panel · 2015-03-20 · 2015/03/20 2 panel the experts michael prinsloo head: best practice ......

2015/03/20

1

Leading opinion: goals-based investment strategies

INVESTING

TOWARDS

YOUR GOAL

Hot Topics | 2015

Panel

THE

EXPERTS

Michael Prinsloo

Head: Best Practice

Trevino Ramsamy

Head: Investment Surveys

Rob Southey

Head: Asset Consulting

Deslin Naidoo

Head: Investment Research

2015/03/20

2

Panel

THE

EXPERTS

Michael Prinsloo

Head: Best Practice

Anne Cabot-Alletzhauser

Head: Research Trevino Ramsamy

Head: Investment Surveys

Deslin Naidoo

Head: Investment Research

Topics

Main themes 2014

Looking ahead at 2015

Insights following Budget Speech 2015

Giving tax-free savings a purpose

Insights from Manager Watch™ Survey

Going back to first principles

Section 1 | Investment landscape

Section 2 | Investing with an eye on the prize

Investing towards a goal

Sneak peek into risk budgets

An example of goals-based investing

2015/03/20

3

Investment landscape

SECTION 1

Template section

Main themes for 2014

2015/03/20

4

2014 in review

Divergent growth prospects

Prospect of interest rate hikes

Plummet in oil prices (down 48%)

Growth assets outperformed

Emerging markets

underperformed

Low economic growth

Current & fiscal account deficits

Rand depreciated (10.6% against

USD)

MPC keeps interest rates on hold

Electricity supply issues

Resources continued to

underperform

Local Global

2015/03/20

5

2014 asset class returns

26.6%

15.7% 15.4%

11.1% 10.1% 9.9%

5.3%

0%

5%

10%

15%

20%

25%

30%

Local Property

Global Equity

Local Equity (SWIX)

ILBs Bonds Global Bonds

Cash

CPI = 5.8%

Returns quoted in Rands

Asset classes (except cash) provided

inflation-beating returns

Performance to 31 Dec 2014 ($) - global

($) 3 month 1 Year 3 Year (p.a.) 5 Year (p.a.) 10 Year (p.a.)

Global

MSCI All Countries World

Index (ACWI) 0.5% 4.7% 14.7% 9.7% 6.6%

MSCI World 1.1% 5.5% 16.1% 10.8% 6.6%

Regional

USA 4.9% 13.7% 20.4% 15.5% 7.7%

Europe -4.3% -5.7% 12.5% 5.9% 5.2%

Japan -2.4% -3.7% 9.9% 5.7% 2.4%

Pacific ex Japan -1.5% -0.3% 9.5% 6.1% 8.9%

MSCI Emerging Markets

(EM) -4.4% -1.8% 4.4% 2.1% 8.8%

MSCI Emerging Frontier

Markets (EFM) Africa ex SA -15.3% -9.0% 12.5% 1.7% 6.0%

South Africa -1.0% 0.4% 6.0% 5.8% 9.8%

Global Bonds

Citi World Government Bond

Index (WGBI) -1.5% -0.5% -1.0% 1.7% 3.1%

Corporate Bonds 0.1% 3.1% 4.8% 4.9% 4.3%

2015/03/20

6

Currencies to 31 Dec 2014

3 month 1 Year 3 Year

(p.a.)

5 Year

(p.a.)

10 Year

(p.a.)

Rand/Dollar -1.5% -10.6% -12.4% -9.1% -7.3%

Rand/Euro 1.8% 3.0% -10.2% -5.9% -6.2%

Rand/Pound 1.8% -3.5% -12.7% -8.6% -5.1%

Performance to 31 Dec 2014 (R) - global

(R) 3 month 1 Year 3 Year (p.a.) 5 Year (p.a.) 10 Year (p.a.)

