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    Frontier   endowment investing for your portfolio - final (unlinked) Frontier endowment investing for your portfolio - final (unlinked) Presentation Transcript

    • Endowment Investing for Your Portfolio New Model Adviser Conference January 2012
    • Our Objectives Today• Evaluate the investment philosophy and success of the US University endowment funds• Assess the underlying investment theory that supports their investment philosophy• Determine how this investment philosophy can be applied to an investor’s portfolio• Understand the benefits of providing a globally diversified, low cost multi-asset solution as part of your investment proposition 2
    • Frontier Investment Management Overview• Frontier Investment Management (“Frontier”) specialises in advanced indexation strategies to provide a range of low-cost multi-asset investment funds• The firm was founded in 2004 as an independent, privately owned business that has grown to 20 partners/employees with an AUM of $600m• The asset allocation of Frontier’s multi-asset funds draws inspiration from the large US University Endowment Funds, including Harvard and Yale• Frontier’s investment philosophy is “Evidence-Based” and is supported by 100 years of empirical evidence and academic research• Frontier has attracted a diversified, high-quality client base comprising leading financial planning businesses, wealth managers, charities and institutions 3
    • What is an Endowment Fund?• A non-taxable investment vehicle that contributes towards the future funding of colleges and universities• Funding is derived from a combination of legacies, gifts and investment returns• Over 750 endowment funds in the US; average AUM $520m, largest $27billion• Cambridge and Oxford are the largest Endowment Funds in the UK with AUM of £4.3 billion and £3.3 billion respectively• Long term investment time horizons – up to 100 years 4
    • Why Focus on Endowment Funds?• Leaders in diversified multi-asset investing for two decades with a significant allocation to alternative asset classes• Have achieved attractive annual returns with moderate risk• Investors can benefit from applying Endowment investment principles to achieve risk- adjusted returns that are superior to: – traditional equity/bond portfolios – most balanced investment funds 5
    • Endowments: Innovative Multi Asset Portfoliosportfolios with high historical risk adjusted returns Multi asset Top 5 Endowments (Assets > $10bn) 1% Equities 20% 28% Fixed Income Real Estate Commodities 16% 13% Hedge Funds/Managed Futures 13% 9% Private Equity CashSource: NACUBO 2010; Annual reports (various); Frontier Investment Management. Accompanying notes are an integral part of this presentation. 6
    • Innovative Portfolios & Exceptional Returns• Innovative portfolios with exposure to multiple asset classes; large allocations to alternatives• Significantly higher returns than traditional equity/bond portfolios• Allocation to alternative assets has been a key performance driver 10 Year Returns by Endowment Fund Size to June 2010 Alternative 10Y Annualised Assets Allocation Return Equity / Bond Portfolio (60/40) 0% 2.1% Average Endowment 26% 3.4% Greater than $1bn 56% 5.0% Top 5 Endowments 58% 6.4% Havard & Yale 67% 8.0% 7
    • Emulating Endowment Funds: How?• Endowment portfolios are characterised by key investment principles that can be incorporated into any portfolio:1. Long term investment time horizon2. Strategic asset allocation3. Highly diversified multi-asset portfolios, incorporating alternative asset classesHowever: The average investor is likely to have a shorter time horizon and a lower riskprofile than the Endowments so should focus on liquid investments.Following an Endowment style approach to investing can benefit your business not justwith your investment proposition, but also with your client proposition 8
    • EMULATING ENDOWMENT FUNDS:1. LONG TERM INVESTMENT TIME HORIZON
