What new investment products are on the horizon? · What new investment products are on the...
Transcript of What new investment products are on the horizon? · What new investment products are on the...
BC Pension Leadership Forum 2018
What new investment products are on the horizon?
Philip Falls, Practice Leader and Senior Investment Consultant, PBI Actuarial
Andrew Sweeney, Vice President & Institutional Portfolio Manager, Phillips, Hager & North
Marg Romanow, Benefits Officer, Saskatchewan Union of Nurses, Healthcare Pension Board
Moderator: Stephanie Bertels, Chair, Board of Trustees
Academic Pension Plan, Simon Fraser University
WORKSHOP 3
Marg Romanow, Benefits Officer, Saskatchewan Union of Nurses,
Healthcare Pension Board
WHAT ARE
ALTERNATIVE
INVESTMENTS?
Growing list of non-traditional investments
Hedge Funds
Private Equity
Infrastructure
Real Estate
Commercial Mortgages
Private Debt
Corporate, real estate, infrastructure
Real Assets
commodities, timberland, farmland
Other
insurance linked securities, marine
ARE
ALTERNATIVES
WORTH THE
INCREASED
COMPLEXITY?
Consider
Plan objectives
Current state and market environment
What a new asset class can do for the Plan
Process is key in fulfilling fiduciary duty
WHY ALTERNATIVE INVESTMENTS?
Diversification
Increased Returns
Reduce risk
Long Term Sustainability
CURRENT
STATUS OF
YOUR PLAN
SIPP
Risk Analysis
Sustainability Study – Long Term View
Valuation Timing – Short Term Funding Impact
Industry Status
Strategic Plan Goals and Objectives
Forward Looking Returns
Suite 1200, 1166 Alberni Street, Vancouver, BC V6E 3Z3 Canada T 604 408.2456 F 604 408.2525
Understanding New Investment Products
Philip A. Falls, MBA, CFA, ICD.D
Partner, Senior Consultant
PBI Actuarial Consultants Ltd.
Suite 1200, 1166 Alberni Street, Vancouver, BC V6E 3Z3 Canada T 604 408.2456 F 604 408.2525
We Select Investment Products After Considering
Investment, Benefit and Funding Policies
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Policies are interdependent and must be
managed concurrently
This involves making tradeoffs
Focus on the plan’s objectives:
Achieving a fully funded status?
Improving/maintaining benefits?
Building contingency fund?
Lowering investment risk?
Controlling contribution cost?
PBI brings Pension Committee & Managers
together to understand tradeoffs
Benefit
policy
Investment
policy
Funding
policy
Suite 1200, 1166 Alberni Street, Vancouver, BC V6E 3Z3 Canada T 604 408.2456 F 604 408.2525
Low Volatility Equities & Private Debt:
Expectations and Experience
Simple thesis - Low Volatility Equities
Expect the same or lower average returns than the regular indices but
with much less volatility (2/3)
Better risk adjusted returns are expected – not a great match but “better”
than regular equities
Simple thesis – Private Debt
Expect higher rate of return – 3-5% more for credit exposure
High skill level required by the investment manager
Credit rating BB-B: “repayment does not represent a problem now …but
could be problematic in the future” and “probability of ..repayment is
weak and may cause a problem in the future”
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Suite 1200, 1166 Alberni Street, Vancouver, BC V6E 3Z3 Canada T 604 408.2456 F 604 408.2525
A “B+” rated company’s risk is high as the “probability of
repayment is weak with cause for concern”.
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Plain English interpretations of bond credit ratings
Average
Quality
Source: PBI and internet.
Rating Ranks
Suite 1200, 1166 Alberni Street, Vancouver, BC V6E 3Z3 Canada T 604 408.2456 F 604 408.2525
What Happens To A/L Volatility If We Add Low Volatility Funds?
