Invesco Investment Solutions brochure · Inv estme nt Insights: Capital mar ket assumptions Q2 2019...

Invesco Investment SolutionsA world of investment complexity.A consultative, flexible partner to optimise portfolio outcomes.

This marketing document is exclusively for use by Professional Clients and Financial Advisers in Continental Europe (as defined in the important information), Qualified Investors in Switzerland, Professional Clients in Dubai, Ireland, Isle of Man, Jersey, Guernsey and the UK. This document is not for consumer use, please do not redistribute.

Navigate markets. Drive outcomes. Enhance portfolios.Multi-dimensional thinking for all investment challenges.

Aligning your investments with your organisational needs truly takes a holistic approach. And with today's myriad of investment challenges some of the world’s most sophisticated organisations are turning to Invesco Investment Solutions (IIS). We combine a client-centric focus and multi-asset expertise with one of the broadest and deepest sets of capabilities in the industry to help achieve the results you seek.

Through advisory consultation, custom solutions and strategic partnerships, IIS harnesses the right combination of strategies across Invesco’s full spectrum of active, passive, factor, and alternative investments to solve your organisational needs. From robust research and analysis, to portfolio construction, to the creation of fully bespoke solutions, we bring transformative thinking and unique perspectives to your portfolio.

02 Invesco | Investment Solutions

03

Uniquely positioned to deliver

purposeful outcomes

Expert investment insight

We are a global team of more than 90 PhD and master's

degree holders, with decades of experience managing multi-asset portfolios.

Industry-leading analytics

We offer deep risk assessment, portfolio stress-

testing and enhanced modeling powered by the Invesco

Vision analytics platform.

Diversity of thought

Invesco's ~£1 trillion investment management

platform puts us in an excellent position to offer a vast array of investment solutions to fit

almost any investor need.


Portfolio management

Research and analytics

Uses a multi-dimensional approach to portfolio construction and asset allocation

Client solutions

InvescoInvestmentSolutions Leads advisory

relationships and develops custom

solutions

Builds tailored multi-asset portfolios

A partnership built for results

Solutions at a glance1

We engage with you and your investment team to improve overall portfolio efficiency through our expertise in:

Portfolio diagnostics, creation and implementation Asset allocation, including extensive expertise in alternatives

Factor-based analysis and implementation

Asset/liability management

Economic and regulatory risk

Overlays and custom solutions

Whether you are looking for a strategic partner across your entire investment universe or for a single strategy, our dedicated client solutions strategists, portfolio managers, and analysts will help you reach your objectives with a clear understanding of your industry and the regulatory environment you face. By leveraging the firm’s extensive platform of expertise and solutions, plus dynamically pairing “building blocks” in unique and thoughtful ways, Invesco Investment Solutions can help deliver your desired outcomes.

05

1 For illustrative purposes only. Advisory services may not available in all jurisdictions.

£22bn assets under management

60+ professionals

15+ average years across team leadership

90+ PhDs/master's degrees and designations

10+ global locations across North America, EMEA and APAC

Access to the full resources of the firm, a £950bn platform


Capital Markets Assumptions Seeking to turn investment research into investment opportunities

Invesco Investment Solutions develops capital markets assumptions (CMAs) that provide long-term estimates for the behaviour of major asset classes globally to help guide strategic asset allocation.

The Invesco Investment Solutions team has developed a distinct methodology and process for CMAs offering investors a new level of transparency when it comes to portfolio construction.

The team employ a fundamentally based “building block” approach to developing assumptions for expected return, volatility and correlation with other asset classes.

For illustrative purposes only.