    • 1. Long Term Investment Time Horizons • Asset classes generate long run “real returns” – Historical returns have been significantly higher than cash and inflation – The return above cash is known as the “Excess Return” or “Risk Premium” – Return embedded in asset class (index); fund manager not required Asset Class Returns Above Inflation Asset Class Returns Above Inflation January 1973 to December 2010 January 1991 to December 2010 Inflation = 4.4% 8.4% Inflation = 2.3%9% 14% 12.7% 7.9% 7.6% 11.5%8% 12%7% 6.2% 8.4% 9.0% 10%6% 4.8% 7.4% 8% 6.4%5% 6.1% 6.0%4% 6% 3.8%3% 4%2% 2%1%0% 0% Global Global Emerging Emerging Global Commo- Hedge Managed 8 Asset UK Equities UK UK Real Commo- 4 Asset Class Real Equities Fixed Equities Bonds dities Funds Futures Class Bonds Estate dities Portfolio Estate Income PortfolioReturns are GBP hedged. Multi Asset Portfolios are equally weighted and rebalanced annually on December 31.Accompanying notes are an integral part of this presentation. 10
    • Probability of Return Capture Increases with Time 12 Month vs 10 Year Rolling Returns vs Inflation +3% December 1982 – December 2010 (337 periods)Number of rolling periods included in calculations: 1 Year = 445, 3 Year = 421, 5 Year = 397, 10 Year = 337. Accompanying notes are an integral part of this presentation. 11
    • Probability of Return Capture Increases with Time 12 Month vs 10 Year Rolling Returns vs Inflation +3% December 1982 – December 2010 (337 periods) 75% of 12 month periods are over inflation +3%Number of rolling periods included in calculations: 1 Year = 445, 3 Year = 421, 5 Year = 397, 10 Year = 337. Accompanying notes are an integral part of this presentation. 12
    • Probability of Return Capture Increases with Time 12 Month vs 10 Year Rolling Returns vs Inflation +3% December 1982 – December 2010 (337 periods) 75% of 12 month periods are over inflation +3%50% 100% of 10 year periods are over inflation +3% Worst 10 year period 5.2% over inflation40%30%20%10% 0%-10% Multi Asset Portfolio (1Y Annualised)-20% Inflation + 3% (10Y Annualised) Multi Asset Portfolio (1Y Annualised)-30% 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Number of rolling periods included in calculations: 1 Year = 445, 3 Year = 421, 5 Year = 397, 10 Year = 337. Accompanying notes are an integral part of this presentation. 13
    • Long Term Asset Class Returns & Your• Business Multi-asset portfolios generated an “Excess Return” of 6.7% p.a. over the past 20 years• Adopting a longer term horizon maximises the probability of achieving “real returns” above inflation in line with the client’s financial plan (cash flow model)• Clients that understand the importance of time will be less reactive to adverse movements in the market resulting in fewer phone calls and meetings to discuss market volatility Value of Initial 250,000 Investment (11.3% growth pa) 6.2 million 8 Asset Class Portfolio 5.3 6.7% annual return above cash million 0.9 million Cash 5yrs 10yrs 15yrs 20yrs 25yrs 5yrs 30yrsAccompanying notes are an integral part of this presentation. 14
    • EMULATING ENDOWMENT FUNDS:2. STRATEGIC ASSET ALLOCATION
    • Strategic Asset Allocation as a Portfolio• Driver Research shows us that asset allocation is the principle driver behind portfolio return and risk 2% 2% 2% 94% Strategic Asset Allocation Security Selection Market Timing Other Factors Brinson, Hood, Beebower, Journal of Finance (1986) 16
    • Strategic Asset Allocation as a Portfolio Driver Percentage of Return Explained by Asset Allocation Research: Brinson Brinson Ibbotson - Ibbotson - (1986) (1991) Mutual Pension Percentage 94% 92% 81% 88% Active Return -1.1 -0.1 -0.3 -0.4• Asset class performance determines the majority of the return and risk of the portfolio• Therefore, ASSET CLASS selection and strategic allocations are the MOST IMPORTANT drivers of multiple asset class portfolio returns and risk 17
    • Large Endowments: Stable Asset Allocations• Top 5 Endowments average annual change only 7% pa• Most of this small change is due to asset class movement, not tactical decisions Top 5 Average Asset Allocation 100% Private Equity 90% 80% Hedge Funds / Managed Futures 70% Real Estate 60% 50% Commodities 40% Fixed Income 30% 20% Equities 10% Cash 0% -10% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Estimated average asset allocation of the top 5 endowments is calculated by Frontier. The lagged impact of returns uses Frontier asset benchmarkindices and the estimated average asset allocation of the Top 5 endowments. Accompanying notes are an integral part of this presentation. 18