Global

MSCI All Countries World

Index (ACWI) 2.9% 15.7% 29.3% 20.1% 14.6%

MSCI World 3.5% 16.5% 30.9% 21.3% 14.6%

Regional

USA 7.4% 25.6% 35.8% 26.4% 15.7%

Europe -2.0% 4.2% 26.9% 15.9% 13.1%

Japan -0.1% 6.3% 23.9% 15.7% 10.1%

Pacific ex Japan 0.9% 10.1% 23.5% 16.1% 17.0%

MSCI Emerging Markets

(EM) -2.2% 8.4% 17.7% 11.8% 16.9%

MSCI Emerging Frontier

Markets (EFM) Africa ex SA -13.2% 0.3% 26.7% 11.3% 13.9%

South Africa 1.4% 10.9% 19.5% 15.8% 18.0%

Global Bonds

Citi World Government Bond

Index (WGBI) 0.9% 9.9% 11.6% 11.3% 10.8%

Corporate Bonds 2.6% 13.7% 18.1% 14.7% 12.0%

2015/03/20

7

EM underperformed DM

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

De

c-8

8

Fe

b-9

0

Ap

r-9

1

Ju

n-9

2

Au

g-9

3

Oct-

94

De

c-9

5

Fe

b-9

7

Ap

r-9

8

Ju

n-9

9

Au

g-0

0

Oct-

01

De

c-0

2

Fe

b-0

4

Ap

r-0

5

Ju

n-0

6

Au

g-0

7

Oct-

08

De

c-0

9

Fe

b-1

1

Ap

r-1

2

Ju

n-1

3

Au

g-1

4

EM less World Average 1-stdev below

Source: Investment Solutions, MSCI

Performance to 31 Dec 2014 (R) - local


(p.a.) 5 Year (p.a.)

10 Year

(p.a.)

Local Equities FTSE/JSE ALSI

1.4% 10.9% 19.5% 15.8% 18.0%

Local Equities FTSE/JSE SWIX

3.8% 15.4% 21.6% 17.8% 18.6%

Local Bonds

All Bond Index (ALBI) 4.2% 10.1% 8.7% 10.0% 8.5%

Local Cash STeFI Overnight

1.4% 5.3% 5.0% 5.3% 6.9%

Inflation-Linked Bonds Besa Inflation-linked Bond Index (BSAGI)

2.2% 11.1% 10.2% 10.9% 11.2%

Local Property SAPY

11.1% 26.6% 23.1% 21.4% 21.5%

Global Equities

MSCI All Countries World Index (ACWI)

2.9% 15.7% 29.3% 20.1% 14.6%

Global Bonds Citi World Government Bond Index (WGBI)

0.9% 9.9% 11.6% 11.3% 10.8%

Global Property UBS Global Investors Index

12.6% 34.7% 30.9% 24.8% 14.9%

Headline CPI* 0.2% 5.8% 5.6% 5.3% 6.1%

2015/03/20

8

SWIX vs ALSI

4.5% divergence between SWIX & ALSI

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0% N

ov-

06

Feb

-07

May

-07

Au

g-07

No

v-07

Feb

-08

May

-08

Au

g-08

No

v-08

Feb

-09

May

-09

Au

g-09

No

v-09

Feb

-10

May

-10

Au

g-10

No

v-10

Feb

-11

May

-11

Au

g-11

No

v-11

Feb

-12

May

-12

Au

g-12

No

v-12

Feb

-13

May

-13

Au

g-13

No

v-13

Feb

-14

May

-14

Au

g-14

No

v-14

Retu

rns

SWIX-ALSI FTSE/JSE SWIX All Share FTSE/JSE All Share

Source: INet Bridge

Resources underperform

Divergence between financials, industrials & resources

0

50

100

150

200

250

300

350

400

450

Industrials

Resources

Financials

Source: INet BFA

2015/03/20

9

Top 40 share performance to 31 Dec 2014

Source: Investment Solutions

53.9

47.4

45.3

39.2

36.3 35.6

34.2

33.2 27.1

26.1

23.7 20.9

17.3

15.4

10.5

51.9 50.0

47.4

42.4

38.7 36.6

34.0

24.3

17.9

16.9 15.9

12.0

8.5

7.2 5.1

2.7 2.1

- 4.3

8.6

8.1

- 2.6

- 13.1 - 13.4

- 17.3 - 20.2

- 38.4 - 40.7

15.4

10.9

-60 -40 -20 0 20 40 60

RAND MERCHANT IN.HDG. ASPEN PHMCR.HDG.

NETCARE FIRSTRAND

MR PRICE GROUP BARCLAYS AFRICA GROUP

TIGER BRANDS RMB

NASPERS STEINHOFF INTL.

SANLAM INVESTEC

DISCOVERY MEDICLINIC INTERNATIONAL

INVESTEC (JSE) INTU PROPERTIES

REINET INVESTMENTS SCA (DR) REMGRO

NEDBANK GROUP GROWTHPOINT PROPS.

BRIT.AMER.TOBACCO (JSE) CAPITAL & CNTS. (JSE) PROPS.

