Managed Volatility & LDI: A Holistic Plan Solution...Hypothetical Sample Plan Strategy Development:...
Transcript of Managed Volatility & LDI: A Holistic Plan Solution...Hypothetical Sample Plan Strategy Development:...
David R. Wilson, CFAHead of Institutional Solutions Nuveen Asset Management
James A. Colon, CFAPortfolio Manager
Nuveen Asset Management
Managed Volatility & LDI:
A Holistic Plan Solution
FOR INSTITUTIONAL INVESTOR USE ONLY. NOT FOR PUBLIC DISTRIBUTION
2
Client Interview
Key Plan
Characteristics
Asset / Liability
Information
Actuarial Report
Ongoing Risk
Assessments
Milestone Plan
Tracking
Completion
Management
Customized Client
Dashboard
Portfolio
Optimization
Milestone Plan
Construction
Comprehensive
Investment Policy
Statement
Strategy
Implementation
Qualitative Factors
Hedge Ratios
Deterministic
Analyses
Stochastic
Analyses
How We Develop Customized Solutions
Strategy Monitoring
& Management
Strategy
DevelopmentInitial Plan AnalysisPlan Assessment
Hypothetical Sample Plan
Initial Plan Analysis: Key Plan Characteristics
Key Plan Characteristics
Investment Portfolio Value: $875 Million
Estimated Liabilities (PBO): $1 Billion
Funded Ratio: 87.5%
Plan Status: Soft Frozen
Plan End Game: Annuity Buyout
End Game Funded Ratio: 110%
Return-Seeking Assets (‘RSA’): 60.0%
Liability-Hedging Assets (‘LHA’): 40.0%
Current Interest Rate Hedge Ratio: 21.4%
Current Credit Spread Hedge Ratio: 7.1%
Current Funded Ratio Volatility: 13.8%
40%
20%
20%
20%
Asset Allocation
Domestic EquityInternational EquityIntermediate Duration Fixed IncomeLong Duration Fixed Income
Source: Nuveen Asset ManagementSee supplemental information regarding hypothetical sample plans at the back of this presentation.
(15.0)
(10.0)
(5.0)
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5.0
10.0
15.0
20.0
Interest Rate Hedge Ratio
Du
rati
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(20.0)
(15.0)
(10.0)
(5.0)
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10.0
15.0
20.0
Credit Spread Hedge RatioDu
rati
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Hedge Ratio: 21.4% Hedge Ratio: 7.1%
Liability-Hedging Assets Total Portfolio Liabilities Net
Hypothetical Sample Plan
Initial Plan Analysis: Nuveen’s Hedge Ratio Methodology
Source: Nuveen Asset Management, YieldbookSee supplemental information regarding hypothetical sample plans at the back of this presentation.
76.3%
104.5%
60%
70%
80%
90%
100%
110%
5% 15% 25% 35% 45% 55% 65% 75% 85% 95%
Fu
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Rati
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Percentile
1 Year Funded Ratio Volatility Simulation
Downside volatility (median – 5th percentile): 13.8% Downside volatility (95th percentile – median): $317.1 mm
$33.1
$581.5
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100.0
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400.0
500.0
600.0
700.0
5% 15% 25% 35% 45% 55% 65% 75% 85% 95%
NP
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($m
m)
Percentile
10 Year Contribution Simulation
Median PV of contributions: $264mm
Median funded ratio: 90.1%
Hypothetical Sample Plan
Initial Plan Analysis: Stochastic Analysis
Source: Nuveen Asset Management. 2,000 simulations. The simulations provided in this analysis were generated using assumptions Nuveen Asset Management believes to be reasonable representations of asset class performance. Different assumptions may change the results of the analysis. Simulated performance is not a guarantee of future results.
See supplemental information regarding hypothetical sample plans at the back of this presentation.
Hypothetical Sample Plan
Strategy Development: Portfolio Analysis
Metric Current Proposed Change
Return-Seeking Assets 60.0% 60.0% 0.0%
Liability-Hedging Assets 40.0% 40.0% 0.0%
Intermediate Duration Fixed Income 20.0% 0.0% -20.0%
Long Duration Fixed Income 20.0% 40.0% +20.0%
Estimated Funded Ratio Volatility 13.8% 12.1% -1.7%
Estimated Surplus Volatility 9.2% 8.8% -0.4%
Estimated Hedge Ratio 21.4% 30.3% +8.9%
Source: Nuveen Asset ManagementSee supplemental information regarding hypothetical sample plans at the back of this presentation.