    • Emulating Endowment Funds• Brinson et al research indicates that 80-90% of portfolio performance is driven by asset allocation• Frontier Question: if we create an index portfolio with a similar asset allocation, can we achieve a similar risk/return profile to the Endowments• Portfolio was designed to be liquid and low cost – Private Equity excluded (pro-rated across other alternative asset classes) – Representative index selected for each asset class• Results indicates that an “Indexed” Endowment portfolio achieves excellent results Relative Performance of Super Endowments to June 2010 10Y Return 10 Y Volatility Return / Risk (Ann.) (Ann.) Ratio Harvard and Yale (Average) 8.0% - - Endowments with AUM > $1bn 5.0% Endowment Index Portfolio (GBP) 6.6% 9.5% 0.7 UK Equities 1.6% 15.4% 0.1 UK Equity/Bond Portfolio (60/40) 3.6% 8.8% 0.4 IMA Balanced Managed 2.1% 11.9% 0.2 Source: Bloomberg; Investment Management Association; Frontier Investment Management. NB 10 Year Volatility is not available for Harvard and Yale. 19
    • EMULATING ENDOWMENT FUNDS:3. Multi Asset Portfolios IncorporatingAlternatives
    • Endowments: Innovative Multi Asset Portfoliosportfolios with high historical risk adjusted returns Multi asset Top 5 Endowments (Assets > $10bn) 1% Equities 20% 28% Fixed Income Real Estate Commodities 16% 13% Hedge Funds/Managed Futures 13% 9% Private Equity CashSource: NACUBO 2010; Annual reports (various); Frontier Investment Management. Accompanying notes are an integral part of this presentation. 21
    • Modern Portfolio Theory• Harry M. Markowitz developed MPT in 1952 with the publication of a paper : “Portfolio Selection” for which he received the Nobel Laureate in Economics in 1990• Markowitz identified that combining investments with less than perfect correlation produced portfolios with higher risk-adjusted returns• The key principle was that different investments can be un-correlated to each other over various periods of time - the lower the correlation, the greater the benefit derived 22
    • Multi Asset Performance During Bear Markets Alternative Asset Class Performance During Largest Equity Drawdowns Over 31 years Global Global Real Managed Date Commodities Hedge Funds Equities Estate Futures Nov-07 - Feb-09 -50% -64% -45% -23% 16% Sep-00 - Mar-03 -46% 20% -1% 0% 29% Jan-90 - Sep-90 -28% -20% 50% 15% 24% Sep-87 - Nov-87 -21% -16% 2% -8% 8% Dec-80 - Jul-82 -24% 0% -20% NA 17% Average -34% -16% -3% -4% 19%Returns in USD 23
    • Benefits of Alternative Asset Classes • Diversification and portfolio enhancement – Moderate to high returns vs. traditional asset classes – Low volatility relative to other asset classes – Varied correlations to other asset classes – Addition creates overall large improvement in portfolio efficiency • Hedge Funds and Managed Futures should be considered a “strategic” allocation Increasing Alternatives allocation Expected Return (%) HF/MF Return HF/MF Stocks * Bonds Risk/Volatility (%)For illustrative purposes only. Risk 24
    • Annual Performance• Attractive annual returns, few negative years Annual Returns from 1991 to 2010 30% 20% 10% 0% -10% Annual Performance of Hedge Funds -20% Annual Performance of Managed Futures -30% 1991 1992 1994 1995 1997 1998 2000 2001 2003 2004 2006 2007 2009 2010 1993 1996 1999 2002 2005 2008Source: Bloomberg, Frontier Investment Management LLP
    • Multi Asset Investing improves risk-adjusted returns Combining asset classes with variable correlations significantly decreases risk Current MAP PORTFOLIO 1 PORTFOLIO 2 PORTFOLIO 3 PORTFOLIO 4 PORTFOLIO 5 PORTFOLIO 6 Allocation Global Equities 100% 60% 50% 40% 30% 25% 12% Global Fixed Income 30% 30% 30% 30% 25% 20% Global Real Estate 10% 10% 10% 10% 10% 8% Commodities 10% 10% 10% 10% 10% Emerging Equities 5% 5% 5% 5% Emerging Bonds 5% 5% 5% 5% Hedge Funds 10% 10% 20% Managed Futures 10% 20% TOTAL 100% 100% 100% 100% 100% 100% 100% Annualised Return 8.5% 9.3% 9.4% 10.1% 10.1% 10.2% 10.2% Volatility (Ann Std Deviation) 14% 9% 9% 9% 8% 7% 6% Maximum Loss -49% -35% -34% -33% -30% -26% -20% Avg Top 3 Maximum Losses -36% -22% -20% -19% -16% -14% -11% Return/Volatility Ratio 0.6 1.0 1.1 1.2 1.3 1.4 1.6 Return/Maximum Loss Ratio 0.2 0.3 0.3 0.3 0.3 0.4 0.5 Return/Top 3 Max Loss Ratio 0.2 0.4 0.5 0.5 0.6 0.7 0.9Returns above use major benchmark indices for each asset class and assume annual rebalancing (Jan 1991 – Dec 2010). Returns are hedged into GBP. Accompanying notes are an integralpart of this presentation.