BIDVEST GROUP SABMILLER (JSE)

STANDARD BK.GP. SWIX

WOOLWORTHS HDG. ALSI

OLD MUTUAL (JSE) MONDI

LIFE HEALTHCARE GP.HDG. MONDI (JSE) MTN GROUP

SHOPRITE VODACOM GROUP

RICHEMONT SECS. (JSE) ANGLO AMERICAN (JSE)

IMPERIAL SASOL

ANGLO AMERICAN PLATINUM ANGLOGOLD ASHANTI

BHP BILLITON (JSE) IMPALA PLATINUM KUMBA IRON ORE

INDEX

RESOURCES

INDUSTRIALS

FINANCIALS

Foreign equity & bond flows into SA

-25

-20

-15

-10

-5

0

5

10

15

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14

Bonds Equities

Total 2014

Bonds = R 57.9bn net outflows

Equities = R 18.1bn net inflows

Source: INet BFA, Alexander Forbes Asset Consulting

2015/03/20

10

Commodities to 31 Dec 2014


(p.a.)

5 Year

(p.a.)

10 Year

(p.a.)

Gold Price -2.1% -1.9% -8.9% 1.5% 10.4%

Oil -39.5% -48.3% -18.8% -5.8% 3.7%

Platinum -7.1% -11.9% -4.6% -3.8% 3.5%

Oil price

Long term performance of oil price

0

20

40

60

80

100

120

140

160

Dec-8

3

Dec-8

5

Dec-8

7

Dec-8

9

Dec-9

1

Dec-9

3

Dec-9

5

Dec-9

7

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9

Dec-1

1

Dec-1

3

Oil

US

$ P

ric

e

Oil Price

Source: INet BFA

2015/03/20

11

Template section

Looking ahead at 2015

Key global themes

Monetary policy by central banks to diverge

Global growth – around 3%

Higher interest rates – US & UK

US unemployment falling

Eurozone stagnating

Japan’s monetisation of debt

China’s growth may weaken

Low commodity prices, strong USD & weak

China – impact EM

2015/03/20

12

United States employment

Source: STANLIB, Economic update

United States employment by age


2015/03/20

13

China industrial production


Local economic outlook

Boost to consumer

incomes & spending

Lower inflation

Improvement on current

account balance

Delayed interest rate

hikes

No growth driver

Eskom & other problem

sectors

Fiscal consolidation

Insufficient job creation

Labour issues

Structural problems

inhibiting growth

Benefited by lower oil

price

Consumption spending

growth

Stimulus for GDP growth

Better fiscal situation

Stable interest rates

Some other potential

positives

Electricity supply is a serious risk

2015/03/20

14

Eskom Unplanned Capacity Loss Factor


Template section

Insights following

Budget Speech 2015

2015/03/20

15

The outlook

Tax revenue R979 billion (2016 / 2017)

Electricity constraints

Additional revenue collection measures

2015 / 2016 2017 / 2018

SA’s economic

growth 2% 3%

CPI average 4.3% -

Deficit of GDP 3.9% 2.5%

Social security

Grants 2014 / 2015 2015 / 2016

War veterans R 1 370 R 1 430

Old age / disability R 1 350 R 1 410

Old age over 75’s R 1 370 R 1 430

Child support R 315 R 330

Foster care R 830 R 860

2015/03/20

16

Reform proposals

Social security

NHI financing

options

Default preservation,

investment strategies &

annuities

Financial Sector

Regulation Bill

Market conduct

policy (TCF)

Cost effective & suitable

system / cost effective default

fund

Tax changes

Taxable income (R’s) Rates of tax

0 – 181 900 18% of each R1

181 901 – 284 100 32 742 + 26% above 181 900

284 101 – 393 200 59 314 + 31% above 284 100

393 201 – 550 100 93 135 + 36% above 393 200

550 101 – 701 300 149 619 + 39% above 550 100

701 301 and above 208 587 + 41% above 701 300

Combined total rebate Tax threshold

Under 65 R 13 257 R 73 650

Aged 65 - 75 R 20 664 R 114 800

Over 75 R 23 130 R 128 500

Personal income tax Trusts – 1% increase to 41%

Transfer duty: reduced for cheaper

properties, but increased for those

over R2.25 mil

Interest exemptions unchanged - TFSA

Foreign allowance: R4 mil to R10 mil (R20 mil family unit)

2015/03/20

17

Tax changes

2014 / 2015 2015 / 2016

Member R 257 R 270

First beneficiary R 257 R 270

Additional beneficiaries R 172 R 181

Family of four R 858 (R 10 296) R 902 (R10 824)

Medical tax credits

Proposed:

Medical tax credits be taken into account for PAYE &

provisional tax purposes

Non-deductible contributions to retirement funds be

included in dutiable estate

Tax changes

2015/03/20

18

Retirement funds…

…wasn’t much except:

GEPF well funded

RA’s – withdrawals by non-

residents

T-day – deferred to 1 March

2016 or 2017

Certain T-day corrections to

be addressed

Maximum age to be

introduced – preservation of

assets on deferral

Template section

Giving tax free savings a purpose

2015/03/20

19

What’s a TFSA?