Our building block approach to estimating returns

Equity

Fixed Income

Commodities

Yield Valuation change

Roll return

Credit adjustment

Yield Valuation change

Earnings growth

+ +

+ + –

Collateral return

Roll return

Spot return

+ +

Income Capital

07

Insights

CMA methodology update

Annual outlook papers

Quarterly outlook papers

Invesco Vision

Invesco Vision Portfolio management decision support system

The document is intended only for Professional Clients in Continental Europe (as defined under Important Information); for Qualified Investors in Switzerland; for Professional Clients in Dubai, Ireland, the Isle of Man, Jersey and Guernsey, and the UK; for Institutional Investors in Australia; for wholesale investors (as defined in the Financial Markets Conduct Act) in New Zealand, for Professional Investors in Hong Kong; for Qualified Institutional Investors in Japan; for Institutional Investors in Singapore; for Qualified Institutional Investors only in Taiwan and for Institutional Investors in the USA. The document is intended only for accredited investors as defined under National Instrument 45-106 in Canada. It is not intended for and should not be distributed to, or relied upon, by the public or retail investors.

Source: Invesco, estimates as of March 31, 2019. Proxies listed in figure 7. These estimates are forward looking, are not guarantees, and they involve risks, uncertainties, and assumptions. Please see page 7 for information about our CMA methodology. Please see page 9 for the complete CMA disclosure. These estimates reflect the views of Invesco Investment Solutions, the views of other investment teams at Invesco may differ from those presented here.

Figure 1: 10-year asset class expectations (EUR)

• Fixed income • Equity • Alternatives

Figure 2: 10-year asset class expected return-to-risk (EUR)

• Fixed income • Equity • Alternatives

Source: Invesco, estimates as of March 31, 2019. Proxies listed in figure 7. These estimates are forward looking, are not guarantees, and they involve risks, uncertainties, and assumptions. Please see page 7 for information about our CMA methodology. Please see page 9 for the complete CMA disclosure. These estimates reflect the views of Invesco Investment Solutions, the views of other investment teams at Invesco may differ from those presented here.

Overview

Investment Insights: Capital market assumptions Q2 2019 3

Risk (%)

Expe

cted

arit

hmet

ic r

etur

ns (

%)

25 300

2

4

6

8

10

12

20151050

Privateequity

Emergingmarket

Asia Pacific Ex JP

US SmallCap

UK

Commodities

Canada

Japan

US REITsEM AggregateCorporate

EM Aggregate

EM Aggregate Sovereign

US LargeCap

Global REITs

Global Infrastructure

Eurozone Corporate

Eurozone Aggregate

Eurozone TreasuryEurozoneHigh Yield

US MBS

US TIPS US Treasury

US Aggregate

HedgeFunds

US Banks Loans US High-YieldCorps

MSCI Europe

World Equity

Eurozone

MSCI EAFE

WorldEx-USEquity

Japa

n

0.1

0.2

0.3

Cana

daUK

Euro

zone

MSC

I Eur

ope

MSC

I EA

FE

US

Smal

l Cap

US

Larg

e Ca

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Wor

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EM A

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gate

Cor

pora

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EM A

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Sov

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EM A

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gate

Euro

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Euro

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Cor

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Euro

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Agg

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US

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Cor

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US

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US

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rega

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US

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Emer

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Mar

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JP

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0.4

Invesco Global Solutions

2019 Long-term capital market assumptions Euro (EUR)

The document is intended only for Professional Clients in Continental Europe (as defined under Important Information); for Qualified Investors in Switzerland; for Professional Clients in Dubai, Ireland, the Isle of Man, Jersey and Guernsey, and the UK; for Institutional Investors in Australia; for wholesale investors (as defined in the Financial Markets Conduct Act) in New Zealand, for Professional Investors in Hong Kong; for Qualified Institutional Investors in Japan; for Institutional Investors and/or Accredited Investors in Singapore; for certain specific Qualified Institutions/Sophisticated Investors only in Taiwan and for Institutional Investors in the USA. The document is intended only for accredited investors as definedunder National Instrument 45-106 in Canada. It is not intended for and should not be distributed to, or relied upon, by the public or retail investors.