Hypothetical Sample Plan
Strategy Development: Milestone Plan
Funded Ratio 87.5% 90.0% 92.5% 95.0% 97.5% 100.0% 102.5% 105.0% 107.5% 110.0%
Funded Ratio Volatility Target 12.1% 11.4% 10.6% 9.7% 8.1% 6.5% 5.0% 3.4% 2.9% 2.5%
Surplus Volatility Target 8.8% 8.2% 7.6% 7.0% 5.9% 4.9% 3.8% 2.8% 2.2% 1.9%
Return-Seeking Allocation 60.0% 55.0% 50.0% 45.0% 37.50% 30.0% 22.5% 15.0% 10.0% 0.0%
Liability-Hedging Allocation 40.0% 45.0% 50.0% 55.0% 62.50% 70.0% 77.5% 85.0% 90.0% 100.0%
0%
20%
40%
60%
80%
100%
Po
rtfo
lio
Weig
hts
Funded Ratio
Source: Nuveen Asset ManagementSee supplemental information regarding hypothetical sample plans at the back of this presentation.
Hypothetical Sample Plan
Traditional De-Risking Plan – Assumed Surplus Volatility
Funded Ratio 87.5% 90% 92.5% 95% 97.5% 100% 102.5% 105% 107.5% 110%
Risk Assets 60% 55% 50% 45% 37.5% 30% 22.5% 15% 10% 0%
Hedge Assets 40% 45% 50% 55% 62.5% 70% 77.5% 85% 90% 100%
8.78 8.21 7.61 6.97 5.93 4.86 3.79 2.81 2.16 1.90
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Surp
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Source: Nuveen Asset ManagementSee supplemental information regarding hypothetical sample plans at the back of this presentation.
Expected Surplus Volatility at a Given Milestone Point
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rplu
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The graph above is for illustrative purposes and does not represent the surplus volatility of an actual plan.
60% Risk Assets / 40% Hedging Assets – Fully Rate Hedged
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10
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50Su
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Source: Nuveen Asset Management, Bloomberg
Risk Assets are represented by the S&P 500 Index. Hedging Assets are represented by the Barclays Long Credit Index (85%) and the Barclays Long Government Index (15%). The information is provided for illustrative purposes only. Different benchmarks, economic periods and other methods and market conditions may result in significantly different outcomes. Indices are unmanaged and unavailable for direct investment. Past performance is no guarantee of future results.
60% Risk Assets / 40% Hedging Assets – Low Volatility Period
Value at Risk 1% 2.5% 5% 10%
Surplus Return -0.99% -0.83% -0.70% -0.55%
Change in Funded Ratio -1% -1% -1% -1%
Source: Nuveen Asset Management, Bloomberg
Risk Assets are represented by the S&P 500 Index. Hedging Assets are represented by the Barclays Long Credit Index (85%) and the Barclays Long Government Index (15%). The information is provided for illustrative purposes only. Different benchmarks, economic periods and other methods and market conditions may result in significantly different outcomes. Indices are unmanaged and unavailable for direct investment. Past performance is no guarantee of future results.
60% Risk Assets / 40% Hedging Assets – High Volatility Period
Value at Risk 1% 2.5% 5% 10%
Surplus Return -5.74% -4.83% -4.06% -3.16%
Change in Funded Ratio -6% -5% -4% -3%Source: Nuveen Asset Management, Bloomberg
Risk Assets are represented by the S&P 500 Index. Hedging Assets are represented by the Barclays Long Credit Index (85%) and the Barclays Long Government Index (15%). The information is provided for illustrative purposes only. Different benchmarks, economic periods and other methods and market conditions may result in significantly different outcomes. Indices are unmanaged and unavailable for direct investment. Past performance is no guarantee of future results.
40% Risk Assets / 60% Hedging Assets – High Volatility Period
Value at Risk 1% 2.5% 5% 10%
Surplus Return -3.82% -3.22% -2.70% -2.11%
Change in Funded Ratio -4% -3% -3% -2%Source: Nuveen Asset Management, Bloomberg
Risk Assets are represented by the S&P 500 Index. Hedging Assets are represented by the Barclays Long Credit Index (85%) and the Barclays Long Government Index (15%). The information is provided for illustrative purposes only. Different benchmarks, economic periods and other methods and market conditions may result in significantly different outcomes. Indices are unmanaged and unavailable for direct investment. Past performance is no guarantee of future results.