Asset Mix
Scenarios
60% Liability
Aware Bonds +
40% Traditional
Equity Funds
60% Liability
Aware Bonds +
40% LV Equity
Funds
100% Liability
Aware Bonds +
0% Equities
92% Liability
Aware Bonds +
8% Traditional
Equity Funds
92% Liability
Aware Bonds + 8%
LV Equity Funds
A/L
Volatility7.4 5.1 1.0 2.3 1.8
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Andrew Sweeney, Vice President
Investing in New Capabilities
February 2018
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New Capabilities Improve Risk-Return Profile
Expected Return: 5.5% 5.2%
Standard Deviation 8.4% 6.9%
Sharpe Ratio 0.43 0.50
CVaR 95 -16.3% -12.5%
Expected Return: 5.5% 6.0%
Standard Deviation 8.4% 8.5%
Sharpe Ratio 0.43 0.49
CVaR 95 -16.3% -17.8%
Traditional
Portfolio
■
Traditional
Portfolio
■
New
Portfolio
■
New
Portfolio
■
Low Volatility Equities2 Direct Lending3
1 Refer to appendix for modelling assumptions and disclosures. 2 Equity allocation split 50% traditional equities and 50% low volatility equities along the efficient frontier.3 Fixed income allocation split 75% DEX Universe Bond Index and 25% direct lending along the efficient frontier. * Traditional and low volatility equities split 33% Canadian and 67% global.
Hypothetical performance analyses are for illustrative purposes only and there is no guarantee that hypothetical returns or projections will be realized.
0
2
4
6
8
10
2 4 6 8 10 12 14 16
Retu
rn (
%)
Annualized Standard Deviation (%)
0
2
4
6
8
10
2 4 6 8 10 12 14 16
Retu
rn (
%)
Annualized Standard Deviation (%)
60/40 Portfolio 60/40 Portfolio
DEX Universe
Bond Index
DEX
Universe
Bond Index
Direct LendingTraditional
Equities*Traditional
Equities*30 Traditional Equities*
30 Low Vol Equities*
40 Universe Bonds
Low Volatility
Equities*60 Traditional Equities*
30 Universe Bonds
10 Direct Lending
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Why Low Volatility Equities?Risk Reduction Frees Up Risk Budget
What They Are
What They Are Not
Superior risk-adjusted returns Market-relative returns
Equity-like returns with lower
overall risk
What they target
Return characteristics
“Bond proxies”
Investing in stable businesses
and thoughtful portfolio
construction
How they do it Short selling, derivatives
Downside riskDefinition of risk Underperforming the market
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80
100
120
140
160
180
200
220
240
Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17
Low Vol Global Equity Strategy MSCI World Index (CAD)
Low Volatility Global Equity StrategyOutperforming During Market Volatility
Perf
orm
an
ce I
nd
ex
ed
to 1
00
Low Volatility Global Equity Strategy vs. MSCI World Index (CAD)
(January 1, 2013 – December 31, 2017)
Drawdown 2014
Aug 25–Oct 16
2015
Aug 5 –Sep 28
2016
Dec 29 – Feb 11
2017
Jun 23 – Sept
7
Low Vol Global Strategy C$ -1.5% -6.0% -3.6% -6.2%
MSCI World Index C$ -6.2% -10.0% -12.2% -6.2%
Source: RBC GAM, Bloomberg
Gross of fees
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Opportunities outside the banking sector
Short-term floating rate loans (4-7 year terms, 2-3yrs average life)
Senior loans: top of the capital structure – get paid first; Subordinate Loans – strong
protection
Targeting event driven situations – growth, restructure or acquisition capital
Attractive for investors
Attractive pricing structure – cash yield, structuring and prepayment fees
Lender-friendly terms – covenant heavy (negotiated directly by us)
Capture illiquidity premium
Attractive for borrowers
Flexibility and customization
Certainty of capital
Long-term partnership
What is Direct Lending?
