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Citywire beta retreat november 2012
 

Citywire beta retreat november 2012

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    Citywire beta retreat november 2012 Citywire beta retreat november 2012 Presentation Transcript

    • Marketing Communication - For Professional Clients OnlyYield enhancement and downside protection Adapting to changing demographics November
    • Contents1. Living longer and longevity risk ……………………………………………………(pg. 3)2. Impact for private client managers ………………………………………………...(pg. 6)3. Case Study 1: IFSL Harewood US Enhanced Income OEIC Fund ................(pg. 10)4. Contacts Us ……………………………………..…………………….……..….……(pg. 17) 29 November 2012 2
    • 1. Living longer and longevity risk 29 November 2012 3
    • Living longer Medical advances and healthier lifestyles means that life expectancy is rising and there is no sign that this trend is about to stop anytime soon!(1) Life expectancy in the US is increasing by one to three months every year(2) More than 2 million people presently aged over 50 in the US will live to be older than 100 (17% of the present population!)(3) Deaths per 1,000 live births Years 25 82 80 20 78 76 15 74 72 10 70 5 68 UK Infant Mortality Rate (LHS) UK Life Expectancy (RHS) 66 0 64 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20Source: 1) OECD Health Data 2011 – Frequently Requested Data 2) Aegon – What is the right price for removing longevity risk 3) Department for Work and Pensions – Number of Future Centenarians –December 2010 29 November 2012 4
    • Longevity Risk Longevity risk simply refers to the risk that an individual will outlive his or her assets* According to Aegon, every year of additional life expectancy is generally thought to add about 3–4% to future pension requirements in the US(1) In the US, for a couple aged 65 who is about to retire, there is a 50% chance that one of them will live to age 91, and a 25% chance that at least one of them will live to age 96 (source Morningstar)(2) Possible 31 years retirement!*The purpose of this presentation is to deal with longevity risk from a private client manager perspective. The objective is not to deal with hedging mortality risk from an insurance company perspectiveSource:1) Aegon – What is the right price for removing longevity risk 2) Morningstar and Annuity 2000 Mortality Tables – Transactions, Society of Actueries, 1995-1996 Reports 29 November 2012 5
    • 2. Impact for private client managers 29 November 2012 6
    • Key Challenges to Life-Cycle Investing Traditionally, investors’ retirement planning means investing in risky assets (i.e. stocks) at the beginning of the work life and gradually shifting holdings to bonds as retirement nears Two keys challenges  Declining Bond Yields  No longer sufficient for increasing retirement periods  Rising Inflation  Declining real returns 14.00% 300 10Y Government Bond Yield (LHS) UK RPI(RHS) 12.00% 250 10.00% 200 8.00% 150 6.00% 1 100 4.00% 2.00% 50 0.00% 0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 b- b- b- b- b- b- b- b- b- b- b- b- b- b- b- b- b- b- b- b- b- b- b- b- Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe Fe How can we help clients to meet their financial needs in post-retirement for over 25 years and preserve their capital against the eroding impact of inflation, all within a tight risk-budget?Source: Bloomberg. Data is computed from 27/02/1989 to 31/03/2012. Tickers: UK RPI (UKRPI Index), 10Y UK Government Bond Yield (GUKG10 Index) 29 November 2012 7
    • Keeping a defensive exposure to equity in post-retirement Necessity to keep exposure to equity in post-retirement  100% allocation to bonds does not work with very long post-retirement life However equity downside risk must be mitigated for cautious, income-seeking investors  Some investors have been significantly affected by the recent market downturn 140% Eurostoxx 50 FTSE 100 S&P 500 120% 100% 80% 60% 40% 20% 0% 0 01 02 03 04 05 06 07 08 09 10 11 0 1 2 3 4 5 6 7 8 9 0 1 -0 l -0 l -0 l -0 l -0 l -0 l -0 l -0 l -0 l -0 l -0 l -1 l -1 n- n- n- n- n- n- n- n- n- n- n- n Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Look for ways to keep exposure to equity while mitigating the downside riskSource: Bloomberg. Data is computed from 03/01/00 to 30/09/11. Tickers: Eurostoxx 50 (SX5E Index), FTSE 100 (UKX Index), S&P 500 (SPX Index) 29 November 2012 8
    • Risk Management and Longevity Risk Tweaking the Risk/Return Profile of Traditional Assets  Hybrid Equities and Defensive Strategies Two Approaches to Investing for Longevity  Hybrid Equities  Enjoying the benefits of non-linear payoffs and risk reduction  Defensive Strategies  Capturing market increases while limiting the impact of any decreases Equities Return Hybrid Equities Bonds RiskFor illustration purposes only 29 November 2012 9