1 March 2015, contribute R30 000 p.a.

R500 000 lifetime limit

Exempt from:

Income tax on interest

Capital gains tax

Dividend withholding tax

But, after tax

contributions

TFSA 101

Start young Start today Start now

Simple

Transparent

Suitable

Insurance policies

CIS

Banking products

Government products

Reg 28 doesn’t apply

Reasonable fees

No performance fees

Medium to long-term

Start young Start today Start now

2015/03/20

20

What are the benefits?

Effect of tax on long term investment

R 850,521

R 1257,391

R 2148,225

R 901,007

R 1345,641

R 2346,181

R 500,000

R 750,000

R 1000,000

R 1250,000

R 1500,000

R 1750,000

R 2000,000

R 2250,000

R 2500,000

Year 10 Year 12 Year 15

Typical multi-asset class fund (40% marginal tax-rate)

Typical multi-asset class fund (18% marginal tax-rate)

Tax-free multi-asset class fund

Saving of R197 956

Employer angle

Savings safety valve Link to financial goals Commitment

Child’s education

Post-retirement:

healthcare

housing

2015/03/20

21

ASK THE

EXPERTS

Questions?

Template section

Insights from Manager Watch™ Survey

Manager Watch™ Survey of Retirement Fund

Investment Managers 2014

2015/03/20

22

History of performance surveys

1994 Manager

Watch™

Performance Only

Survey – a

market first!

1998 Manager Watch™

Survey revamped

Participation criteria set

Large Manager

Watch™

o Launched June 1998

o Top 10 active

balanced managers

RDP Survey (renamed Targeted

Development Investments

Survey)

Enhancements post-1998

Risk profiling

SA only & global only portfolios

Benchmark returns

Risk-adjusted measures

2001 Absolute

Return

Survey

2002 Money Market

Survey

2003 Specialist

Bond Survey

2004 Hedge FOF

Survey

Specialist Equity Survey

2006 International

Survey

2007 Medical Aid

Survey

2010 BEE Survey

Property

Survey

2012 LDI Survey

2013 Enhanced

Survey

Governance

2014 Equity Fund

Analysis

Surveys revamped

2015 Survey Rules

Goals -based

Survey highlights

Performance highlights

AuM analysis

Review of asset manager

fees

Peeling back the layers:

There is more to an

equity manager than

their performance!

2015/03/20

23

Performance highlights - balanced

Managers defensively positioned

Volatility was expected

Thought markets were fully priced

Focus on risk mitigation

But markets delivered good returns - weighed against managers

Managers needed to take advantage of opportunities to add value

through tactical asset allocation, sector rotation, security selection

and trading

Cash created performance drag for SA & Global BIV managers

Global BIV managers over-weight US markets did well

Performance highlights - equity

Sectors:

Gap between resources (-14.7%) and financials (27.3%) ~ 42%

Relative exposure to resources made a difference

Role of benchmarks significant – ALSI higher resource exposure

Stock selection:

Naspers almost impossible to overweight & had an excellent 2014

Fall of African Bank put pressure on some managers

Sasol started dropping due to fall in the oil price

Strategies:

Quantitative strategies performed well – diversified styles

Value underperformed

Earnings & price momentum outperformed

Findings:

SA managers failed to out-perform, despite opportunities

Herding concern – many appear vulnerable to similar factors

2015/03/20

24


-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

6/1

/20

03

9/1

/20

03

12

/1/2

00

33

/1/2

00

46

/1/2

00

49

/1/2

00

41

2/1

/20

04

3/1

/20

05

6/1

/20

05

9/1

/20

05

12

/1/2

00

53

/1/2

00

66

/1/2

00

69

/1/2

00

61

2/1

/20

06

3/1

/20

07

6/1

/20

07

9/1

/20

07

12

/1/2

00

73

/1/2

00

86

/1/2

00

89

/1/2

00

81

2/1

/20

08

3/1

/20

09

6/1

/20

09

9/1

/20

09

12

/1/2

00

93

/1/2

01

06

/1/2

01

09

/1/2

01

01

2/1

/20

10

3/1

/20

11

6/1

/20

11

9/1

/20

11

12

/1/2

01

13

/1/2

01

26

/1/2

01

29

/1/2

01

21

2/1

/20

12

3/1

/20

13

6/1

/20

13

9/1

/20

13

12

/1/2

01

33

/1/2

01

46

/1/2

01

49

/1/2

01

41

2/1

/20

14

Rolling 1 Year Average Active returns - SWIX

Rolling 1 year Average Active returns

Amongst benchmark-cognisant managers only 6 out of 17 managers (35%) have provided

alpha over a 5-year period. In the non benchmark-cognisant category, only 7 out of 23 managers (30%) have provided alpha over 5 years


