Transcript Schroders Institutional Series

Schroders Institutional Series
It’s more than just Bonds vs Equities
Chris Durack
Director
Head of Product and Distribution
September 2012
2
Three random individuals
(Sir) Ed
3
(Dame) Kiri
Note: Any likeness to real people is entirely coincidental
(Just) Darren
40 year savings outcomes
End benefit as a multiple of salary
13.6
40 year average rate of return
5.92%
5.99%
9.1
4.8
Ed
4
Kiri
Darren
Source: Why SAA is Flawed, Schroders, April 2012
2.05%
Ed
Kiri
Darren
Why the difference?
– SAA
– Contribution rate
– Investment approach
– Time horizon
1935, Darren
1919, Ed
1958, Kiri
5
Dinner party conversation
Average outcome: 10.4x Salary
18.0
16.0
Multiple of Salary
14.0
12.0
11.2
10.8
11.1
10.0
10.2
8.2
9.6
9.5
8.9
8.5
7.4
7.4
5.9
8.0
6.0
4.0
Ox
6
Source: Schroders
Pig
Rat
Tiger
rabbit
Sheep
Horse
Dragon
Monkey
Snake
Dog
Rooster
What is the problem?
– Major assumptions made
– Approach has too many constraints
– Path dependency
7
Assumption 1: Objective = SAA
10 Year Rolling Real Returns
15%
10%
5%
0%
-5%
1909
1919
1929
1939
1949
1959
1969
1979
Source: Schroders, Global Financial Data, Balanced fund is 30% global equity, 30% Australian equity, 30% Australian
8 bonds, 10% cash.
1989
1999
2009
Assumption 1: Objectives = SAA
Or another way…
Years required to have 90% confidence... What's the best I can promise with 90%
confidence over
85
2.60%
2.10%
53
CPI + 5%
CPI + 4%
-0.80%
40 Years
9 Source: Why SAA is Flawed, Schroders, April 2012
20 Years
10 Years
Assumption 2: All members are equal
Year drawdown starts
1972 1951 2007 1987 1945 2000 1929 1919 1969 1911 1994 1940 1937 1907
0%
Max drawdown
-10%
-20%
-30%
-40%
-50%
10 Source: Schroders, Global Financial Data
Assumption 3: Equity assumptions are logically consistent
% p.a
8
112 Year Real Returns for Equities
7
6
5
4
3
2
1
0
11 Credit Suisse Global Returns Yearbook, 2012, Real returns from 1 January 1900 to 31 December 2011.
Assumption 3: Equity assumptions are logically consistent
ASX Market cap as % of Nominal GDP
180%
160%
140%
120%
100%
80%
60%
40%
20%
12 Source: Schroders
2109
2103
2097
2091
2085
2079
2073
2067
2061
2055
2049
2043
2037
2031
2025
2019
2013
2007
2001
1995
1989
1983
1977
1971
1965
1959
1953
1947
1941
1935
1929
1923
1917
0%
Approach is wrong – something has to give
Positive Real Returns
CPI + 4-5%
Over rolling 5 – 7
year time frames
13
Fixed SAA
70/30
Approach is wrong – significant flexibility required in Asset Allocation
Asset Allocation
Asset Allocation and Real Returns by Decade
Real Return % p.a
100%
10%
8.2%
7.8%
8.1%
8%
80%
6.3%
6.2%
6%
4.4%
4.5%
4.6%
4.6%
4.5%
60%
4%
2%
40%
Global Equities
Aust. Equities
20%
0%
-1.5%
Bonds
Cash
-2%
Real Return
0%
-4%
1900-09 1910-19 1920-29 1930-39 1940-49 1950-59 1960-69 1970-79 1980-89 1990-99 2000-09
14
Source: Schroders, SMART, Global Financial Data
Significantly more flexibility required
Difference in Asset Allocation from Standard 60/40
50%
40%
More Defensive
30%
20%
10%
0%
-10%
-20%
-30%
More Growth
-40%
-50%
1900-09
15 Source: Schroders
1910-19
1920-29
1930-39
1940-49
1950-59
1960-69
1970-79
1980-89
1990-99
2000-09
Path dependency
% increase in end benefit
20%
Impact of contributions and investment returns as members age
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
First 20 years
1% increase in contribution rate
Second 20 years
1% increase in earning rate
16 Source: Schroders. 40 Year contributions at base contribution rate of 9% of salary, indexed at 3%p.a. Annualised earning
base rate 8%p.a.
Path dependency
Difference in money weighted and time weighted returns on
accumulated benefit over 20 years
Relative Impact of Accumulation Process
% Difference in End Benefit
50%
40%
Money Weighted Better
30%
20%
10%
0%
-10%
-20%
Time Weighted Better
-30%
1900
1910
1920
1930
1940
1950
1960
1970
Start Year
17 Source: Schroders, Global Financial Data. Assumes contribution of 12% of salary and salary increases each year of CPI+2%.
1980
1990
Path dependency
Duration of Drawdowns
100
Number of Years Drawdown Lasts
90
80
Drawdowns haven't run out yet
70
60
50
40
30
20
1900
1902
1904
1906
1908
1910
1912
1914
1916
1918
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
10
Year Drawdown Commences
Source: Schroders, Global Financial Data. Assumes initial drawdown of 7% of capital at end of year and indexed thereafter
18 with inflation. Investment return based on stylised balanced fund with fixed strategic asset allocation of 30% global equity,
30% Australian equity, 30% Australian bonds and 10% cash.