    • Case Study 1: IFSL Harewood US Enhanced3. Income OEIC Fund 29 November 2012 10
    • Fund Overview IFSL Harewood US Enhanced Income Fund (the “Fund”) Exposure Reduced Dividend to the Volatility Yield S&P 500 TR vs. S&P 500 TR Enhancement Index Index 29 November 2012 11
    • The Covered Call strategyHow does a Covered Call strategy work? Covered Call on the S&P 500 TR Index = Long exposure to the Index + Sale of call options on the Index Key point: The premiums generated by the sale of call options create a cushion against potential market falls  The greater the risk in the market, the greater the cushion  However, upside participation is capped due to the sale of call options Performance of the strategy S&P 500 TR Index Cushioning effect increases with higher volatility Index price levelFor illustrative purposes only 29 November 2012 12
    • How is the “traditional Covered Call strategy” optimised ?1) The daily sale of call options* Call options are sold on each scheduled trading day and expire 15 scheduled trading days thereafter The daily sale of call options provides more reactivity to market trends:  No longer dependent on one single point of the market movements  Benefit from the increase in volatility during a bearish market  Closely follow the upward trends of the marketTraditional Covered Call: Does not follow upward Optimised Covered Call: Captures changing markettrends conditions Performance Performance Upper limit of the monthly option sold 17/08/11 17/08 18/08 19/08… Time TimeFor illustrative purposes only* Except in the event of a bull market with a very low level of volatility (<9%); in such a situation no calls are sold 29 November 2012 13
    • Performance analysis of the US Covered Call Strategy (Pro-forma)Pro-forma Performance analysis (January 2001 – October 2012)160% IFSL US Enhanced Income Fund IFSL Harewood US140% Enhanced Income Fund S&P 500 TR Index S&P 500 TR Index (in GBP)120% (Class B)100% Annualised return 2.71% 1.46% 80% Annualised volatility 17.40% 22.14% 60% Source: Bloomberg, BNP Paribas. Data ranges from 31 January 2001 to 31 October 40% 2012. Performance simulations based on proforma data over the 31 January 2001 to 20 May 2010 period, and on historical performances from 21 May 2010. 20% 0% Gross Income Generated* Lower volatility than the S&P 500 TR Index Feb-12 3.55%  Lower volatility: Reducing the impact of market drawdowns on May-12 1.90% portfolios for defensive, income-seeking investors Aug-12 2.18% Nov-12** 1.40% Enhanced yield Total (over 1Y) 9.03%  12 Month Net Yield is 7.70% *Net of Charges **Estimated: to be paid on the 30th of November 2012 Outperformance over the S&P 500 TR Index  1.25% p.a. outperformanceSource: Bloomberg, data ranges from 31 January 2001 to 31 October 2012.Past performance is not a reliable indicator of future results. Performance simulations based on proforma data over the 31 January 2001 to 20 May 2010 period, and on historical performances from21 May 2010. Performance displayed is net of the annual management charge, and gross of any tax applied at the Fund level 29 November 2012 14
    • Lower volatility and limited drawdown (Pro-forma)A lower volatility in simulated historical returns than the S&P 500 TR IndexDistribution of simulated rolling monthly returns of the Fund* Distribution of rolling monthly returns of S&P 500 TR Index (compo GBP)16% 14%14% 12%12% 10%10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -15% -10% -5% 0% 5% 10% 15% -15% -10% -5% 0% 5% 10% 15% Calendar IFSL Harewood US Enhanced S&P 500 TR Index 31 January 2001 – IFSL Harewood US Enhanced Income S&P 500 TR Index monthly returns Income Fund (Class A) (composite GBP) 28 October 2011 Fund (Class A) (composite GBP) Min -9.58% -11.89% Annualised Return 2.71% 1.46% Max 12.18% 10.53% Annualised Volatility 17.40% 22.14% Max Drawdown -35.23% -45.44% A better risk/return ratio in simulations, than the S&P 500 TR Index (composite GBP)Source: Bloomberg, data ranges from 31 January 2001 to 31 October 2012.*Past performance is not a reliable indicator of future results. Performance simulations based on proforma data over the 31 January 2001 to 21 February 2011 period, and on historical performances from 22February 2011. Performance displayed is net of the annual management charge, and gross of any tax applied at the Fund level 29 November 2012 15
