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MY DEALER SERVICES ALTERNATIVES IN A MULTI SECTOR PORTFOLIO 26 SEPTEMBER 2014 Brian Long – Head of Wealth Management Representative of Mercer Investments.

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Presentation on theme: "MY DEALER SERVICES ALTERNATIVES IN A MULTI SECTOR PORTFOLIO 26 SEPTEMBER 2014 Brian Long – Head of Wealth Management Representative of Mercer Investments."— Presentation transcript:

1 MY DEALER SERVICES ALTERNATIVES IN A MULTI SECTOR PORTFOLIO 26 SEPTEMBER 2014 Brian Long – Head of Wealth Management Representative of Mercer Investments (Australia) Limited ABN 66 008 612 397 AFSL #244385

2 MERCER 1 PRESENTATION SUMMARY Challenges of the post GFC economic environment Introduction to alternative asset classes Hedge Funds and the rationale for including them in client portfolios Relative performance How to communicate Absolute Return Portfolio to Clients

3 MERCER 2 PORTFOLIO CONSTRUCTION PRE GFC

4 MERCER 3 YOU NEVER KNOW WHAT’S ON THE OTHER SIDE OF THE HILL PERIODIC TABLE OF ANNUAL AUSTRALIAN INVESTMENT RETURNS

5 MERCER 4 WORLD ECONOMIC GROWTH IS HAPPENING BUT IT IS WEAK… 4 What’s the implication? Our focus on portfolio diversification is essential to balance changing investment risks US Economic recovery continuing, tapering, debt ceiling uncertainty Australia More closely linked to China than the US Europe Deflationary risk China Growth being allowed to slow.

6 MERCER 5 Disinflation Cash Bonds Property Equities 0 Real Return Profile Inflation Bonds Equities Cash Property 0 Real Return Profile Stagflation Equities Bonds Property Cash 0 Real Return Profile Deflation PropertyEquities Cash Bonds 0 Real Return Profile …AND ASSET CLASS BEHAVIOUR WILL CONTINUE TO BE VOLATILE

7 INTRODUCTION TO ALTERNATIVE ASSETS 6

8 MERCER 7 In 2013, Mercer conducted 150 Alternatives searches for 9 Billion in assets placed. MERCER & ALTERNATIVES

9 MERCER 8 ALTERNATIVE ASSETS ARE WELL ACCEPTED AND ARE GAINING TRACTION 30% 25% 20% 15% 10% 5% 0 % of Pension Fund Allocation 20032013 Australia 20032013 UK 20032013 US 20032013 Canada Real Estate as a % of Total Portfolio Alternatives (ex-real estate) as a % of Total Portfolio Source: Australia: Rainmaker; Canada: PIAC; UK: WM; US: Callan Associates We begin by reproducing part of Table 1 from our first white paper. Endowment Hedge Funds Domestic Equity Bonds Foreign Equity Private Equity Real Assets Cash Harvard18%11% 22%13%26%-3% Yale25%10%4%15%20%29%-4% Avg. Education Endowment 22% 12%20%9%14%2%

10 MERCER DEFINITION OF “ALTERNATIVE INVESTMENTS” Mercer considers alternatives to be: Alternative approaches to traditional assets (e.g. long / short equities) Traditional approaches to alternative assets (e.g. infrastructure) Other definitions include: Non-traditional asset classes, anything outside bonds, shares and cash. Funds that focus more on alpha than beta (skill based) Funds that allow shorting Funds that focus on absolute return Funds with unconstrained benchmark 9