-3%

-2%

-1%

0%

1%

2%

3%

4%

6/1

/20

05

10

/1/2

00

5

2/1

/20

06

6/1

/20

06

10

/1/2

00

6

2/1

/20

07

6/1

/20

07

10

/1/2

00

7

2/1

/20

08

6/1

/20

08

10

/1/2

00

8

2/1

/20

09

6/1

/20

09

10

/1/2

00

9

2/1

/20

10

6/1

/20

10

10

/1/2

01

0

2/1

/20

11

6/1

/20

11

10

/1/2

01

1

2/1

/20

12

6/1

/20

12

10

/1/2

01

2

2/1

/20

13

6/1

/20

13

10

/1/2

01

3

2/1

/20

14

6/1

/20

14

10

/1/2

01

4

Rolling 3 Year Average Active returns - SWIX

Rolling 3 year Average Active returns

2015/03/20

25

Top 20 asset managers ranked by AUM

79% of

total

AUM

AUM analysis

Total value of assets managed

Total AUM has grown by 20.4% over 12 months

2015/03/20

26

AUM analysis

Asset distribution according to manager BEE ratings

Peeling back the layers

There is more to

an equity

manager than

their

performance!

2015/03/20

27

Template section

Going back to first principles

First principles

Objectives

Risk

Strategic asset allocations

Benchmarks

Fees

Performance

Passive vs active

Passive vs passive

Red Herrings A good investment

strategy

2015/03/20

28

As simple as possible but no simpler

Using performance comparisons can be misleading

Interrogate process to ensure the strategy can deliver on the

fund’s objective

Using performance comparisons can be misleading

Have we maximised the probability of success

Interrogate process to ensure the strategy can deliver on the

fund’s objective

Active or passive is an implementation choice

Understand your objective

Replacement ratio index of members born in different years

0

10

20

30

40

50

60

70

80

90

100

1952-born 1962-born 1972-born 1982-born

Ind

ex

37.8

40.3

50.1

66.7

Source: Alexander Forbes Pensions Index, December 2014

2015/03/20

29

Objectives in a retirement fund

Saving for retirement Preparing for retirement

Objectives:

Accumulating assets

Contribution levels

Risk tolerance

Preservation

Focussed objectives:

Changing risk tolerance

Changing risk capacity

Replacing income

Protecting assets

Growth

Understand the process

Building your strategy

Determine investment objective

Establish horizon of objective

Define appropriate risk

controls

Calculate asset mix that meets

objective

Choose implementation benchmarks for

assets

Establish a monitoring and

rebalancing process

2015/03/20

30

Common investment objectives

Targeted replacement ratio

Capital growth

Capital protection

Income targeting

It’s difficult to compare portfolios

with different objectives

Optimal strategy for objective

Gold on 100m Pain on the marathon

2015/03/20

31

What’s really important?

We used this example at our Hot Topics seminar in 2014 –

we’d like to re-emphasise the message

Monthly

Income needed

Capital needed

for income

Investment

Value

Affordability

Level

1 June 2013 R5 500 1 864 818 1 500 000 80.44%

1 July 2013 R5 500 1 659 085 1 441 393 86.88%

Improvement 12.04% -3.91% 6.44%

The goal is not to maximise wealth at retirement; it’s to ensure there

will be sustainable income replacement post-retirement

Understanding strategic asset allocation

This is the most

important decision!

Over 90%* of

variation in returns

is attributed to

asset allocation

Accumulation portfolio | Final portfolio | De-risking process

*Source: 1986 Brinson, Hood and Beebower, The determinants of portfolio performance

2015/03/20

32

Benchmarks

SWIX vs ALSI

Performance differentials in the chosen

benchmark indices can outweigh differentials due

to fee structures

Risk neutral position

Structure

Availability of

portfolios

Independent

construction

Costs & TER

Liquidity

Considerations Choosing equity benchmark

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

SWIX-ALSI

Caveat Emptor

75

175

275

375

475

575

675

Feb-0

4

Aug-0

4

Feb-0

5

Aug-0

5

Feb-0

6

Aug-0

6

Feb-0

7

Aug-0

7

Feb-0

8

Aug-0

8

Feb-0

9

Aug-0

9

Feb-1

0

Aug-1

0

Feb-1

1

Aug-1

1

Feb-1

2

Aug-1

2

Feb-1

3

Aug-1

3

Feb-1

4

Aug-1

4

Cumulative performance based on R100 investment

AF Passive Bold AF Passsive Bold Moderate

AF Passsive Moderate AF Passsive Moderate Cautious

AF Passive Cautious

Source: Alexander Forbes passive portfolios, December 2014

0%

5%

10%

15%

20%

25%

1 Year 3 Year 5 Year 10 Year

Historic returns

AF Passive Bold AF Passsive Bold Moderate

AF Passsive Moderate AF Passsive Moderate Cautious

AF Passive Cautious

Analysing historic risk

and performance

numbers will not help

you determine whether

one strategy is superior

to another!