    • Summary of Fund Details* Classification  UCITS III compliant UK OEIC Fund, authorised and regulated by the FSA Currency  Sterling Unhedged Minimum  £1,000 Investment Sedol Code  B3RHSV1 ISIN Code  GB00B3RHSV16 Liquidity  Daily at NAV Launch date  22/02/2011  Exposure to the performance of the S&P 500 TR Index (Bloomberg: SPTR Index) and to BNP Paribas’ Underlying systematic daily enhanced Covered Call strategy on the Index through an OTC Derivative contract Investment with BNP Paribas as counterparty  The Fund’s counterparty risk on BNP Paribas is mitigated through the posting of cash and/or Collateral** government and public securities issued by the following countries: Austria (AA+), Belgium (AA), France (AA+), Germany (AAA), Sweden (AAA), Netherlands (AAA), UK (AAA), and USA (AA+)  Currently eligible for ISA; SIPP/SSAS; Offshore Bonds; Capital growth currently expected to be taxed Tax as CGT for direct investments (applied to UK tax residents) Capital  None: capital is fully at risk (equity income fund) Protection*The full terms and conditions of the Fund are contained in the Prospectus of the Fund dated 01 October 2011. Potential investors should read the prospectus before making a decision to invest in the Fund. Inthe event of discrepancy between the terms of this document and the terms of the Prospectus, the terms of the Prospectus will prevail.**The Fund is exposed to counterparty risk on BNP Paribas since it seeks to achieve its investment objectives by entering into a contract (OTC Derivative) currently with BNP Paribas as counterparty. 29 November 2012 16
    • Contacts Us Privalto Harewood Solutions Tel: +44 (0)800 328 7419 Tel: +44 (0)800 595 8056 Email: privalto@uk.bnpparibas.com Email: harewoodsolutions@bnpparibas.com Website: www.privalto.co.uk Website: www.harewoodsolutions.comFor Financial Advisers and Planners For Discretionary Fund Managers 29 November 2012 17
    • Important NoticeThis report is a marketing communication and does not constitute independent research or financial or other advice.Privalto is part of the BNP Paribas group specialising in the design and management of structured investments for UK financial advisers and planners. This publication may not be reproduced, in whole or inpart, in any way and under any circumstances without the prior written consent of Privalto and/or BNP Paribas.This report does not constitute an offer or a solicitation to engage in any such trading strategies or to purchase or sell any financial instruments. Given its general nature, the information herein does not containall the elements that may be relevant for an investor to make an informed decision in relation to any trading strategies or financial instruments. In providing this report, BNP Paribas (“BNPP”) gives no financial,legal, tax or any other advice to, nor has any fiduciary duties towards, recipients. BNPP also does not give any recommendation to pursue any particular strategy. Investors must make their own assessment asto whether to pursue any of the trading strategies or transactions discussed herein in the light of their needs and objectives using their own financial or other advisers. Certain strategies or potential transactionsdiscussed in this report involve the use of derivatives, which may be complex in nature and may give rise to substantial risks, including the risk of total loss of any investment.The Marketing and Trading functions which are responsible for issuing this report are subject to additional and/or different potential conflicts of interest over and above those applicable to Research functions.BNPP may engage in transactions in a manner inconsistent with the views expressed in this report. Furthermore, BNPP trades or may trade as principal in the financial instruments (or related derivatives)described herein, may have proprietary positions in such financial instruments (or related derivatives), and/or may make markets in the financial instruments (or related derivatives) and receive fees for suchactivities, whether such activities are consistent with this report or not. This document is prepared for eligible counterparties and professional clients only and is not intended for, and should not be circulated to,retail clients (as such terms are defined in the Markets in Financial Instruments Directive 2004/39/EC (“MiFID”)). BNPP accepts no liability for any direct or consequential losses arising from any action taken inconnection with or reliance on the information contained in this document. This report has not been prepared in accordance with legal requirements designed to promote the independence ofinvestment research and BNPP is not subject to any prohibition on dealing ahead of the dissemination of investment research.As an investment bank with a wide range of activities, BNPP may face conflicts of interest, which are resolved under legal provisions and internal guidelines. You should be aware, however, that BNPP mayengage in transactions in a manner inconsistent with the views expressed in this document, either for its own account of for the account of its clients. Laws and regulations of countries outside the UK mayrestrict the distribution of this document. Persons in possession of this document should inform themselves about possible legal