August 2013 Investment Client - Aon · PDF filePatti Bjork, Director Retirement Research ......
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Investment Strategy Webinar August 21, 2013
Transcript of August 2013 Investment Client - Aon · PDF filePatti Bjork, Director Retirement Research ......
Investment Strategy Webinar
August 21, 2013
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Presenters
John Thompson, PartnerInvestment Solutions Email: [email protected]
Patti Bjork, Director Retirement Research Email: [email protected]
Kevin Vandolder, CFA, PartnerInvestment ConsultingEmail: [email protected]
Duncan Lamont, CFA, Principal Global Investment Practice Email: [email protected]
Peter Hill, Partner Investment Consulting Email: [email protected]
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Discussion Topics
Opening Remarks Market Outlook: Focus on Emerging Markets Results of Aon Hewitt Study Measuring Employee Savings and
Investing in Defined Contribution Plans Alternative Investments in Defined Contribution Plans Closing RemarksQ&A Session
Market Outlook: Focus on Emerging Markets
Duncan Lamont
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Initial Jobless Claims ('000 of claimants)
275
375
475
575
675
Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13
The Case for Tapering Grows
Continued improvement in employment situation
And core inflation is no longer falling
6 year low!
Core Consumer Prices
-0.5
0
0.5
1
1.5
2
2.5
3
2009 2010 2011 2012 2013
% y/y% 3m annualized
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Emerging Markets Have Struggled
Emerging markets have recently been hit hard by tapering concerns
But it’s not all the Fed’s fault
- slowdown in growth has been a drag on performance for some time now
Is the worst over or set to continue???
0 1 2 3 4 5 6 7 8
Developedeconomies
Emergingeconomies
BRIC
Emerging Economies Growth Challenges(Pre-crisis and post-crisis growth rates, %*)
Post-crisisPre-Crisis
* 2003-07 vs 2010-14
Source: IMF (estimates for 2013/4)
Performance Since 8 May
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
Developedequities
USTreasuries
US HighYield
EM equities USD-denomEMD
Localcurrency
EMD
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Much Improved Valuation Case for Emerging Market Equities
EM equities have underperformed developed markets by over 40% in USD terms over the past 3yrs!
EM equities were too expensive but now they have fallen too far
Return on equity advantage has narrowed but still there
Relative Price/Book Ratio
0.6
0.7
0.8
0.9
1.0
1.1
1.2
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Emerging markets cheapening
Return on Equity (RoE)
4.4
6.4
8.4
10.4
12.4
14.4
16.4
18.4
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Developed markets RoE Emerging markets RoE
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Emerging Market Debt Valuations Have Also Improved Markedly
Hard EMD spreads now relatively more attractive than equivalently-rated corporate bonds
EM currencies have fallen in value
Local EMD yields have risen almost 1.5% since early May
Both of these increase attractiveness of local EMD
Credit Spreads (basis points)
200
250
300
350
400
450
Dec-09 Dec-10 Dec-11 Dec-12
USD-denom EMD
US corporate bonds
EM currency composite (equally weighted basket of 8 main local EMD currencies)
80
85
90
95
100
105
110
Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13
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But is the Tide Set to Turn? Catalyst = less bad newsBad news Impact / our assessment
Weak growth in BRICs, especially China
A drag but leading indicators are showing improvement Longer term impact of China rebalancing is positive (but risky along
the way)
Weak commodity prices Some economies/markets are heavily exposed to commodities so harmed by falling prices
But many are also commodity consumers so impact not uniform Pickup in global growth suggests drag from commodity price
weakness will be gradually overcome
US monetary tightening Legitimate concern and currently key barrier to major re-rating in EM
Dollar debt will be negatively impacted as it is directly linked to US Treasury yields – but credit spreads now look better value than US corporate bonds
But if US monetary tightening is gradual against backdrop of reasonable economic growth then EM assets should do ok
Political Unrest Irrelevant in general unless you believe that riots in one country risk starting riots in another
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Summary
Emerging market assets have significantly underperformed developed markets
Valuation case has now shifted in favor of both emerging market equities and debt
Negative news flow is abating
Now is the time to start building emerging market allocations
Results of Aon Hewitt Study Measuring Employee Savings and Investing in Defined Contribution Plans
Patti Bjork
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2013 Universe Benchmark: Four Key Themes
Aon Hewitt examines the savings and investment behavior of 3.5 million eligible employees across 141 defined contribution plans. As the data was analyzed, the following trends emerged.
1.Participation hits a record
high
2.Automation continues to play a strong
role
3.Leakage erodes
financial security
4.Diversification improves and
balances recover
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The Spotlight on Retirement Savings
Employers want…an efficient, effective benefit plan that attracts talent and supports talent transition from work into retirement while
Managing cost Eliminating or reducing risks Addressing compliance
As a result… the retirement landscape has dramatically shifted to one that is built on employee accountability
Shift to Defined Contribution Plans
Defined contribution plans are now the primary source of retirement income at a vast majority of large companies.
Source: Aon Hewitt survey Trends & Experience in Defined Contribution Plans 2013
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Many Employees Are on a Rocky Road to Retirement
Employers have responded…through plan design:
Automatic enrollment Automatic escalation Automatic rebalancing Target-date funds Managed accounts Retirement income solutions
…and employers want to find ways to better engage their workforce in retirement savings
2.1
2.6
4.1
2.2
11.0
4.9
15.9
8.8
Private Resources
Shortfall Private Needs
Social Security
Total Needs
Retirement Income Falls Short
Source: Aon Hewitt study The Real Deal—2012 Retirement Income Adequacy at Large Companies
Employees Don’t Save Enough
Source: Aon Hewitt study 2013 Universe Benchmarks
Savings gap of 2.2 times pay
Savings rates compared to match:
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A Decade in Review: Participation Rates1
78% participation rate is at a record high.