Contents

Understanding Invesco’s 2019 long-term capital market assumptions

1

Executive summary 2

Global market overview 3

About our capital market assumption methodology

9

Contributors 10

The Invesco White Paper Series July 2018

Capital market assumptions: Methodology update

The Invesco Global Solutions Development and Implementation team (Invesco Global Solutions) is dedicated to designing outcome-oriented, multi-asset portfolios that meet the specific goals of investors. Capital market assumptions (CMAs) are key to this effort. CMAs provide the long-term estimates for the behavior of different asset classes. Specifically, for each of the asset classes which we estimate, we develop assumptions with regard to return, standard deviation of return (volatility) and correlation with other asset classes.

We have expanded the research platform to include additional time horizons and alternative asset classes. This document reviews the building block methodology which underpins the estimates for traditional asset classes (equities, fixed income, commodities) and introduces the recent CMA enhancements.

Estimating returns for traditional asset classes: A 'building block' approachWe employ a fundamentally based "building block" approach to estimating asset class returns. Building blocks represent a “bottom-up” approach in which the underlying drivers of asset class returns are used to form estimates (Figure 1).

First, these sources of return are identified by deconstructing returns into income and capital gain components. Next, estimates for each driver are formed using fundamental data such as yield, earnings growth and valuation, and combined to establish estimated returns.

By incorporating fundamental data, our approach allows for the relative attractiveness of asset classes to vary over time. Other approaches based on historical relative returns can provide relatively static risk-premiums through time in which certain asset classes contain constant return advantages. The following section will detail and present the estimates across various equity, fixed income and commodity asset classes.

Figure 1: Our building block approach to estimating returns

Yield

Yield

Collateralreturn

Valuationchange

Earningsgrowth

Valuationchange

Rollreturn

Spotreturn

Creditloss

Equity

• Income • Capital

Fixed income

Commodities Rollreturn


This document is for Qualified Investors in Switzerland, Professional Clients only in Dubai, Professional Clients in Continental Europe and the UK; for Institutional Investors only in the United States and Australia; in New Zealand for wholesale investors (as defined in the Financial Markets Conduct Act); for Professional Investors in Hong Kong; for Qualified Institutional Investors in Japan; in Taiwan for Qualified Institutions/Sophisticated Investors; in Singapore for Institutional/Accredited Investors; in Canada, this document is restricted to Accredited Investors as defined under National Instrument 45-106. It is not intended for and should not be distributed to, or relied upon by, the public or retail investors. Please do not redistribute this document.

Invesco Global Solutions Development and Implementation team


Your portfolio should be based on your beliefs about the world and the future. Invesco Investment Solutions’ team of global research professionals, with expertise across a variety of domains (e.g., Mathematics, Statistics, Data Science, etc.), dedicated years of research and effort to developing the Invesco Vision portfolio management decision support system. The platform was specifically designed around the idea of providing professional investors with the information they need to make better informed investing decisions. The system provides a wide variety of capabilities including:

Asset and liability modelling

Portfolio construction

Portfolio analytics

Invesco Vision was created to allow for more productive collaborations with our clients and to support investors in most effectively applying their judgement in the portfolios they manage.

Greater insights for better investment decisions.Introducing Invesco Vision

09

1

3

2

4

Develop consistent expectations for portfolio assets using Investment Solutions’ assumptions or an investor’s own expectations

Assess your current asset allocation compared to your risk/return targets

Model liabilities to optimise funding ratio risk and target sufficient short-term liquidity

Evaluate the impact of changes to the asset allocation such as adding, removing, or reweighting assets

5

7

6

8

Identify and quantify the sources of portfolio return and risk to understand what is driving investment outcomes

Gain greater clarity about return and risk trade-offs within your portfolio and identify additional opportunities for diversification

Understand the risks of portfolio assets and liabilities to more fully understand your exposures and vulnerabilities

Stress test your portfolio for performance under various “what if” scenarios

Model assets and liabilities


The output of any risk management or portfolio construction exercise is a function of the inputs used.