2015/03/20

33

Where does this leave us?

objectives

strategic asset allocations

time horizons

benchmarks

It’s difficult to compare strategies

with different:

Be pragmatic

1. How does the asset allocation achieve the

objectives?

2. Why are the underlying benchmarks selected?

3. What risks are managed explicitly? And what

are not?

4. How long is the member in this strategy?

Questions to ask about the design of your strategy

2015/03/20

34

Investing with an eye on the prize

SECTION 2

Heuristics & biases affect us

Ostrich effect

Herding

Clustering Illusion Representivness

Anchoring

Base Rate Fallacy

Prince charming effect

overconfidence

Zero Sum

Source: Investment Solutions, Ready Set Retire

2015/03/20

35


Gamblers fallacy

H H H H

H H ?

50:50

Anchoring

a reference point &

adjust…


2015/03/20

36

Anchoring


R350 R45 R85 R155

Problem with relativity


Case 1 You are shopping for a pen, it

costs R250. You remember that

you can get the same pen for

R180 in another shop 15

minutes away. Do you take the

trip to save R70?

(You save 28%)

Most say

YES !

2015/03/20

37

Problem with relativity


Case 2: You are shopping for a suit which

costs R4,550. A customer

whispers in your ear that the

exact same suit is on sale for

R 4,480 in another shop 15

minutes away. Do you take the

trip to save R70?

YOU SAVE 1,5%

Most say

NO !

“To invest successfully over a

lifetime does not require a

stratospheric IQ, unusual business

insights or inside information.”

“What’s needed is a sound

intellectual framework for making

decisions and the ability to keep

emotions under control from

corroding that framework.”

Warren Buffet

2015/03/20

38

Template section

Investing towards a goal

What would you choose?

The probability of reaching the income replacement

target

The probability of beating the income replacement target

An investment strategy that maximises:

2015/03/20

39

Would you still choose it?

-

,200

,400

,600

,800

1,000

1,200

1,400

1,600

Illustration: RR outcomes for 10 000 retirees

Goals Based Solution Standard Solutions

Minimum

acceptable goal

(60% RR)

but 1 in 10

members fail to

meet goal

more members may

beat goal

1 in 50

members

fail to meet goal

A goal …

… without a

plan is just a

wish

2015/03/20

40

Impact of democratization of investing

Traditional wealth management

model

Stronger regulatory protections

make mutual funds accessible Shift from DB to DC

Managers focused on

absolute return targets

‘Smoothed out’ returns

DB schemes

Source: Investment Solutions

Introduction of market-linked

diversified funds

Shift to DC schemes

Performance objectives –

benchmarks, competitors &

performance tables

Focus – single manager

diversified portfolios

Portfolios – different managers across & within

asset classes

Pre-packaged multi-manager portfolios

Decline in importance of asset allocation – all

assets provided good returns

Conventional model -

diversified mix of assets

Key characteristics: growth

& defensive asset classes;

age group appropriate

Reliance on equities for

growth

Risk & return measurements

against passive benchmarks

& competitors

As investing democratized

Limited technology –

unfeasible to provide

customised solutions

Performance comparisons

– easy to explain & sell

Limited asset classes – ILB

only viable investment

option in late 2000’s

Technology Performance Asset classes

2015/03/20

41

The more likely culprit

R ,0

R ,500

R 1,000

R 1,500

R 2,000

R 2,500

R 3,000

R 3,500

R 4,000

R 4,500

R 5,000

R 5,500

R 6,000

R 6,500 Jan-8

7

Jan-9

1

Jan-9

5

Jan-9

9

Jan-0

3

Jan-0

7

Jan-1

1

Jan-1

5

R100.00

R6323.63

Jan 87 – Dec 14

The challenge

Often the

investor

doesn’t even

feature!

2015/03/20

42

What makes goals-based different?

Traditional Goals-based

Investment

target High risk-adjusted return Highest probability of meeting

specific funding requirements

Risk definition Volatility or variability of

returns

Risk of falling short of target

Investment

strategies Asset mix – provides

highest risk-adjusted returns

against peers

Asset class & strategy mix –

important for increasing

probability of meeting target

Performance

measurement

& monitoring

Measurement of success

against benchmark or peers

over 1, 3, 5 years

Success measured as function

of meeting goal over targeted

time frame

How much of a

shortfall can be

tolerated?

