HEK December 2012 Investment Strategy Webcast
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Transcript of HEK December 2012 Investment Strategy Webcast
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Investment Strategy Webinar
December 19, 2012
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Presenters
Steve Cummings, President & CEO
Phone: 847.442.0064Email: [email protected]
Mike Sebastian, Partner
Phone: 312.715.3352Email: [email protected]
Tapan Datta, Principal
Global Asset AllocationPhone: 011 + 44 020 7086 9076
Email: [email protected]
Eric Friedman, Senior Consultant
Phone: 312.715.2973Email: [email protected]
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Market outlook entering 2013
Tapan Datta
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Fiscal Cliff: What are the risks?
SCENARIOS INDICATIVE PROBABILITIES/MARKET
OUTCOMES
FULLY AVOIDED LITTLE FISAL DRAG
NO CREDIBLE LONG-TERM DEFICIT
REDUCTION PLAN
30% - Risky assets benefit short-term
AVOIDED SOME FISCAL DRAG
(2% of GDP
20% - potentially large (double digit %) market
sell-off
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Approaching the Cliff: Consumers have limited ability to weather tax rises
CONSUMERS: PERSONAL INCOME GROWTH IS
MEDIOCRE(% growth on year ago)
-8
-6
-4
-2
0
2
4
6
8
10
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Source: Datastream
HOUSEHOLD SAVINGS RATES DO NOT HAVE ROOM
TO FALL MUCH FURTHER
0
1
2
3
4
5
6
7
8
9
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
%
Source: Datastream
Consumer spending is
vulnerable in the event of notrolling over the payroll tax cut
less so with the higher income
tax cuts
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Approaching the Cliff: Business reactions have been felt already
CAPITAL SPENDING INTENTIONS ALO WEAK
15
17
19
21
23
25
27
29
31
33
35
Nov-
06
May-
07
Nov-
07
May-
08
Nov-
08
May-
09
Nov-
09
May-
10
Nov-
10
May-
11
Nov-
11
May-
12
Nov-
12
$
bn
SMALL BUSINESS HAS TURNED MORE PESSIMISTIC(NFIB Optimism Index)
80
85
90
95
100
105
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
Business spending
has already slowed. Avoidingthe cliff could bring a mild
rebound..
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Going into 2013: Weak global growth environment
After what seemed initially to be
a normal recovery fromrecession, the global economy
has looked quite soft through
2011-12.
CHINA: EXPORT GROWTH (%)
-40
-30
-20
-10
0
10
20
30
40
50
60
Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11
Global Growth
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Long-term problem with 2013 impact: Public debt
In developed economies,
thoughprivate debt has been
coming down, highpublicdebt
is a key obstacle to sustained
recovery.
For the US economy which
has so far performed better
than its peers, this has the
potential to become a major
drag on growth.
RISING PUBLIC DEBT IS A KEY OBSTACLE TO SUSTAINED
RECOVERY
(Ratio of Gross Public Debt to GDP)
0
50
100
150
200
250
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Euro Area Japan USA
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Summary of medium-term market views
Equities Limited return prospects but prefer to bonds
Stay at target non trivial risk of poor outcomes
Favour non-US markets on any rebalancing
Prefer large cap to small, but case is becoming less compelling
Bonds Low yields unattractive and risky
Credit still preferred to government bonds, but reduce relative
positioning Long credit spreads more attractive than intermediate, but
duration is the difficulty.
Favour Investment grade and secured loans to high yield
Alternative Asset Classes Favour real estate, hedge funds, infrastucture and selected private
equity investments
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2012 In Review: Looking Forward to 2013
Mike Sebastian
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2012 Thought Leadership Update: White Papers
Risk Parity and the Limits of Leverage (Journal of Investing, Fall 2012)
Are Custom Target Date Funds Right for Your Plan?
Funding Stabilization and PBGC Premium Increases: Strategic Implications for Pension
Plan Sponsors
Go Big or Go Home: The Case for an Evolution in Risk Taking
Tales from the Downside: Risk Reduction Strategies
Inflation Risk and Real Return
Public Funds Can Compete
Conviction in Equity Investing
Harvesting the Equity Insurance Risk Premium
Measuring Success in Fixed Income
Fiduciary Considerations for Target Date Funds
Reinsurance Funds: Are they the ultimate diversifier? (From UK Idea Development
Group)
Carbon-Related Investment: The long term is not simply a series of short terms (From
UK IDG)
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Preview: 2013 Thought Leadership
Risk evolution
Custom solutions
Renewed focus on investment foundations
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New Thought Leadership: Fiduciary
Considerations with Target Date Funds
Eric Friedman
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Fiduciary Considerations with Target Date Funds
Target Date Funds (TDFs) have taken on an increasingly important role in DC
plans. We view this trend favorably.
TDFs do not necessarily present greater fiduciary risks than other investments.
Because TDFs bundle a number of investment aspects and decisions together,analyzing them is more complex.
The outsourced nature of these may provide fiduciaries a false sense of comfort
because the day-to-day responsibilities appear to no longer lie with them.
Fiduciaries retain the responsibility for evaluating the vendors ability to provide an
appropriate solution.
For the full version of our white paperFiduciary Considerations with Target Date Funds,
please ask your consultant or visit our website at http://www.hewittennisknupp.com.
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Fiduciary governance best practice strongly supports plan sponsor consideration
of each element of target date fund strategies.
Key Elements of Target Date Funds
Funds
Glide Path
Fees
participant
outcomes
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HEK Preferences
HEK Prefers HEK Does Not Prefer
Glide Path Risk level consistent with
participant needs Supportable rationale for shape
and slope of glide path
Diversification of asset classes
Risk level set without regard to
participant circumstances Limited rationale for glide path
structure
Minimal diversification
Funds Passive management
High conviction active
management
Best-in-class active managers for
each asset class
Closet indexing
Low quality active management
Fees Appropriate fee levels for value
provided
Excessive fees for value provided
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TDF Solutions
Plan sponsors should evaluate their TDF approach regularly:
Quality of current approach may have changed
Decline in fund quality
Participants needs or plan sponsors views may have changed
Change in participant circumstances (e.g. DB freeze)
Change in views on active/passive management
Change in views on diversification
Alternative options may have improved Emergence of custom TDF solutions
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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 sessions.
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Our next investment strategy update call is scheduled
for Wednesday, January 16th, at 10 a.m. CST.