11 MERCER 10 WHAT ARE ALTERNATIVE INVESTMENTS USED FOR?

12 HEDGE FUNDS AND THE RATIONALE FOR INCLUDING THEM IN CLIENT PORTFOLIOS 11

13 MERCER HEDGE FUNDS - TWO COMMON STEREOTYPES… Cowboys? Mad scientists? OR 12

14 MERCER 13 HEDGE FUNDS ARE THEY REALLY RISKY?

15 MERCER HEDGE FUND HISTORY YearEvent 1949First hedge fund established by Alfred Winslow Jones 1968SEC estimates approximately 140 hedge funds in existence 1988SEC identifies approximately 2,700 hedge funds 1990s Yale and Harvard endowments pioneer use of hedge funds by large institutions 1998 Hedge funds feature prominently in news due to implosion of Long- Term Capital Management 2000sStrong hedge fund demand by institutional investors 2008Madoff (the original Ponzi scheme!) 2011Estimated 10,000 hedge funds worldwide 2014Hedge funds comprise estimated $2.6 trillion of assets 14

16 MERCER 15 TYPES OF HEDGE FUND INVESTMENTS AND A BROAD RANGE OF RISKS TAKEN Relative Value Convertible Arbitrage Fixed Income Arbitrage Statistical Arbitrage Equity Market Neutral Event-Driven Merger Arbitrage Distressed Securities Opportunistic Global Macro Managed Futures / CTA Long/Short Equity Hedge Short Selling Emerging Markets Sector Funds Lower Risk Higher Risk “Multi-Strategy funds are characterized by their ability to dynamically allocate capital among strategies falling within several traditional hedge fund disciplines”

17 MERCER HEDGE FUNDS HAVE PERFORMED WELL OVER LONG PERIODS 16

18 MERCER 17 02 July 2015 WHY ALLOCATE TO HEDGE FUNDS? Hedge Funds have delivered equity-like returns over 20 years… Data sources: Hedge Fund Research, Inc, Bloomberg

19 MERCER 18 02 July 2015 WHY ALLOCATE TO HEDGE FUNDS?... with significantly lower volatility… Data sources: Hedge Fund Research, Inc, Bloomberg

20 MERCER 19 02 July 2015 Data Source: Hedge Fund Research, Inc WHY ALLOCATE TO HEDGE FUNDS?... and selected strategies have offered a low correlation with global equities

21 MERCER 20 INDIVIDUAL HEDGE FUND STRATEGY PERFORMANCE Source: Credit Suisse Hedge Index LLC.

22 MERCER ALTERNATIVES ARE AMONG INVESTMENT RETURN “BUILDING BLOCKS” Looking to get a return above cash or risk free assets Core beta –Traditional, liquid, capital market risk premia, for example, ERP, credit, term –Equities, Bonds, Cash Scarce beta –Non-traditional risk premia, for example, illiquidity, insurance risk, regulatory risk –Infrastructure, Private Equity, Timber, Insurance-linked Securities Alpha (return from skill) –Non-directional hedge funds –Alpha component of traditional active strategies Opportunistic –Short to medium term exposures to any of the above –Informed by DAA views 21

23 MERCER 22 The heat map below shows the factor risk exposure of typical underlying asset classes. In particular we identified two asset classes we believe would improve the diversification of the model portfolios: Macro/Managed Futures and Multi Strategy. We were specifically are attempting to avoid Equity Risk Premium 22 ALTERNATIVE PORTFOLIOS Quantitative Return Drivers Equity Risk Premium Small Cap Premium Emerging Mkt Premium Credit Risk Premium Unexpected Inflation Term Premium Illiquidity Premium Non- Corporate GDP Growth AlphaOther Equities Developed Large CapHigh Moderate Minimum VolatilityHighModerate Emerging MarketsHigh Developed Small CapHigh Fixed Income Cash Sovereign Fixed Income (Domestic) High Sovereign Fixed Income (Foreign) Some High Sovereign Inflation-Linked High Credit - Investment Grade Moderate HighSome Credit - High Yield High Some Credit - Short duration high income High Some Moderate Emerging Market Debt Moderate Some HighModerate Some Real Assets Infrastructure - ListedHigh Infrastructure - Unlisted CoreSome High Moderate Real Estate - Unlisted Core ModerateHigh Real Estate - ListedHigh ModerateHigh Alternatives Macro / Managed FuturesSome High Multi Strategy Some Moderate Some High