Establish a risk

budget to control

which investment

decisions should

drive performance

outcomes.

Is saying you target

75% RR good

enough?

Have you controlled

the other parameters

that might inhibit the

outcome?

Goals-based in retirement funds

Define goal Define risk

Understand how your

decisions will impact

each member’s

trajectory.

Define measure

of success

2015/03/20

43

LDI – example of goals-based

LDI managers reduce unrewarded inflation & interest rate risk

95%

100%

105%

110%

Source: Alexander Forbes Manager Watch LDI Survey, AF calculation

Asset management industry…

… will need a complete overhaul

Hope is not an investment strategy!

Advisory & asset management need to change in tandem

Supportive regulatory environment

Dramatic changes in performance measurement & monitoring

Set right expectations for investors & manage

Digital delivery is enhancing potential – the time is ripe

2015/03/20

44

Template section

Sneak peek into risk budgets

Consider this…

What is most important to you when setting an

investment strategy?

1 Targeting the highest return possible

3 Targeting an appropriate replacement ratio

4 Beating the average of the Large Manager Watch

2 Ensuring no negative return over 12 a month period

2015/03/20

45

Consider this…

Replacement ratio index of members born in different years

0

10

20

30

40

50

60

70

80

90

100

1952-born 1962-born 1972-born 1982-born

Ind

ex

37.8

40.3

50.1

66.7

Source: Alexander Forbes Pensions Index, December 2014

Consider this…

Jan 2015 Q4 2014 1 Year 3 Year

(p.a.)

5 Year

(p.a.)

10 Year

(p.a.)

Local Equities FTSE/JSE ALSI

3.1% 1.4% 10.9% 19.5% 15.8% 18.0%

Local Equities FTSE/JSE SWIX

4.0% 3.8% 15.4% 21.6% 17.8% 18.6%

Local Bonds

All Bond Index (ALBI) 6.5% 4.2% 10.1% 8.7% 10.0% 8.5%

Local Cash STeFI Overnight

0.4% 1.4% 5.3% 5.0% 5.3% 6.9%

Inflation-Linked Bonds Besa Inflation-linked Bond Index

(BSAGI)

0.0% 2.2% 11.1% 10.2% 10.9% 11.2%

Local Property SAPY

7.4% 11.1% 26.6% 23.1% 21.4% 21.5%

Global Equities

MSCI All Countries World Index (ACWI)

-1.0% 2.9% 15.7% 29.3% 20.1% 14.6%

Global Bonds Citi World Government Bond Index

(WGBI)

0.3% 0.9% 9.9% 11.6% 11.3% 10.8%

Global Property UBS Global Investors Index

6.6% 12.6% 34.7% 30.9% 24.8% 14.9%

Headline CPI* -0.2% 0.2% 5.8% 5.6% 5.3% 6.1%

2015/03/20

46

… and this

Funds in deficit – liabilities

grew faster than assets

What went wrong?

Easy to lose sight of real

risks given strong equity

markets

Funds need a risk budget

Similar to financial expenses budget

Household expense budget Investment risk budget

How much is available to spend? How much risk can be taken?

What can it be spent on? Where the risk should be taken?

What is the expected value from this

expenditure?

What is the expected additional return

/ protection?

2015/03/20

47

Consider key investment risks

1 Not meeting projected liabilities

2 Losing capital

3 Not generating real growth

4 Strategies that take too much / little risk

5 Benchmark effectiveness

Essence of risk budgeting

Seeks to answer:

1 What types of risks are needed?

2 What are the horizons of these risks?

3 Which risk criteria are relevant & how is this measured?

4 What are the tolerances for these measures?

5 How would the measures be monitored & managed?

6 What actions are needed if limits are breached?

7 What responsibilities need to be allocated?

2015/03/20

48

Essence of risk budgeting

Why change

anything when

returns are

good?