Estimating portfolio asset return, risk, and correlation expectations is central to portfolio and risk analyses. Some of the challenges we can help investors with in these efforts include:

Developing consistent return estimates across all portfolio assets

Developing risk and correlation estimates for alternative/private market assets

Establishing asset or liability benchmarks that are aligned with client objectives

Liability Factor analysis Isolated Risk

CFs 10 10 Curve GBP Trsy GBP Real

Years Nom CFs Real CFs Years Nom Rates Real Rates Specific Risk

Total

Spec. Risk

Credit

Inflation

Rates

Isolated risk (%)0 2 4 6 8 10

0.5 12.79 12.79 0.5 0.72 -2.33 01.5 13.36 13.36 1.0 0.71 -2.33

Real CF Multiplier2.5 13.89 13.89 1.5 0.73 -2.27

0.793.5 14.37 14.37 2.0 0.74 -2.24

4.5 14.80 14.80 2.5 0.79 -2.18

5.5 15.16 15.16 3.0 0.82 -2.14

6.5 15.46 15.46 3.5 0.87 -2.1

7.5 15.69 15.69 4.0 0.91 -2.06

8.5 15.84 15.84 4.5 0.96 -2.02

Cash flow Analytics

• Nominal cash flow • Real cash flow • Real cash flow (Infl Adj) • Present value

Cas

h fl

ow

s

50 yr40 yr30 yr20 yr10 yr0 yr

10

20

30

40£ Mln Items Nominal Real

Yield (%) 1.65 -1.59OAS to treasury (bps) 0 -328Effective duration 13.56 17.23Modified duration 13.77 17.38Convexity 2.87 4.27

Type ≤ 30 year › 30 year TotalNominal 766.0 80.1 846.0PV 789.2 91.6 880.8

Liability Factor analysis Isolated Risk

CFs 10 10 Curve GBP Trsy GBP Real

Years Nom CFs Real CFs Years Nom Rates Real Rates Specific Risk

Total

Spec. Risk

Credit

Inflation

Rates

Isolated risk (%)0 2 4 6 8 10

0.5 12.79 12.79 0.5 0.72 -2.33 01.5 13.36 13.36 1.0 0.71 -2.33

Real CF Multiplier2.5 13.89 13.89 1.5 0.73 -2.27

0.793.5 14.37 14.37 2.0 0.74 -2.24

4.5 14.80 14.80 2.5 0.79 -2.18

5.5 15.16 15.16 3.0 0.82 -2.14

6.5 15.46 15.46 3.5 0.87 -2.1

7.5 15.69 15.69 4.0 0.91 -2.06

8.5 15.84 15.84 4.5 0.96 -2.02

Cash flow Analytics

• Nominal cash flow • Real cash flow • Real cash flow (Infl Adj) • Present value

Cas

h fl

ow

s

50 yr40 yr30 yr20 yr10 yr0 yr

10

20

30

40£ Mln Items Nominal Real

Yield (%) 1.65 -1.59OAS to treasury (bps) 0 -328Effective duration 13.56 17.23Modified duration 13.77 17.38Convexity 2.87 4.27

Type ≤ 30 year › 30 year TotalNominal 766.0 80.1 846.0PV 789.2 91.6 880.8


Portfolio construction

11

Having the right tools is critical to achieving desired outcomes.

A broad set of portfolio construction approaches allows us to develop portfolios that consider investors’ preferences for a variety of return and risk tradeoffs in achieving specific investment objectives.

Absolute and relative risk optimisation

Robust optimisation

Liability matching (ALM, LDI, and CDI)

Portfolio constructions with regulatory considerations (Solvency II)

Return-agnostic optimization

Efficient frontier Factor analysis Isolated Risk

• Frontier • Frontier with alternatives Benchmark Portfolio

Isolated risk (%)

Geo

met

ric r

etur

n (%

)

0 5 10 15 20 252

4

6

8

10

Corporate bondAggregate bond

High yield RE US CORE

IFRE US RENEW

PortfolioBenchmark

US large capRE US MEZ

Emergingmarket equity

PE US SBO

Developed ex US equity

0 2 4 6 8 10

Total

Currency

Specific Risk

Hedge Fund

Private

Real Estate

Commodity

Equity

Credit

Inflation

Rates

Frontier weights Weights details

Weight (%)

Wei

ght

(%)

0 10 20 30 40 50 600

20

40

60

80

100

1050 15 20 25

Total risk (%)

Total risk (%)

IFRE US Ren

PE US SBO

RE US Core

RE US Mez

Em Mkt Eq

Dev xUS Eq

US LC Eq

High Yield

Corp Bond

Agg Bond

Selected portfolio



Portfolio analytics

Effective risk management requires relevant information about portfolio risks.