24 MERCER SAMPLE ANALYSIS – DOWN YEAR MARKETS Comparison balanced portfolio with alts versus balanced portfolio without alts Performance of market indices weighted to each SAA (before fees) Balanced 1 Year Returns (gross) FY YearWith AltsWithout Alts 2008-8.7%-9.6% 2009-9.0%-11.6% 20122.1%1.4% Mercer Sector Survey Median returns (net fees - investment management only) weighted to each SAA Balanced 1 Year Returns (net fees) FY YearWith AltsWithout Alts 2008-8.2%-9.9% 2009-11.0%-12.1% 20122.0%1.0% 23 Benchmarks used for the analysis: - S&P/ASX 300 - MSCI World ex Australia (unhedged) - FTSE EPRA/NAREIT Global (hedged) - UBS Global Infrastructure and Utilities Index (hedged) - Hedge Fund Research Fund of Fund Index $A - UBS Composite Bond Index - Barclays Capital Global Aggregate Bond Index (hedged) - UBS Bank Bill Index Mercer Sector Survey used for the analysis: -Median of the Wholesale-Equity - Australia - All Cap Universe -Median of the Wholesale-Equity - Global - Large Cap Universe (unhedged) -Median of the Global REIT (Australian Investors) Universe (hedged) -Median of the Global Listed Infrastructure (Australian Investors) (hedged) -Median of the Wholesale-Hedge Funds / Absolute Return - Global -Median of the Wholesale-Fixed Income - Australia - Core -Median of the Wholesale-Fixed Income - Global - Core (hedged) -Median of the Wholesale-Cash - Australia Universe

25 COMMUNICATING HEDGE FUND INVESTMENTS TO CLIENTS 24

26 MERCER WHY WE HAVE ADDED HEDGE FUNDS AS A SMALL PART OF YOUR PORTFOLIO The global economy is in for a long period of low growth This necessitates a different way of investing than in the past There will be more shocks and rallies occurring in the next economic cycle than experienced prior to the GFC We do need to increase the level of insurance / protection in our portfolios Sovereign bonds do not perform this function reliably any more 25

27 MERCER WHY WE HAVE ADDED HEDGE FUNDS AS A SMALL PART OF YOUR PORTFOLIO Hedge funds have different “drivers of return” than traditional assets (equities and bonds) and can over the course of a market cycle can reasonably be expected to cushion the impact of increased bond yields and equity market corrections Hedge funds are well understood and are used by many institutional and professional investors It is generally necessary to be prepared to forgo some upside in order to have a level of protection from downside risks at a vey modest price 26

28 MERCER ALTERNATIVES……….HANDY TO KEEP IN YOUR PORTFOLIO 27

29 MERCER 28 IMPORTANT NOTICES 28 References to Mercer shall be construed to include Mercer LLC and/or its associated companies. This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer’s prior written permission. The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results. Mercer’s ratings do not constitute individualised investment advice. Information contained herein has been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party. This does not constitute an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financial instruments or products or constitute a solicitation on behalf of any of the investment managers, their affiliates, products or strategies that Mercer may evaluate or recommend. For the most recent approved ratings of an investment strategy, and a fuller explanation of their meanings, contact your Mercer representative. For Mercer Investments conflict of interest disclosures, contact your Mercer representative or see www.mercer.com/conflictsofinterest. www.mercer.com/conflictsofinterest Mercer universes: Mercer’s universes are intended to provide collective samples of strategies that best allow for robust peer group comparisons over a chosen timeframe. Mercer does not assert that the peer groups are wholly representative of and applicable to all strategies available to investors. The value of your investments can go down as well as up, and you may not get back the amount you have invested. Investments denominated in a foreign currency will fluctuate with the value of the currency. Certain investments carry additional risks that should be considered before choosing an investment manager or making an investment decision. This presentation is not for distribution to retail investors. This presentation has been prepared by Mercer Investments (Australia) Limited (MIAL) ABN 66 008 612 397, Australian Financial Services Licence # 244385. Copyright 2013 Mercer LLC. All rights reserved.

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