Allocating risk optimally

Decisions

ALM SAA Benchmark

selection

Strategy

selection

Manager

style

Tactical

decision

Ch

an

ge in

ris

k

2015/03/20

49

Risk budgeting allows answers to…

Optimum allocation to

asset classes Allocation between

active & passive

Allocation to alternative

asset classes

Optimum blend of

differentiated mandates

within an active strategy

Advantages to a fund

5 Strengthens governance structure

6 Provides a robust framework

1 Discuss issues proactively

2 Transparent & aids effective interrogation

3 Enables effective decision making

4 Quicker implementation

2015/03/20

50

Template section

An example of goals based investing

Journey to a suitable retirement

Saving for

retirement

Preparing for

retirement

Managing

retirement

Reti

rem

en

t Objectives:

Accumulating assets

Contribution levels

Risk tolerance

Preservation

Focussed objectives:

Changing risk

tolerance

Changing risk

capacity

Replacing income

Protecting assets

Growth

Establishing needs

Consumption

Managing income

drawdown

Protecting assets

Growth

Unexpected events

Many years Several years Hopefully many years

2015/03/20

51

Life stage

Typically move from high to low equity, while favouring cash

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

8 Years + 7 Years 6 Years 5 Years 4 Years 3 Years 2 Years Final Year

Local equities Local property Local nominal bonds Local ILBs Local cash

Offshore equities Offshore bonds Offshore cash Gold

An evolution of thinking: goals-based

De-risked portfolios have been targeting annuities – post-retirement

products that provide an income for the rest of your life

1 | Portfolios constructed in context of risks associated with targeted

objective(s)

2 | Time horizon becomes a critical factor in solution design

3 | Strategies selected based on how well they improve the probability of

meeting a specific goal

4 | Success is defined in terms of whether the solution is actually meeting

its stated goal

This changes the investment problem:

2015/03/20

52

Goals-based life stage models

Remains a return maximisation

objective Much greater clarity is needed

Strategy & portfolio selection will be

driven by:

1 | Investment philosophy:

Specialist active

Specialist passive

Balanced

2 | Risk tolerance:

Magnitude of additional return

Exposure to growth assets

Investment horizon

Active risk exposure

Defining appropriate investment

objective:

Desired outcome

Timeline

Risk

Constructing effective goals-based

portfolios

Time is a critical resource members in

this phase don’t have

Accumulation portfolios De-risking phase

Time smoothes probability of loss

0%

5%

10%

15%

20%

25%

30%

35%

40%

0.25 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 5.75 6.25 6.75 7.25

Horizon (Years)

Losing money on bonds Losing more than 5% on bonds

Losing money on equities Losing more than 5% on equities

Source: Alexander Forbes Research & Product Development

2015/03/20

53

De-risking investment strategies

Saving for

retirement

Preparing for

retirement

Managing

retirement

Reti

rem

en

t

Growth strategies

Income replacement

Capital preservation

Capital growth

Income replacement

annuities

Living annuities

Other

Many years Several years Hopefully many years

Income replacement

Ability of portfolio to protect expected income stream that a member could

create from the accumulated value of retirement savings

The expected monthly income stream could be based on the income an

inflation-linked annuity would pay

1 | Reduce the variation around this income replacement objective

2 | Reduce the risk of not meeting the expected outcome

Therefore a goals-based portfolio needs to be built to:

2015/03/20

54

Capital protection

Estimated potential losses through time

0

10

20

30

40

50

60

20

10

/11

/01

20

11

/02

/01

20

11

/05

/01

20

11

/08

/01

20

11

/11

/01

20

12

/02

/01

20

12

/05

/01

20

12

/08

/01

20

12

/11

/01

20

13

/02

/01

20

13

/05

/01

Implemented Portfolio Modeled SAA ILB10 ILB30

Bonds Property Equity Foreign Cash (Currency)

Foreign Bonds Foreign Equity

Focused solutions

Evolving asset allocations

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

8 Years + 7 Years 6 Years 5 Years 4 Years 3 Years 2 Years Final Year

Local equities Local property Local nominal bonds Local ILBs Local cash

Offshore equities Offshore bonds Offshore cash Gold

2015/03/20

55

A meaningful monitoring framework

Failure of objective over 1 year

Objective Absolute return

portfolio

Goals-based

de-risking portfolio

Capital protection 6.50% 0.81%

Income replacement 8.90% 2.40%

Inflation protection 13.82% 13.82%

Growth >3% 16.26% 19.51%

Success of meeting objectives

Source: Alexander Forbes Research & Product Development

Concluding comments

What risks are really important to the member & how can we go beyond

conventional de-risking strategies to better address those risks

Traditional Life stage solutions provide a framework to address two

problems in one solution

Goals based solutions require more than setting goals & objectives.

It needs:

Solutions designed specifically for the goal not approximations

New ways to measure success and failure

Looking beyond performance measures

2015/03/20

56

ASK THE

EXPERTS

Questions?

Closing comments

“A goals-based approach provides

no guarantee of better

performance, but it does

significantly increase the

probability of alignment between

the investor’s objectives and their

portfolio construction and ultimate

performance.”

Collective Insight, Andrew Bradley

2015/03/20

57

Closing comments

THANK

YOU

panel · 2015-03-20 · 2015/03/20 2 panel the experts michael prinsloo head: best practice ......

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