAB+

C+

GERMANY

MEXICOC

Global Scorecard of Pension Systems. Index Value based on Adequacy, Sustainability and Integrity



Past 7 year of increasing pension cost expected to continue in future

Estimated 2018 pension cost to be +170% with respect to 2009 cost, resulting in 35% of current

government expenses

Trend expected to rise until 2050

− Significant portion of pension fund liability under Defined Benefit scheme (“Generation of

Transition”)

− “Generation of Transition” average age: 52, median age: 45

− Regulated under the regime preceding the reforms of 1995 (IMSS) and 2007 (ISSSTE)

Source:Source: CEFP, SHCP, 5to Informe de Gobierno as at 30 Sept 2017

Growing Pension CostDirect consequences of demographics trends

«Generation of Transition» age distribution

0%

10%

20%

30%

40%

-

200,000

400,000

600,000

800,000

1,000,000

Billio

ns P

eso

s

Growing total pension cost

Pension expense (LHS) % of Current govt. expense (RHS)



Current Mexican Pension SystemPost reforms of 1995 (IMSS) and 2007(ISSSTE)

Information as of September 30th, 2017 with the exception of AUM as % of GDP.Sources: CONSAR and OCDE.

Key figures

Regulator National Commission of the Retirement Savings System (CONSAR)

Number of AFORES 11

Number of accounts 59 million

AUM MXN 3,094,881 AUM, equivalent to close to 170,432 million USD

AUM as % of GDP 15.60%

System historical

net rate of return11.53% nominal, 5.58% real

Net return indicator

SB4 (Investment horizon 84 months) 7.10%





Investment target Most AFOREs around 200 bp above inflation.

Investment Policy Age Equity Risk (including Private Equity)

Siefore 4 Less than 36 years old 65.0%

Siefore 3 between 37 and 45 years old 55.0%

Siefore 2 between 46 and 59 years old 45.0%

Siefore 1 60 years or older 20.0%



Sources: Amundi Asset Management, Institutional Solutions. For Illustrative purpose only.

Main Features a “transition” DC Plan should embed

Address the INDIVIDUAL PENSION GAP

Finding the Optimal trade-off between a

sustainable SUBSTITUTION RATE and

its shortfall (or volatility)

The substitution rate of the salary is defined as the ratio between the retirement pension

and the last salary (the pension gap is its complement to one).

Last salary is function of salary inflation, salary evolution and age at retirement.

The maximization of substitution rate can be represented as a defined benefit

problem with individual liabilities linked to salary inflation.




Focusing on Individual Liabilities

Salary dynamics depend on :

1. MACRO DYNAMICS

• Inflation, wages, economic growth

2. MICRO Features

• Age, Sex, Sector, Carreer Path, Human capital (education and skills)

The dynamics of salaries affect the Substitution Rate:

• numerator cumulate contributions and investment performances

• denominator is the salary at retirement

Retirement at Salary

Annuit

rate onsubstituti

T

T

S

yA

S

AG




Defining Default Investment Solutions

1. From individuals to groups: cluster analysis of the adherents by age, sex,

sector, carrier path, human capital. Our approach should not be focused only

on age.

2. From groups to types: definition of employee types for each representative

cluster

3. From types to default solutions: design the investment solution for the

employee types

• Asset allocation decisions

• Based on salary dynamics

• To maximize the substitution rate

4. From default solutions to individual solutions

• Integrating different building blocks to approximate the

individuals requirements and targets



04HOW TO PROCEED?




What Investment Process Makes Sense?

Investment Features

• Broad Asset Diversification

• Multiple Time Dimension (addressing short term issues with overlays)

• See it as an Asset Liability Mangement problem!

Asset Allocation

Tools

• Simulation models for generating correlated paths of assets and salary determinants

• Multistage optimization to manage different horizons



Identified KEY long term investors’ investment decision drivers:

− Macroeconomic variables and asset prices - long term direction

− Economic and financial cycle - medium term evolution

− Possible market deviations - short term misalignments

Source: Amundi Asset Management, Global Financial Data, Bloomberg. Data as of 28th of April 2015.

Identify Trends and CyclesEmbrace the Scary Uncertainty

0

1

2

3

4

5

6

7

8

9

17

92

17

97

18

02

18

07

18

12

18

17

18

22

18

27

18

32

18

37

18

42

18

47

18

52

18

57

18

62

18

67

18

72

18

77

18

82

18

87

18

92

18

97

19

02

19

07

19

12

19

17

19

22

19

27

19

32

19

37

19

42

19

47

19

52

19

57

19

62

19

67

19

72

19

77

19

82

19

87

19

92

19

97

20

02

20

07

20

12

20

17

Lo

g P

ric

e

S&P 500

SPX Trend Trend & Cycle

Return Sample Used

− Different variables/cycles affect Long/Medium/Short term dynamics



Real GDP Trend evolves dynamically

based of an assumptions on:

Labor Force (L)

Total Factor Productivity (TFP)

Capital (K)

Source: Amundi Asset Management, Global Financial Data, Bloomberg. Data as of 28th of April 2015.