Alternative Lending Source for Medium Sized Companies
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Structural Considerations
Capital call and distribution framework
Capital commitment and lock-up period
Investment period
Source: BlueBay internal estimates. For illustrative purposes only.
+200-275bps
Spread
(illiquidity)
Direct LendingCapturing Illiquidity Premium Through Private Loans
Incremental
Spread
+100 –
300bps
Investment Strategy
Target superior returns to equivalent public debt,
through liquidity and credit premiums
Senior secured loans and subordinated debt (short
term, floating rate)
Capital protection, contractual returns, current
income
Gro
ss
An
nu
al
Re
turn
Ob
jec
tive
Credit Risk
Direct
Lending
Appendix
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Assumptions and DisclosuresCapital Market Assumptions
Assumptions represent the views of PH&N for the purposes of illustrating and understanding the potential risk-reward trade-off of different portfolio decisions. Investors should be aware of the
limitations using forward-looking assumptions in that there is absolutely no guarantee that future performance will occur according to any ex-ante expectation.1 Expected 10-yr annualized return net of fees.
Asset Classes Representative Data Series
Expected
10-yr
Annualized
Return
Expected
Annual
Volatility
Expected
Annual
Downside
Risk
Universe Bonds FTSE TMX Canada Universe Bond Index 2.60% 4.2% -7.4%
Direct Lending1 Credit Suisse Leveraged Loan Index (USD) 8.00% 3.0% -17.8%
Canadian Equities S&P/TSX Composite Index 7.00% 16.5% -29.9%
Canadian Low Volatility Equities RBC QUBE Low Volatility Canadian Equity Fund 6.30% 11.1% -17.6%
Global Equities MSCI World Index (CAD) 6.81% 14.2% -26.2%
Global Low Volatility Equities RBC QUBE Low Volatility Global Equity Fund (CAD) 6.12% 11.3% -16.0%
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Assumptions and DisclosuresCapital Market Assumptions
Assumptions represent the views of PH&N for the purposes of illustrating and understanding the potential risk-reward trade-off of different portfolio decisions. Investors should be aware of the
limitations using forward-looking assumptions in that there is absolutely no guarantee that future performance will occur according to any ex-ante expectation.
Correlation
Univ
ers
e B
on
ds
Direct
Le
ndin
g
Can
ad
ian E
qu
itie
s
Ca
na
dia
n L
ow
Vo
latilit
y E
qu
itie
s
Glo
ba
l E
qu
itie
s
Glo
ba
l L
ow
Vo
latilit
y E
qu
itie
s
Universe Bonds 1
Direct Lending -0.1 1
Canadian Equities 0.0 0.4 1
Canadian Low Volatility Equities 0.1 0.3 0.7 1
Global Equities 0.0 0.3 0.6 0.5 1
Global Low Volatility Equities 0.4 0.0 0.3 0.4 0.7 1
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Disclaimer
This presentation is intended for institutional investors only.
This document has been provided by Phillips, Hager & North Investment Management (PH&N IM) for information purposes only and may not be reproduced, distributed or
published without the written consent of PH&N IM. It is not intended to provide professional advice and should not be relied upon in that regard.
PH&N IM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. PH&N IM reserves the right at any
time and without notice to change, amend or cease publication of the information. Information obtained from third parties is believed to be reliable, but no representation or
warranty, express or implied, is made by PH&N IM, its affiliates or any other person as to its accuracy, completeness or correctness. We assume no responsibility for any errors
or omissions.
This information is not intended to be an offer or solicitation to buy or sell securities or to participate in or subscribe for any service. No securities are being offered, except
pursuant and subject to the respective offering documents and subscription materials, which shall be provided to qualified investors. This document is for general information only
and is not, nor does it purport to be, a complete description of an investment in any RBC, PH&N or BlueBay funds. If there is an inconsistency between this document and the
respective offering documents, the provisions of the respective offering documents shall prevail.