    • Core Strength: Applying Endowment Investing• The US University Endowments have been leaders in multi-asset investing for more than two decades• By applying the investment principles behind their philosophy, investors can reduce risk and increase risk adjusted returns• This process can be adapted to individual risk profiles through core / satellite investing with an “endowment style” core• Core strength comes from: – Long term, strategic asset allocation – High diversification, including alternative asset classes – Low cost, liquid investing• Over the medium to long term, this approach is well positioned to outperform traditional equity bond portfolios 27
    • Frontier Multi Asset Funds• Provides investors with the returns of eight asset classes in a single investment: Traditional Asset Classes Alternative Asset Classes Global Equities Real Estate Global Fixed Income Commodities Emerging Equities Hedge Funds Emerging Bonds Managed Futures• Asset allocation is inspired by the US University Endowment Funds, while taking into account the shorter time horizons and lower volatility targets of UK investors.• Strategic asset allocation with annual rebalancing• Use efficient and low cost methods of accessing each asset class 28
    • Frontier Multi Asset Funds Quantitative University Frontier Analysis Endowments Experience Current Asset AllocationIFDS Frontier MAP Cautious Fund IFDS Frontier MAP Balanced Fund 29
    • Frontier MAP Balanced Performance• The Frontier MAP Balanced fund launched in April 2009 and has returned 24% to date• Fully FSA Regulated, Daily Dealing UK OEIC, 0.75% Annual Management Charge• Investment Objective: Deliver asset class index returns at low cost Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD 2009 4.02% 4.87% 0.89% 2.11% 2.48% 1.50% 0.66% 0.99% 0.69% 19.66% 2010 -2.43% 0.47% 3.56% 0.69% -4.01% -0.30% 2.68% 0.26% 3.30% 1.88% -1.03% 2.85% 7.88% 2011 0.09% 1.15% 0.12% 1.99% -1.68% -1.20% 0.70% -2.40% -3.39% 2.96% -3.30% 1.46% -3.67% December 2011 Asset Class Returns 2011 Asset Class Returns2% 12% 9.6% 1.5% 1.3% 8% 1.1% 5.8%1% 4% Global Emerging Real Commo- Hedge Managed 0.6% Equities Equities Estate dities Funds Futures Global Emerging Commo- Hedge 0% Global Emerging Equities Equities dities Funds0% Fixed Bonds -4% 0.0% Global Emerging Real Managed Income -3.5% -4.9% Fixed Bonds Estate Futures -6.3% -5.8% -0.4% -8% -6.9% Income-1% -12% -1.2% -16% -1.6%-2% -20% -18.1% 30
    • Incorporating a Core Allocation to the MAP• Funds Incorporating the MAP Funds as a low cost, diversified core to a traditional portfolio can reduce risk and significantly improve portfolio efficiency: 10 Year Returns to June 2010 Annualised Annualised Return / Risk Returns Volatility Ratio UK Equities (FTSE AllShare) 1.6% 15.4% 0.1 IMA Balanced Managed Sector 2.1% 11.9% 0.2 MAP Funds * 4.7% 7.9% 0.6 With 40% MAP Allocation 3.2% 7.8% 0.4 Increase in Portfolio Efficiency: 138%* Includes Pro Forma performance, see notes for further information.Source: Bloomberg; Investment Management Association, Frontier Investment Management LLP 31
    • Summary: Frontier Multi Asset Funds• One fund, 8 asset classes, 15000+ securities*, ideal core investment• Multi asset approach at very low cost• Disciplined asset allocation with rebalancing• Optimised portfolios for varying risk profiles• Fully FSA Regulated, Daily Dealing UK OEIC, AUM > £100m• Available on a wide range of fund platforms, wraps and life companies that include:* This number represents the number of the securities within the reference asset class indices to which the Fund accesses the returns. 32
    • Next Steps: Working with Frontier• Fill in a feedback form or speak to one of our team if you would like further information• Request a demonstration of our Portfolio Analyser Tool that allows you to incorporate your asset allocation alongside the Frontier Funds to highlight the efficiency of a core solution. 33
    • Contact Details Andrew Cracknell t: +44 (0) 152 783 9747 Partner, m: +44 (0) 781 0484 023 Head of Intermediary Business e: andrew.cracknell@frontierim.comFrontier Investment Management Bruce Gascoine m: +44 (0) 776 0263 666Berkeley Square House Business Development Manager e: bruce.gascoine@frontierim.comBerkeley Square, MayfairLondon, W1J 6DB Jacob Berry t: +44 (0) 207 317 6906United Kingdom Business Development Manager m: +44 (0) 7590 568 781 e: jacob.berry@frontierim.comt: +44 (0) 207 317 6900f: +44 (0) 207 317 6901 Conor O’Donnell t: +44 (0) 207 317 6923w: www.frontierim.com Relationship Manager e: conor.odonnell@frontierim.come: info@frontierim.com 34
