New recipes for investment success

1
New recipes for investment success
Emma Douglas Mark Johnson

• 21 May 2009

FOR PROFESSIONAL INVESTORS ONLY
2
The knives are out for pensions
3
Try changing the ingredients

• Your DC default option
• The governance of your DB scheme

4
Whats wrong with Lifestyle?

• Members hate seeing their investments fall in
  value
• Members dont understand benchmarks
• Members retire earlier than they expected
• In some schemes 80 retire early
• Members think managers are making tactical asset
  allocation decisions

Im alright, Im in Lifestyle
5
Diversified Growth Strategies

• Has a return target
• Cash 3-4 or RPI 5
• Multi-asset portfolio
• Invests in equities, bonds and cash
• Also property, high yield bonds, commodities,
  hedge funds, private equity etc
• Capital preservation bias
• No guarantee

6
From a members perspective

• Medium-low risk
• Aiming for long term capital growth
• Expected to outpace inflation
• Less volatile than traditional funds
• Capture most market upside in rising markets BUT
• Capital preservation ethos helps to limit
  downside
• Money is being managed by experts

7
Does it work?

• GBP Composite data - 31 December 2003 to 31 March
  2009

Annualised Average Return () Annualised Average Return () Annualised Absolute Volatility () Annualised Absolute Volatility ()
FTSE All Share 1.5 1.5 13.4 13.4
BlackRock Target Return 5.3 5.3 6.3 6.3
Best Monthly Return () Worst Monthly Return () Worst Monthly Return () of Negative Months
FTSE All Share 6.3 -13.2 -13.2 25/63
BlackRock Target Return 3.3 -6.4 -6.4 19/63
Source BlackRock
8
Can we communicate?
Snorkelling not scuba diving
9
Not this!
Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund Weight in Fund
  Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Jul-08 Aug-08 Sep-08
UK Equities 25.1 35.2 13.2 11.5 15.2 20.3 15.1 20.1 11.8 9.5 9.0 15.7 12.1 12.1 14.9
Overseas Equities 2.2 5.6 0.9 6.0 9.5 12.0 8.3 10.8 7.5 4.3 4.0 8.6 0.6 0.2 1.6
Emerging Market Equities 3.7 8.2 0.0 0.0 0.3 2.3 2.7 1.9 3.2 5.0 5.8 3.0 2.7 2.7 2.5
Sector Equities 0.0 0.0 2.0 1.6 1.1 2.2 4.0 5.4 8.2 6.7 5.6 5.2 5.1 4.7 2.3
Natural Resources 0.0 0.4 1.0 0.4 2.7 0.5 0.7 0.2 3.3 2.4 3.3 1.7 3.0 3.7 3.7
Infrastructure 0.3 0.3 2.9 2.3 2.1 1.0 5.6 8.3 6.5 6.0 5.1 4.3 4.0 4.0 0.3
Hedge Funds 0.0 0.0 0.0 4.0 5.7 7.7 10.0 10.7 8.5 10.8 10.3 10.4 10.0 9.1 9.1
Global Currency 0.0 0.0 0.0 4.1 3.5 1.2 1.4 1.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Property 0.3 0.4 0.0 2.6 5.7 5.6 7.2 6.3 5.2 4.6 3.5 3.1 2.0 2.1 2.1
Diversified Commodities 0.0 0.0 0.0 0.5 1.0 2.0 2.0 1.2 0.8 2.5 3.7 2.9 3.5 3.0 2.9
Derivative Strategies 0.0 0.0 0.0 0.0 2.3 0.7 1.1 0.9 3.0 3.1 4.7 4.1 4.0 4.4 5.5
Private Equity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.5 1.3 1.3 1.0 1.2 1.3
Fixed Interest Short Duration Cash 64.4 25.5 15.4 11.6 27.2 9.9 11.3 13.6 5.9 5.3 6.2 6.2 5.0 5.6 8.6
Cash 4.0 24.4 64.5 55.3 23.6 34.7 30.6 19.3 36.0 38.3 37.5 33.5 47.0 47.2 45.2
                               
Total Portfolio 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source BlackRock. Positions taken from the BIJF
Target Return Fund, a representative account.
Launch date of BIJF TR Fund June 30 2005.
10
Looks fine in a pie chart!
DC Target Return Fund December 2007

DC Target Return Fund March 2009

Overseas Equities, 3.0
UK Equities
Cash
11.0
UK Equities
Derivatives
15.5
Cash
Cover
Overseas Equities, 4.2
Derivatives
20.9
Emerging Market Equities, 9.0
Cover
Natural Resources, 2.2
28.0
Government
Emerging Markets, 4.3
Sector Equities, 3.0
Bonds
8.1
Property, 3.0
Diversified Commodities, 3.5
Short Duration
Hedge Funds, 6.0
Derivative Strategies, 2.9
Fixed Income
Credit
Portfolio,
Convertibles
Hedge Funds, 5.5
28.0
22.1
Infrastructure, 0.2
Infrastructure, 7.0
Private Equity Funds, 1.2
Private Equity, 2.0
Short Duration Fixed Income Portfolio, 9.4
11
What challenges are DB clients facing?
Anything but a quiet life!
12
Where Has Effort Been Invested?
Mismatch between value and time spent
13
What is Fiduciary Management?

