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New recipes for investment success

New recipes for investment success. 21 May 2009. Emma Douglas & Mark Johnson. FOR PROFESSIONAL INVESTORS ONLY. The knives are out for pensions…. Try changing the ingredients. Your DC default option… The governance of your DB scheme…. What’s wrong with Lifestyle?.

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New recipes for investment success

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  1. New recipes for investment success 21 May 2009 Emma Douglas &Mark Johnson FOR PROFESSIONAL INVESTORS ONLY

  2. The knives are out for pensions…

  3. Try changing the ingredients • Your DC default option… • The governance of your DB scheme…

  4. What’s wrong with Lifestyle? • Members hate seeing their investments fall in value • Members don’t understand benchmarks • Members retire earlier than they expected • In some schemes 80% retire early • Members think managers are making tactical asset allocation decisions I’m alright, I’m in Lifestyle

  5. Diversified Growth Strategies • Has a return target • Cash + 3-4% or RPI + 5% • Multi-asset portfolio • Invests in equities, bonds and cash • Also property, high yield bonds, commodities, hedge funds, private equity etc • Capital preservation bias • No guarantee

  6. From a member’s perspective • Medium-low risk • Aiming for long term capital growth • Expected to outpace inflation • Less volatile than traditional funds • Capture most market upside in rising markets BUT • Capital preservation ethos helps to limit downside • Money is being managed by experts

  7. Does it work? • GBP Composite data - 31 December 2003 to 31 March 2009 Source: BlackRock

  8. Can we communicate? ‘Snorkelling not scuba diving’

  9. Not this! Source: BlackRock. *Positions taken from the BIJF Target Return Fund, a representative account. Launch date of BIJF TR Fund June 30 2005.

  10. Looks fine in a pie chart! UK Equities Overseas Equities, 3.0% Cash & 11.0% UK Equities Derivatives 15.5% Cash & Cover Overseas Equities, 4.2% Derivatives 20.9% Emerging Market Equities, 9.0% Cover Natural Resources, 2.2% 28.0% Government Emerging Markets, 4.3% Sector Equities, 3.0% Bonds 8.1% Property, 3.0% Diversified Commodities, 3.5% Short Duration Hedge Funds, 6.0% Derivative Strategies, 2.9% Credit & Fixed Income Portfolio, Convertibles Hedge Funds, 5.5% 22.1% 28.0% Infrastructure, 0.2% Infrastructure, 7.0% Private Equity Funds, 1.2% Private Equity, 2.0% Short Duration Fixed Income Portfolio, 9.4%

  11. RegulatoryChanges DB Plan Closings AccountingChanges ‘Perfect Storm’ in Markets ActuarialChanges IncreasedComplexity The DayJob Volatile FundingLevels What challenges are DB clients facing? Anything but a quiet life!

  12. Typical Trusteetime spent Contributionto overall success Strategic Asset Allocation Dynamic Asset Allocation Manager Structure Selection of Managers Where Has Effort Been Invested? Mismatch between value and time spent

  13. What is Fiduciary Management? • Fiduciary Management involves (partial) outsourcing of the day to day management of the Pensions Scheme to a Fiduciary Manager • The Fiduciary Manager is responsible for a number of key functions traditionally undertaken by client • The key benefit for clients is that one single party is accountable for the design, implementation and oversight of the plan’s investment activities • Partnership approach allows the sponsor and the pension fund to focus on high-level strategic objectives Success requires a close partnership between the Sponsor/Pension Fund, their Advisors and the Fiduciary Manager

  14. Why Fiduciary Management? • Pension Fund Trustees and Sponsors are faced with • Greater emphasis on risk management - requires a higher level of diversification and data • Increased complexity of financial products, creation of new asset classes • Increased regulatory requirements and introduction of international accounting standards • Increased complexity of Governance and Compliance rules • Cross over between strategy and tactics driven by market volatility, shorter timeframes and more diverse allocations ‘In –Sourcing’ to get the benefits of an in house manager but without the limitations

  15. Full Board of Trustees responsible for setting strategic objectives and monitoring BlackRock responsible for strategic advice, dynamic asset allocation, portfolio structure, manager selection Examples of Fiduciary Management • Partial • Members wished to outsource the management of their alternatives portfolio • BlackRock responsible for the selection, implementation and risk monitoring across hedge funds, private equity, property, infrastructure and commodities

  16. Fiduciary Management Illustration Traditionally Managed Fiduciary Managed Client Actuary/ Consultant Actuary/ Consultant Risk Management Portfolio Manager(s) Performance Monitoring Asset Allocation Client Fiduciary Manager Portfolio Implement-ation Performance Measurement Custodian Risk Management Custodian Process should capture all interdependencies to meet aclient’s objectives

  17. Tracking Pension Scheme Funding Level Development Weekly Monthly Source: BlackRock.

  18. A Client’s Perspective of a Fiduciary Relationship • Consultant • Trustees • Fiduciary Manager • Actuarial • Scheme Governance • Risk modelling and management • Investment Strategy (Liability Perspective) • Investment strategy • Investment strategy (Investment Input) • Benefits Consultancy • Asset allocation policy • Investment performance • Monitor Fiduciary • Covenant management • Portfolio construction • Cashflow management • Manager selection/ terms • Benefits policy, payment structure • Manager monitoring and de-selection • Hedging strategy • Guidance on strategy • Scheme administration • Comprehensive reporting - risk and performance • Monitor and select fiduciary • Tactical investments • Manage all suppliers • Implement asset allocation • Valuation assumptions • Funding • Benchmark selection • Set risk budget Source: BlackRock

  19. Bringing it All Together Discuss Scheme Investment Objectives & ALM Study Strategic Advice Client Your Service & Pension Reporting Long Term Scheme Investment Strategy Risk & Performance Portfolio Analysis Construction & Implementation

  20. So if you want a healthier pension scheme …

  21. … maybe there is a simpler ingredient

  22. Any questions?

  23. Note to User: This is a standard compliance page for general presentations only • The following notes should be read in conjunction with the attached document: • Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Services Authority. Registered office: 33 King William Street, London, EC4R 9AS. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. • Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. • Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. • This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. • Subject to the express requirements of any client-specific investment management agreement or provisions relating to the management of a fund, we will not provide notice of any changes to our personnel, structure, policies, process, objectives or, without limitation, any other matter contained in this document. • Unless otherwise specified, all information contained in this document is current as at May 2009. THIS MATERIAL IS FOR DISTRIBUTION TO PROFESSIONAL CLIENTS AND SHOULD NOT BE RELIED UPON BY ANY OTHER PERSONS.

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