Commissions, trailing commissions, management fees and expenses all may be associated with the funds mentioned in this presentation. Please read the offering materials for a
particular fund before investing. The performance data provided are historical returns, they are not intended to reflect future values of any of the funds or returns on investment in
these funds mentioned in this presentation. Further, the performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption,
distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. The unit values of non-money market funds change frequently. For
money market funds, there can be no assurances that the fund will be able to maintain its net asset value per unit at a constant amount or that the full amount of your investment
in the fund will be returned to you. Mutual fund securities are not guaranteed by the Canada Deposit Insurance Corporation or by any other government deposit insurer. Past
performance may not be repeated. The amount of risk associated with any particular investment depends largely on the investor’s own circumstances. Investors should consult
their professional advisors/consultants regarding the suitability of the investment solutions mentioned in this presentation.
This document may contain forward-looking statements about general economic factors which are not guarantees of future performance. Forward-looking statements involve
inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place
undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-
looking statement. All opinions in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.
PH&N IM is a division of RBC Global Asset Management Inc. (RBC GAM Inc.). RBC GAM Inc. is the manager and principal portfolio adviser of the Phillips, Hager & North
(PH&N) investment funds and RBC Funds. RBC Global Asset Management is the asset management division of Royal Bank of Canada (RBC) which includes RBC GAM Inc.,
RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, the asset management division of RBC Investment Management (Asia) Limited, and
BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.
®/™ Trademark(s) of Royal Bank of Canada. Used under licence.
© RBC Global Asset Management Inc., 2018.
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Marg Romanow, Benefits Officer, Saskatchewan Union of Nurses,
Healthcare Pension Board
ASSESS
ALTERNATIVE
INVESTMENT
OPTIONS
Which Asset Classes meet your needs?
Prioritize those that best meet your needs.
How many new asset classes do you want to introduce?
Consider governance implications.
Determine your ESG priorities.
Consider CAPSA Guidelines
Accessing expertise to ensure knowledgeable decisions
Clearly defined process/criteria
ASK QUESTIONS
ON IDENTIFIED
ASSET CLASS
OPTIONS
Does the Asset Class help meet your long term
obligations?
Ensure you understand the new investment
How are returns generated? What are the risks?
Does the level of risk meet your needs?
Does it fit with your other existing investments?
What is the availability of investment vehicles?
What is the impact on Plan administration?
Access experts/get education as needed to
answer the above
NARROW
DOWN THE
OPTIONS
Once you have decided on an asset class:
How will you implement – multiple managers? Build a program over time? How many will you hire?
Does the asset class require a more nimble approach to manager selection?
Will you interview or delegate the selection process?
Which managers will you interview?
Do you have enough information to make a decision?
ASK QUESTIONS
ON MANAGER
SELECTION
PROCESS
Objectives for fund/manager match our targets?
What is the history of the fund?
What are the risks related to this fund?
Does the team depth/experience and process give it any advantage?
Total Assets Under Management?
Does the manager provide transparency?
Are management fees consistent with the market and structure aligned with our interests?
Political factors? Currency factors?
ADDITIONAL
DUE DILIGENCE
FOR
ALTERNATIVES
Ensure there is an appropriate due diligence
process. Complexity can come from vehicles
used (limited partnerships).
Has the structure been reviewed for regulatory
and tax issues?
Have terms and conditions been reviewed?
Is the reporting process to you acceptable?
What is the expected investment horizon?
Does it meet your needs?
Are they flexible to meet your needs? Ie ESG
considerations?
BE NOT AFRAID
Utilize the typical process of hiring Managers.
Adapt/enhance the hiring process as necessary for the specifics of the new fund.
Do not dismiss the Asset Class without due consideration.
Do not be influenced by generalized fears.
Consider the options carefully.
Ensure that you understand the new Asset Class.
Ensure that you can factually justify your decisions.
Ensure that you are meeting your Fiduciary Responsibility as a Pension Trustee.