Understanding the multitude of return and risk trade-offs presented by portfolios requires the ability to intuitively evaluate risk from a variety of perspectives. We can help investors:

Uncover and understand sources of return and risk

Compare candidate portfolios with existing or alternate portfolios.

Stress testing portfolios - considering historical and hypothetical scenarios

Macro factors Current portfolio

Proposed portfolioScenario analysis Current portfolio

Proposed portfolio

Rat

es

Infla

tion

Cred

it

Equi

ty

Com

mod

ity

Rea

l est

ate

Priv

ate

equi

ty

Hed

ge f

und

Curr

ency

Spec

ific

risk

Tota

l

10

0

Isolated risk (%)

8

6

4

2

12 2

0

-2

-4

-8

4

-10

Profit/Loss (%)

-6

EUR

/USD

-15%

US

Tsy

-100

bps

US

Tsy

+100

bps

EM -1

5%

EAFE

-15%

US

-15%

JPY

/USD

-15%

Wor

ld -1

5%

Oil

-15%

GBP

/USD

-15%

Gol

d -1

5%

Shocks Shocks

For illustrative purposes only.For illustrative purposes only.

13

Portfolio Selection

An investor’s portfolio is the practical expression of their beliefs about the future, their investment objectives, their constraints, and their willingness to bear a variety of risks.

Portfolio selection is when the application of the many judgements made throughout the portfolio analysis process results in the identification of a portfolio that balances the achievement of specified outcomes with the understanding and acceptance of a variety of return and risk trade-offs. Successful portfolio selection requires access to the right types of analytical resources, the right types of investments, and the right investment partners.

Efficient frontier Factor analysis Isolated Risk Benchmark

0 4 8 12 16 20

Total relative risk (%)

Optimal absoluterisk portfolio

Weight (%)

Wei

ght %

0 20 40 60 800

0 42 86 1210 1614 2018

2 6 10 14 18

20

40

60

80

100


G lobal AggG lobal TsryG lobal CorpUS MBSG lobal HYUS LC EqDev xUS EqWorld EquityEm Mkt EqRE Wrld CorePE US LBO

Total relative risk (%) Relative risk (%)0.0 0.2 0.4 0.6 0.8 1.0

-3

-2

-1

0

1

2

3

Geo

met

ric re

turn

(%

)

TotalCurrencySpecific riskHedge fundPrivateReal estateCommodityEquityCreditInflationRates

0.0 0.2 0.4 0.6 0.8 1.0

Minimum tracking error portfolio

Reference portfolio(benchmark) Developed ex US equity

US large cap

RE world coreG lobal high yield

US securitizedG lobal treasury

G lobal corporate

PE US LBO

Emerging market equityAbsolute risk efficient frontier

Efficient frontier Factor analysis Isolated Risk Benchmark

0 4 8 12 16 20

Total relative risk (%)

Optimal absoluterisk portfolio

Weight (%)

Wei

ght %

0 20 40 60 800

0 42 86 1210 1614 2018

2 6 10 14 18

20

40

60

80

100


G lobal AggG lobal TsryG lobal CorpUS MBSG lobal HYUS LC EqDev xUS EqWorld EquityEm Mkt EqRE Wrld CorePE US LBO

Total relative risk (%) Relative risk (%)0.0 0.2 0.4 0.6 0.8 1.0

-3

-2

-1

0

1

2

3

Geo

met

ric re

turn

(%

)

TotalCurrencySpecific riskHedge fundPrivateReal estateCommodityEquityCreditInflationRates