Capturing the Risk PremiumExploit Long Term Equity Returns

LONG TERM

Dividend

Yield

Equity Long Term Total Return

Nominal

GDP

Growth

0

5

10

15

20

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

S&P 500 Dividend Yield

Average

0

500

1000

1500

2000

2500

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Pri

ce

S&P 500

S&P 500 Index GDP Growth + Inflation



Equity

Fundamental metrics (e.g. Corporate Earnings) are affected by cycles;

e.g. (Revenues – Costs) affects margins − On the Revenue side, normally sales are affected by the Business cycle

− On the Cost side, variables like leverage, interest rates levels or

commodity prices (e.g. Oil) are more related to the cycle of credit and

monetary policies

Source: Amundi Asset Management, Bloomberg, Factset. For Illustrative purpose only.

Identify Medium Term Cyclical PatternsFocusing on Financial Cycles

Modelling Cyclical Patterns proved to be extremely important when forecasting

returns with a 1-5 Year Horizon

300

400

500

600

700

800

900

1000

1100

1200

1.2%1.7%2.2%2.7%3.2%3.7%4.2%4.7%5.2%5.7%6.2%6.7%7.2%

ene-10 ene-11 ene-12 ene-13 ene-14 ene-15 ene-16 ene-17

Cyclical Patterns

US speculative default rates, 8m lag US high-yield spreads, bps, rhs

Credit

Normally meaningful variables such as the amount of

leverage companies take during the phases of low interest

rates can identify the cycle.

When Monetary policies revert or signs of late cycles are

visible rates might rise, revenues may shrink and default

rates can be affected; a more cyclical variables tend to rise.

MEDIUM TERM



Robust short term Outlook analysis takes into account both financial variables and

market misalignments.

Update as of 31st of March 2017. Source: Amundi Asset Management Global Asset Allocation Research, Bloomberg, FactSet.

Build Short Term OutlookMerge Macroeconomic and Financial Theory with Empirical Evidence

SHORT TERM

Short term Outlook

should look at:

Fair Value Valuation

Technical and Momentum analysis

Sentiment and Consensus analysis and risk perception.

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

mar-

00

mar-

01

mar-

02

mar-

03

mar-

04

mar-

05

mar-

06

mar-

07

mar-

08

mar-

09

mar-

10

mar-

11

mar-

12

mar-

13

mar-

14

mar-

15

mar-

16

mar-

17

EPS Growth YoY

EPS Growth

0

500

1000

1500

2000

2500

20

03

20

04

20

05

20

06

20

07

20

08

20

08

20

09

20

10

20

11

20

12

20

13

20

13

20

14

20

15

20

16

Fair Value

Fair Value S&P 500 Index

S&P 500

Fair Value Drivers

LTM EPS level

10 YRS YIELD Government Rate

GDP GROWTH (QoQ ANN, %)

UNEMPLOYMENT

CPI YOY (%)

OIL PRICE




Modelling Salary DynamicsJoining Macro and Micro Dimension

Modeling Future Salaries

MACRO DIMENSION

• trend of nominal salaries (growth) estimated on

an autoregressive component, on the increase

in prices on the real growth of the economy

MICRO DIMENSION

• three macro categories are identified:

blue-collars, white-collars and

executives/managers,

• the following equation has been estimated

for gross remuneration:

where DS indicates the vector of sector dummies

(Agriculture, Industry, Trade, Transport, Finance and

insurance, Public administration), while the

third grade polynomial is aimed at capturing the age

affect, as shown in the graph.

)1(d 41 Ardyw ttt

DSageageageRL 43 3^2^

0

5

10

15

20

25

30

35

40

45

50

20 30 40 50 60 70 80

Blue Collars White Collars Managers



Bridging between DB legacy and DC future

ConclusionThink about the right retirement target

Address structural correlation between assets and individual liabilities (salaries)

Long term return opportunities with short term challenges (QEs)

Design robust default solutions where to transition members

Transitioning schema at individual level with an individual advisory planning



05APPENDIX



The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial

instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment

decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI

information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person

involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties

of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in

no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.

(www.mscibarra.com).

Additional Notes



Unless otherwise stated all information contained in this document is from Amundi Asset Mangement and is as at 30 September 2017.

Past performance does not guarantee and is not indicative of future results. Unless otherwise stated, all views expressed are those of Amundi

Asset Management. These views are subject to change at any time based on market and other conditions and there can be no assurances that

countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return

and principal value may go down as well as up and could result in the loss of all capital invested.This content of this document is approved by

Pioneer Global Investments Limited.

This document is private and confidential and is for the sole use of institutional or professional clients to whom it is addressed. It is not to be

distributed to the public or to other third parties and the use of the information provided by anyone other than the addressee is not authorised.

The content of this document is approved by Pioneer Global Investments Limited, a member of the Amundi group which is authorized by the

Central Bank of Ireland.

For Attendees of the Pioneer Investments Knowledge Lab Use Only and Not to be Distributed to the Public.

Pioneer Investments is a trading name of the Amundi Asset Management S.p.A. group of companies.

Date of First Use: 30 October 2017.

Important Information

october 2017, mexico city how to integrate a strategy with a long … · 2018-10-22 · mexican...

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