restrictions and observe them accordingly. Any investment to which thisdocument relates is only available to such persons as this document may be lawfully distributed and other classes of persons should not rely on this document. This document is prepared for eligiblecounterparties and professional clients only and is not intended for, and should not be circulated to or relied upon by, retail clients (as such terms are defined in the Markets in Financial Instruments Directive2004/39/EC (“MiFID”)).The information contained in this document has been obtained from sources believed to be reliable, but BNPP makes no representation, express or implied, that such information, or any opinions based thereonand contained in this document, are accurate or complete. Other financial institutions or persons may have different opinions or draw different conclusions from the same facts or ideas analysed in thisdocument. Any scenarios, assumptions, historical or simulated performances, indicative prices or examples of potential transactions or returns are included for illustrative purposes only, and BNPP gives noassurance that any favourable scenarios described are likely to happen, nor that it is possible to trade on the terms described herein or that any of the potential returns illustrated can be achieved. BNPP isfurther under no obligation to update or keep current the information contained in this document.All figures and examples whether historical, backtested or simulated (i.e. merely hypothetical), are provided by way of illustration only. Actual historical or backtested past performance and forecasts are notreliable indictors of future performance. Any proposed investment in a security cannot be fully assessed without full knowledge and understanding of the relevant Final Terms and the Terms and Conditionscontained in the relevant Base Prospectus for such Securities (as supplemented from time to time), which are not included in this document.The securities described herein are expressed to have no capital protection at any time, partial capital protection or full capital protection.In case of no or partial capital protection, investing does put capital at risk. Investors should be aware that there is risk of partial or total loss of any capital invested, that investment in the securities is highlyspeculative and should only be considered by investors who can afford to lose some of the capital invested.In case of partial or full capital protection, this applies only providing that the securities are held until maturity. If the securities are not held until maturity then this protection does not apply, and investors shouldbe aware that there is risk of partial or total loss of the entire invested capital. The capital protection applies to a portion or the full nominal value of the securities only, as the case may be.Capital protection is designed to protect the investor from certain market risks, but not counterparty risk. The investor is still exposed to the risk of counterparties entering insolvency or defaulting on theirobligations. Capital protection is provided by the issuer of the securities which may be BNP Paribas Arbitrage Issuance BV (“IBV”) or BNP Paribas, When the securities are issued by IBV, IBV’s paymentobligations under the securities are guaranteed by BNPP, an investment in the securities is subject to the credit risk of the BNPP Group.This document contains only a summary description of the main features of the fund described herein (the “Fund”).] A proposed investment in the Fund cannot be fully assessed without full knowledge andunderstanding of the relevant terms of the Fund contained in the relevant prospectus or key information document for the Fund (as supplemented from time to time). In particular, potential investors shouldcarefully read the sections headed "Risk Factors" for a full description of the potential risks associated with the Fund.Investment Fund Services Limited Registered in England No. 06110770 (Authorised Corporate Director of the Fund) is authorised and regulated by the Financial Services Authority. BNP Paribas London Branch(registered office 10 Harewood Avenue, London NW1 6AA; tel: [44 20] 7595 2000; fax: [44 20] 7595 2555) is authorised by the Autorité de Contrôle Prudentiel and authorised and subject to limited regulation bythe Financial Services Authority. Details about the extent of our authorisation and regulation by the Financial Services Authority are available on request. BNP Paribas London Branch is registered in Englandand Wales under no. FC13447. 29 November 2012 18BNP Paribas SA is authorised by the Autorité de Contrôle Prudentiel and regulated by the Autorité des Marchés Financiers in France. BNP Paribas SA is incorporated in France with Limited Liability. RegisteredOffice 16 boulevard des Italiens, 75009 Paris.