• Fiduciary Management involves (partial)
  outsourcing of the day to day management of the
  Pensions Scheme to a Fiduciary Manager
• The Fiduciary Manager is responsible for a number
  of key functions traditionally undertaken by
  client
• The key benefit for clients is that one single
  party is accountable for the design,
  implementation and oversight of the plans
  investment activities
• Partnership approach allows the sponsor and the
  pension fund to focus on high-level strategic
  objectives

Success requires a close partnership between the
Sponsor/Pension Fund, their Advisors and the
Fiduciary Manager
14
Why Fiduciary Management?

• Pension Fund Trustees and Sponsors are faced with
• Greater emphasis on risk management - requires a
  higher level of diversification and data
• Increased complexity of financial products,
  creation of new asset classes
• Increased regulatory requirements and
  introduction of international accounting
  standards
• Increased complexity of Governance and Compliance
  rules
• Cross over between strategy and tactics driven by
  market volatility, shorter timeframes and more
  diverse allocations

In Sourcing to get the benefits of an in house
manager but without the limitations
15
Examples of Fiduciary Management

• Partial
• Members wished to outsource the management of
  their alternatives portfolio
• BlackRock responsible for the selection,
  implementation and risk monitoring across hedge
  funds, private equity, property, infrastructure
  and commodities

• Full
• Board of Trustees responsible for setting
  strategic objectives and monitoring
• BlackRock responsible for strategic advice,
  dynamic asset allocation, portfolio structure,
  manager selection

16
Fiduciary Management Illustration
Fiduciary Managed
Traditionally Managed
Client
Actuary/ Consultant
Actuary/ Consultant
Risk Management
Portfolio Manager(s)
Performance Monitoring
Asset Allocation
Client
Fiduciary Manager
Portfolio Implement-ation
Performance Measurement
Custodian
Risk Management
Custodian
Process should capture all interdependencies to
meet aclients objectives
17
Tracking Pension Scheme Funding Level Development
Weekly Monthly
Source BlackRock.
18
A Clients Perspective of a Fiduciary Relationship
Fiduciary Manager
Trustees
Consultant
Risk modelling and management
Scheme Governance
Actuarial
Investment strategy (Investment Input)
Investment strategy
Investment Strategy (Liability Perspective)
Investment performance
Asset allocation policy
Benefits Consultancy
Portfolio construction
Covenant management
Monitor Fiduciary
Manager selection/ terms
Cashflow management
Manager monitoring and de-selection
Benefits policy, payment structure
Guidance on strategy
Hedging strategy
Comprehensive reporting - risk and performance
Scheme administration
Tactical investments
Monitor and select fiduciary
Implement asset allocation
Manage all suppliers
Valuation assumptions
Funding
Benchmark selection
Set risk budget
Source BlackRock
19
Bringing it All Together
Discuss Scheme
Investment
Objectives ALM Study
Strategic
Advice
Client
Your
Service
Pension
Reporting
Long Term
Scheme
Investment
Strategy
Risk
Performance
Portfolio
Analysis
Construction
Implementation
20
So if you want a healthier pension scheme
21
maybe there is a simpler ingredient
22
Any questions?
23
(No Transcript)
24
Note to User This is a standard compliance
page for general presentations only

• The following notes should be read in conjunction
  with the attached document
• Issued by BlackRock Investment Management (UK)
  Limited, authorised and regulated by the
  Financial Services Authority. Registered office
  33 King William Street, London, EC4R 9AS. Tel
  020 7743 3000. Registered in England No.
  2020394. For your protection telephone calls are
  usually recorded. BlackRock is a trading name of
  BlackRock Investment Management (UK) Limited.
• Past performance is not a guide to future
  performance. The value of investments and the
  income from them can fall as well as rise and is
  not guaranteed. You may not get back the amount
  originally invested. Changes in the rates of
  exchange between currencies may cause the value
  of investments to diminish or increase.
  Fluctuation may be particularly marked in the
  case of a higher volatility fund and the value of
  an investment may fall suddenly and
  substantially. Levels and basis of taxation may
  change from time to time.
• Any research in this document has been procured
  and may have been acted on by BlackRock for its
  own purpose. The results of such research are
  being made available only incidentally. The
  views expressed do not constitute investment or
  any other advice and are subject to change. They
  do not necessarily reflect the views of any
  company in the BlackRock Group or any part
  thereof and no assurances are made as to their
  accuracy.
• This document is for information purposes only
  and does not constitute an offer or invitation to
  anyone to invest in any BlackRock funds and has
  not been prepared in connection with any such
  offer.
• Subject to the express requirements of any
  client-specific investment management agreement
  or provisions relating to the management of a
  fund, we will not provide notice of any changes
  to our personnel, structure, policies, process,
  objectives or, without limitation, any other
  matter contained in this document.
• Unless otherwise specified, all information
  contained in this document is current as at May
  2009.
• THIS MATERIAL IS FOR DISTRIBUTION TO
  PROFESSIONAL CLIENTS AND SHOULD NOT BE RELIED
  UPON BY ANY OTHER PERSONS.