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Hypothetical Sample Plan
Traditional De-Risking Plan – Range of Surplus Volatility45.3%
42.6%39.7%
36.5%
31.1%
25.3%
19.2%
12.9%8.5%
1.9%
Funded Ratio 87.5% 90% 92.5% 95% 97.5% 100% 102.5% 105% 107.5% 110%
Risk Assets 60% 55% 50% 45% 37.5% 30% 22.5% 15% 10% 0%
Hedge Assets 40% 45% 50% 55% 62.5% 70% 77.5% 85% 90% 100%
Source: Nuveen Asset ManagementSee supplemental information regarding hypothetical sample plans at the back of this presentation.
Risk Budget Targeting
Equities60%
Fixed Income (D=6)40%
Equity Risk50%
InterestRate Risk
50%
Portfolio Contribution to Surplus RiskLiabilities
Funded Ratio = 100%+ =
The “Contribution to Surplus Risk” chart employs assumptions Nuveen Asset Management believes to be reasonable representations of asset class risk characteristics. Different assumptions may change the results of the analysis.
Risk Budget Targeting
Equity Risk87%
Interest Rate Risk13%
Contribution to Surplus Risk
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90VIX Index
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Source: Nuveen Asset Management. The “Contribution to Surplus Risk” chart employs assumptions Nuveen Asset Management believes to be reasonable representations of asset class risk characteristics. Different assumptions may change the results of the analysis.
Hypothetical Sample Plan
Volatility-Controlled De-Risking
Funded Ratio 87.5% 90% 92.5% 95% 97.5% 100% 102.5% 105% 107.5% 110%
Risk Assets 60% 55% 50% 45% 37.5% 30% 22.5% 15% 10% 0%
Hedge Assets 40% 45% 50% 55% 62.5% 70% 77.5% 85% 90% 100%
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Surp
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Source: Nuveen Asset ManagementSee supplemental information regarding hypothetical sample plans at the back of this presentation.
Equity Correlations to PPA Spot Curve
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-0.8
-0.6
-0.4
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U.S. Large Cap Equities U.S. Small Cap Equities Intl Dev Equities Emg Mkt Equities
Source: Nuveen Asset Management, BloombergUS Large Cap Equities are represented by the Russell 1000 Index. US Small Cap Equities are represented by the Russell 2000 Index. Intl Dev. Equities are represented by the MSCI EAFE Index. Emg Mkt Equities are represented by the MSCI Emerging Markets Index. The information is provided for illustrative purposes only. Indices are unmanaged and unavailable for direct investment. Past performance is no guarantee of future results.
Steps Toward Holistic Risk Solutions
Introductory Step:
Individual Asset Classes
Volatility-Targeted U.S. Equities
Volatility-Targeted International Developed Equities
Volatility-Targeted Emerging Market Equities
Advanced Step:
Risk Overlay
Appendix
Low Volatility Equities
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90S&P 500 Index
S&P Low Volatility Index
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y
Source: Nuveen Asset Management, BloombergIndices are unmanaged and unavailable for direct investment. Past performance is no guarantee of future results.
Minimum Variance Equities
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80MSCI World Index
MSCI World Minimum Volatility Index
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Source: Nuveen Asset Management, BloombergIndices are unmanaged and unavailable for direct investment. Past performance is no guarantee of future results.
Smart BetaA
nn
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90Russell 1000 Index
"Smart Beta" 1000 Index
Source: Nuveen Asset Management, Bloomberg
Important Information
The Hypothetical Sample Plan portfolio is presented for illustrative purposes only and does not reflect a strategy or product currently or previously managed by Nuveen Asset Management, LLC (“NAM”). The hypothetical portfolio allocations, holdings and weights and other characteristics are subject to change without notice. There is no guarantee the hypothetical portfolio will meet its investment objectives. The reader should not assume that investment in the hypothetical portfolio will be profitable. This report contains no recommendation to buy or sell any specific securities and should not be considered investment advice of any kind.
This information represents the opinion of Nuveen Asset Management, LLC, and is not intended to be a forecast or guarantee of future
events or results. It is not intended to provide specific advice and should not be considered investment advice of any kind. Information was
obtained from sources we believe to be reliable, but are not guaranteed as to their accuracy or completeness. This report contains no
recommendations to buy or sell specific securities or investment products. All investments carry a certain degree of risk, including possible
loss of principal. This presentation is for general information purposes only and should not be construed as specific investment advice. It is
important to review your investment objectives, risk tolerance, and liquidity needs before choosing an investment style or manager.
Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide
positive performance over any period of time. Past performance is no guarantee of future results and different periods and market
conditions may result in significantly different outcomes.Firm tenure for Nuveen Asset Management investment professionals may include
years of service at predecessor advisory operations.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.
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