    • Notes & Disclaimer1. The Frontier Investment Management (“Frontier”) Multi Asset Platform Funds were invested on September 2nd, 2005. Prior data is pro-forma and has been calculated from the original asset allocation weights applied to the original Indices and rebalanced annually at December 31 each year. Pro-forma performance is net of 50 basis points per annum to take into account index replication costs, currency hedging and annual rebalancing costs. Performance data from September 2005 to October 2006 inclusive is based on actual fund NAVs restated to reflect current fee levels. The Plus fund was invested in July 2006.2. While Frontier has developed methods of preparing pro-forma returns that it believes to be reasonable, fair and complete, there can be no assurances that the results derived from such methods are correct, accurate or reliable. Accordingly, the informational value of pro-forma returns is limited.3. Non-USD index returns have been hedged into USD except for Emerging Market Equities. All returns are USD based unless otherwise stated.4. Frontier annual cost savings are based on current asset allocation weights and published research on the total costs of active investing vs index investing across asset classes, with management fee savings based on fund of funds investing.5. Each asset class is represented by a relevant market index. UK Equities are represented by the FTSE All Share Total Return Index. UK Bonds are represented by the Citigroup 10-year Gilt Benchmark Index. US Equities are represented by the Standard & Poor’s 500 Total Return Index. US Bonds are represented by the Citigroup 10- year Treasury Benchmark Index. European Equities are represented by the MSCI Europe ex UK Total Return Index. European Bonds are represented by the Citigroup 10- year European Benchmark Index. Commodities are represented by the S&P GSCI Index until April 2007 and the S&P GSCI Light Energy Index thereafter. Hedge Funds are represented by the HFR Fund of Funds index (minus 1% survivorship bias) and Managed Futures by the CISDM Asset Weighted Index until October 2010, then the NewEdge CTA Index (minus 1% survivorship bias). Cash returns are UK 1 Month Libor minus 1% per annum.6. The Frontier asset allocation process combines multiple inputs including reference to major US University endowments but also includes quantitative analysis and the inputs of the Frontier Asset Allocation Committee. Frontier does not expect similar returns to those of the endowments in the MAP Funds due to the lack of private equity exposure and a significantly lower volatility target than most endowments.7. Endowment data is sourced from NACUBO and annual reports; calculations by Frontier Investment Management.8. Fund data is sourced from Bloomberg and assumes the reinvestment of any dividends issued at the time of their issuance. Bloomberg data has not been checked or verified by Frontier Investment Management DISCLAIMER This document is issued for information purposes only by Frontier Investment Management LLP (“Frontier”) in respect of the IFDS Frontier Multi Asset Fund (“the Fund”). Frontier is authorized and regulated by the Financial Services Authority (“FSA”). This document does not constitute an offer by Frontier to enter into any contractual/agreement nor is it a solicitation to buy or sell any investment. Nothing in this document should be deemed to constitute the provision of investment, financial or other professional advice in any way. Potential investors are directed to the read the Fund prospectus and should always consult with their professional advisors. The contents of this document are based upon sources of information believed to be reliable. Frontier has taken reasonable care to ensure the information stated is factually true. However, Frontier make no representation, guarantee or warranty that it is wholly accurate and complete. PAST PERFORMANCE IS NOT NECESSARILY A GUIDE TO FUTURE PERFORMANCE. 35