0.0 0.2 0.4 0.6 0.8 1.0

Minimum tracking error portfolio

Reference portfolio(benchmark) Developed ex US equity

US large cap

RE world coreG lobal high yield

US securitizedG lobal treasury

G lobal corporate

PE US LBO

Emerging market equityAbsolute risk efficient frontier


Contact us

Amsterdam Telephone +31 20 561 62 61 www.invesco.nl

Brussels Telephone +32 2 64 10 17 0 www.invesco.be

Dubai Telephone +971 4 425 0950 www.invesco.ae

Frankfurt Telephone +49 69 2980 7800 www.de.invesco.com

Madrid Telephone +34 91 78 13 02 0 www.invesco.es

Milan Telephone +39 02 88074 1 www.invesco.it

Paris Telephone +33 1 5662 4377 www.invesco.fr

Stockholm Telephone +46 84 63 11 09 www.invesco.eu

UK Telephone +44 1491 417000 www.invesco.co.uk

Vienna Telephone +43 1 316 200 www.invesco.at

Zurich Telephone +41 44 287 90 00 www.invesco.ch

15

Telephone calls may be recorded in the UK.

Invesco is a leading investment management firm with one singular purpose: To help investors get more out of life by delivering a superior client experience.

Invesco designs portfolios for a complex investment world.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Important information

This presentation is exclusively for use by Professional Clients and Financial Advisers in Continental Europe, Qualified Investors in Switzerland, Professional Clients in Dubai, Ireland, Isle of Man, Jersey, Guernsey and the UK. This document is not for consumer use, please do not redistribute.

For the distribution of this document, Continental Europe is defined as Austria, Belgium, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain and Sweden.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

This overview contains general information only and does not take into account individual objectives, taxation position or financial needs. Nor does this constitute a recommendation of the suitability of any investment strategy or product for a particular investor.

It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy to any person in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it would be unlawful to market such an offer or solicitation. It does not form part of any prospectus.

Where individuals or the business have expressed opinions and forecasts, they are based on current market conditions, they may differ from those of other investment professionals at Invesco and are subject to change without notice. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.

By accepting this document, you consent to communicate with us in English, unless you inform us otherwise.

All information is sourced from Invesco, unless otherwise stated. All data as of 30 June 2019 and is GBP.

Issued in Austria by Invesco Asset Management Österreich – Zweigniederlassung der Invesco Asset Management Deutschland GmbH, Rotenturmstrasse 16-18, 1010 Wien, Austria.

Issued in Belgium, Finland, France, Italy, Luxembourg, Netherlands, Norway, Spain and Sweden by Invesco Asset Management S.A., 16-18 rue de Londres, 75009 Paris, France.

Issued in Dubai by Invesco Asset Management Limited PO Box 506599, DIFC Precinct Building No 4, Level 3, Office 305, Dubai, United Arab Emirates. Regulated by the Dubai Financial Services Authority.

Issued in Germany by Invesco Asset Management Deutschland GmbH An der Welle 5, 60322 Frankfurt am Main, Germany.

Issued in Ireland by Invesco Global Asset Management DAC Central Quay, Riverside IV, Sir John Rogerson’s Quay, Dublin 2, Ireland. Regulated in Ireland by the Central Bank of Ireland. Issued in the Isle of Man by Invesco Global Asset Management DAC Central Quay, Riverside IV, Sir John Rogerson’s Quay, Dublin 2, Ireland. Regulated in Ireland by the Central Bank of Ireland.

Issued in Jersey and Guernsey by Invesco International Limited 2nd Floor, Orviss House, 17a Queen Street, St Helier, Jersey, JE2 4WD. Regulated by the Jersey Financial Services Commission.

Issued in Switzerland by Invesco Asset Management (Schweiz) AG, Talacker 34, 8001 Zurich, Switzerland.

Issued in the UK by Invesco Asset Management Limited Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

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Invesco Investment Solutions brochure · Inv estme nt Insights: Capital mar ket assumptions Q2 2019...

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