Automatic enrollment supporting participation rate.
Lowest participation is among youngest workers, and lower tenured workers, although automatic enrollment slowly lessening the gap.
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A Decade in Review: Automation
Source: Aon Hewitt 2013 Trends & Experience in Defined Contribution Plans
On average, participants subject to automatic enrollment had a participation rate of 81.4%, without automatic enrollment (63.5%).
16.5% of participants enrolled in contribution escalation, where available.
9.0% Percentage of participants enrolled in automatic rebalancing, where available.
2% of Plans With Automatic Enrollment
% of Plans With Automatic Escalation
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Cash outs Are a Primary Concern
Source: Aon Hewitt 2013 Universe Benchmarks and Aon Hewitt 2013 Hot Topics in Retirement
43% of participants cash out after termination.
Post-termination decision-making greatly influenced by plan balance, age, and gender.
60% of employers report being concerned about cash-out behavior.
When surveyed about preferences on terminated employee assets, plan sponsors noted:– 20% prefer to retain
assets,– 17% prefer to leave the
plan, and– 63% had no preference.
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A Decade in Review: Average Plan Balance
The average plan balance at the end of 2012 was $81,240, this is a substantial increase from 2011 ($74,380)
The median plan balance at the end of 2012 was $25,150
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Recommendations
Curb leakage out of the plan and look for new ways to reach employees
Offer an array of investment advisory help
Leverage the full potential of automation
Modify availability of loans/withdrawals Limit dollars available for loans and withdrawals Simplify post-termination loan repayment process Encourage lifetime income solutions and options
Target-date funds Online guidance or investment advice/managed account features Seminars, personal financial planning and lifetime income solutions
Adopt automatic enrollment Increase automatic enrollment default contribution rates Include automatic escalation in automatic enrollment Expand automatic enrollment to existing nonparticipants Add automatic rebalancing and automatic escalation as plan features
Look for innovative ways to promote and educate a digital workforce Promote and work within the employer system Use multiple levels of technology to communicate Provide increased education and resources
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Alternative Investments in Defined Contribution Plans
Kevin Vandolder & Peter Hill
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The Role of Alternative Assets in DC Plans
Alternative assets have increasingly been used by many institutional investors to improve the risk/return characteristics of their portfolios
Nevertheless, there are several reasons why defined contribution plans have rarely included alternative assets:– Liquidity needs– Quality of available options– Valuation frequency– Potential for Misuse– Fee levels
This results in a decrease in expected returns by 50-70 bps, which can translate to over $100,000 over the course of a 40-year career
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1%
2%
3%
4%
5%
6%
7%
8%
9%
0% 5% 10% 15% 20% 25%
Expe
cted
Return
Volatility
No Alternatives
With Alternatives
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Fitting Alternative Assets into DC Plans
Alternative investments should typically be standalone core options. However, they can be beneficial within multi-asset funds
• Diversified age-appropriate portfolio • Alternatives would be a sleeve of the whole fund
Target Date Funds
• Used to give participants fewer, better core options• Each core fund be focused on a portfolio objective
such as growth, inflation protection and capital market volatility
Multi-Asset Core Funds
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Emerging Solutions to Challenges of Including Alternatives in DC Plans
• There is less need for liquidity when alternative assets are used as components of multi-asset funds
Liquidity Needs
• Without the need for daily liquidity, it is easier to adapt alternative asset products for DC plans without sacrificing quality
Quality of Available Options
• Asset managers are increasingly developing products that have the daily valuation needed for most DC plans
Valuation Frequency
• There is less potential for participants to misuse alternative assets as components of diversified multi-asset funds
Potential for Misuse
• Total fee levels can be managed by including alternatives as components of multi-asset funds
Fee Levels
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Alternative Investment Strategies that Could Fit Well in DC Plans
Strategy
Long/ short equity High
conviction equity
Macro
Managed futures
Option-oriented
Unconstrained
bondsMulti-strat
GTAA
Absolute return
Commodities
Real estate
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Challenges
Despite our enthusiasm for alternatives in DC plans, there are challenges– Fund quality: Managers sometimes modify their strategies for DC plan needs. Our confidence in
the revised strategy may decline. This problem does not apply to all funds. – Fees structures: Handling incentive fees for the DOL’s fee disclosure rules may warrant a legal
opinion. – Fee levels: Though alternative assets may add value after fees, the higher fee levels can draw
unwanted attention. This can be managed through moderately sized allocations to alternatives or pairing them with low-fee investments in other asset classes.
– First adopter risk: Differences from peer group practices seem to raise more questions in the DC environment than in other areas. This issue is declining quickly as more DC plan sponsors are including alternative assets.
Each of these challenges can be overcome We expect to see more DC plan sponsors incorporate alternative investments
and they may be mainstream in the not-too-distant future.
Closing Remarks
John Thompson
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Question & Answer
Questions may be submitted at any time during the web seminar by typing the question in the "Ask a Question" text field and clicking "Submit." Questions will be answered live as time permits during the question and answer session.
Q&A
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Our next investment strategy update call is scheduled for Wednesday, September 18, at 10 a.m. CDT.