Are returns predictable?
Australian Equity Market
US Equity Market
25%
20%
Actual 10 year return
Forecast 10 year return
15%
20%
10%
15%
5%
10%
0%
5%
-5%
Actual 10 year return
0%
Forecast 10 year return
-10%
19
-5%
1990
1995
Source: Schroders, Datastream, Predicted return is calculated using inverted Shiller PE, Annual data
2000
2005
2010
2015
2020
Which is the better portfolio?
40
Industry Average
35
Forward Looking Base
30
25
20
15
10
5
0
Australian
Equities
20
Global
Equities
Australian High Yield High Yield Australian
REITs
Bonds
Floating
Bonds
Rate
Source: Schroders, SMART VaR, *High yield used as a proxy for other assets (e.g. unlisted)
Index
Linked
Bonds
Cash
Which is the better portfolio?
15
Industry Average
10
Forward Looking Base
5
0
-5
-10
-15
-20
-25
Real Return
Volatility
Prob. Of Loss
95% VaR
21 Source: Schroders, SMART VaR, *High yield used as a proxy for other assets (e.g. unlisted)
95% CVaR
99% Stress
VaR
Are markets cheap?
Asset class yield vs 20 year range
35%
30%
25%
20%
15%
10%
5%
Minimum - Maximum
Current
Source: Datastream, indices over 20 years to 31 August 2012 or since inception to 31 August 2012 if < 20 years of history available.
DataStream indices for US Equities, UK Equities, EMU Equities, Australian Equities, US 10y bonds, UK 10yr bonds, EU 10y bonds,
22 Australian 10y bonds, Merrill Lynch US Corporate Master, Merrill Lynch US HY Master, JPM Global EM Bonds, JPM GBI EM Diversified
Bonds, FTSE EPRA NAREIT Developed Index.
EM Local Bonds
EMD$
US High Yield
IG Bonds
Australian 10Y
Bunds
Gilts
10Y Treasuries
Australian Eq
Property REITs
EU Eq
UK Eq
US Eq
0%
Do you have a choice?
Retail
Funds
23
SMSF’s
Governance is a large part of the issue
Fund
Impact
High
Low
Objective
CPI+
24
Source: Schroders, stylised
Fund
Strategy
70 / 30
Asset Class
Strategy
Implementation
Small cap,
Large Cap,
Active, Passive
Benchmark
Restrictions
Tax
Selection
XYZ Asset
Management
Monitoring
Performance
vs Benchmark
1,3 yrs
We have to change the governance emphasis
Short
Long
Implementation emphasis
Outcome emphasis
–
Fixed SAA
–
Objective based AA
–
Asset Managers
–
Asset owner
–
Short - term alpha
But who takes
–
Absolute performance
–
Benchmark orientated
responsibility?
–
Absolute risk orientated
Protect business risk
Minimise objective risk
Measurement against
Measurement against
benchmarks
objectives
25
Source: Schroders, stylised
Part of the solution?
International
Shares
Australian
Shares
International
Shares
Fixed Interest
Alternatives
Property
Fixed Interest
Alternatives
Property
Australian
Shares
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How can we reshape the approach?
Governance must change
Assumptions the industry makes are wrong
– Objectives = SAA
– Time horizon
– Logical inconsistency of assumptions
Approach has too many constraints
We can’t hide in the averages – this is real people’s real money
It’s not a case of if or when, but how
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Investment presentation
Disclaimer statement
This presentation is intended solely for the information of the person to whom it was provided by Schroder Investment
Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). Investment in Schroder Funds may be
made on an application form in the Product Disclosure Statement (PDS) which is available from the Schroders website
www.schroders.com.au. The information contained in this Presentation is general information only and does not take into
account your objectives, financial situation or needs. Before acting on the information contained in this Presentation you
should obtain a copy of the PDS and consider the appropriateness of the information in regard to your objective, financial
situation and needs before making any decision about whether to invest, or continue to hold.
Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this
presentation. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees,
consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or
negligence or otherwise) for any error or omission in this presentation or for any resulting loss or damage (whether direct,
indirect, consequential or otherwise) suffered by the recipient of this presentation or any other person. Returns shown are
before tax and fees and all income is reinvested.
You should note that past performance is not a reliable indicator of future performance. Opinions constitute our judgement at
the time of issue and are subject to change. The information and opinions and associated estimates and forecasts contained
in this document have been obtained from or are based on sources believed by us to be reliable, but no responsibility can
be accepted for error of fact or opinion. For security reasons telephone calls may be recorded.
Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article.
They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274,
AFS Licence 226473 ("Schroders") or any member of the Schroders Group and are subject to change without notice.
Important Information: For further information on any charts depicting return series or analysis in this presentation
see “Why SAA is Flawed”, “Asset Allocation: How flexible do we need to be?”, and “Understanding the journey to
retirement”, available upon request from Schroder Investment Management Australia Ltd, April and May 2012.
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Employment share by activity over time
Per cent
100
75
50
25
0
1900
1954
Services
29 Source: Source is 2012/13 Budget Paper 1
1971
Agriculture
2000
Industry
2009