Capitalizing on the Commodities Market despite Extreme Volatility - Presentation: Michel Toupin, Laval University Pension Fund - Canadian Institutional Investment Summit
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Capitalizing on the Commodities Market despite Extreme Volatility - Presentation: Michel Toupin, Laval University Pension Fund - Canadian Institutional Investment Summit

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For more information contact: emailus@marcusevans.com ...

For more information contact: emailus@marcusevans.com

Michael Toupin, the Managing Director from Fonds Commun De Placement Des Régimes De Retraite De L'Université Laval delivered his presentation titled "Capitalizing on the Commodities Market despite Extreme Volatility" at the marcus evans Canadian Institutional Investment Summit

Join the 2015 Summit along with leading regional investors and global asset managers in an intimate environment for a focused discussion of key new drivers shaping institutional investment strategies today.

For more information contact: emailus@marcusevans.com



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Capitalizing on the Commodities Market despite Extreme Volatility - Presentation: Michel Toupin, Laval University Pension Fund - Canadian Institutional Investment Summit Capitalizing on the Commodities Market despite Extreme Volatility - Presentation: Michel Toupin, Laval University Pension Fund - Canadian Institutional Investment Summit Presentation Transcript

  • Canadian Institutional Investment Summit « CAPITALIZINGON THE COMMODITIES MARKET DESPITE EXTREME VOLATILITY » GUEST SPEAKER : MICHEL TOUPIN, MANAGING DIRECTOR FONDS COMMUN DE PLACEMENT DES RÉGIMES DE R E T R A I T E D E L ’ U N I V E R S I T É L AV A L October 17-19, 2011 - Hilton Lac-Leamy, Gatineau-Ottawa, Quebec
  • ORDER OF PRESENTATION 2 GENERAL OBJECTIVE PENSION FUNDS OBJECTIVES AND PROCESS COMMODITIES PORTFOLIO  A transfer of risks  Some indices  An inadequate substitute, regional consideration  A risk-reward perspective CORRELATIONS ANALYSIS IMPLEMENTATION A GLOBAL PERSPECTIVE – DEMOGRAPHY AND URBANIZATION OTHER CONSIDERATIONS AND CONCLUSIONSCanadian Institutional Investment Summit Oct. 2011
  • PRESENTATION - GENERAL OBJECTIVE 3 « To describe a commodities portfolio and to introduce its benefits for a pension fund .Canadian Institutional Investment Summit Oct. 2011
  • PENSION FUNDS OBJECTIVES AND PROCESS 4Canadian Institutional Investment Summit Oct. 2011
  • COMMODITIES AND PROTECTION 5 Two combined strategies « to provide a protection against inflation and its effects upon the liabilities as well the assets, no matter the source of inflation» (considering the commodities as a potential source) « to reduce the global risk through a more efficient diversification »Canadian Institutional Investment Summit Oct. 2011
  • COMMODITIES – « THE ORIGIN »A case : Laval University Pension Funds 6Canadian Institutional Investment Summit Oct. 2011
  • COMMODITIES FOR INSTITUTIONAL INVESTORS -A SPHERE OF INFLUENCES IN 2011 7Canadian Institutional Investment Summit Oct. 2011
  • THE COMMODITIES MARKETA TRANSFER OF RISKS BETWEEN PLAYERS 8hedging Bond Holder Speculator-Arbitragor- Hedge Funds Commodity Final sales Transformer-Final User Producer Shareholder Diversified Investorshedging investingCanadian Institutional Investment Summit Oct. 2011
  • TWO COMMODITY INDICES AND THEIR CONTENT 9Canadian Institutional Investment Summit Oct. 2011
  • 10 REGIONAL CONSIDERATIONS AND OPTIMISATIONCanadian Institutional Investment Summit Oct. 2011
  • AN INADEQUATE SUBSTITUTE (1) 11 • Question : Can we replace a Commodity Index (such as The Goldman Sachs C. Index) with Canadian Stocks? • Answer : No 1. Correlation between 4 sectors or sub-sectors of the TSE 300 and the GSCI: Mines and Metals, Gold and Precious Metals, Oil and Gas and Pipelines versus Goldman Sachs Index (all sectors) • Result : to have the best correlation TSE 300/ GSCI = 0,41 the model keeps only Mines and Metals (TSE300), rejects others 2. Correlation between the TSE 300 (all sectors) and the GSCI : maximum correlation = 0,42, the model keeps only Oil and Gas and Gold Precious Metals (TSE300), rejects othersCanadiani Institutional Investment Summit Oct. 2011
  • AN INADEQUATE SUBSTITUTE (2) 12 • Correlation between the TSE 300 (all sectors) and the GSCI - Energy : maximum correlation = 0,49 between the TSE 300 and the GSCI, the model keeps 1 sector of the STX300, Oil and Gas; Finding: We tried to replicate, from a canadian perspective, the market behaviour as defined by a commodities index but, we failed. What’s a possible explanation ?Canadian Institutional Investment Summit Oct. 2011
  • CHOOSING BETWEEEN COMMODITIES AND STOCKSA CASE : IShare Commodity Index and Chicago MercantileExchange Group (the stock) 13 Difference = Business or “Non- Systematic” Risk ? I Share Commodity Index CME Group -25% -35%Canadian Institutional Investment Summit Oct. 2011
  • CORRELATION ANALYSIS ( Q U A N T I TAT I V E P R O C E S S ) 14 HOW TO DETERMINE THE PROPORTION, APPROPRIATE V E R S U S ACCEPTABLECanadian Institutional Investment Summit Oct. 2011
  • RISK-REWARD ANALYSIS SIMULATION WITH SIX MARKET INDICES 15 Index Expected Rendement Rendement au Rendement au Indice espéré return Ranking 90 th 90ième rang Ranking 10 th 10ième rang centile centile Goldman 8,4% -14,9% 26,4% Commodities MSCI EAFE 9,4 -12,8 28,6 S&P 500 17,5 -0,2 34,9 TSE 300 3,6 2,4 4,8 SMc Univers 7,7 -0,8 14,8 Russell 2000 14,2 -8,0 35,7 Close to worst Close to median median January 1992 to December 2000, Cdn $.Canadian Institutional Investment Summit Oct. 2011
  • ADDING COMMODITIES A RISK-REWARD OPTIMIZATION 16 Matières Matières Matières Matières premières = premières = premières = premières = 0% 2% 6% 8% Commodities = 0% 2% 6% 8% Rendementreturn Expected espéré 4,6% 4,6% 4,6% 4,6% 95ième rang centile -3,6 -3,4 -3,0 -2,8 Probabilité Probability of d’échec ( sur 3 ans 19,4 17,8 16,3 15,7 missing the MAR r.min=0%) Rendement baissier espéré -2,7 -2,6 -2,4 -2,3 (r.moy sous 0) Titres de Stocks participation 55,0 53,0 49,0 47,0 (1/3, 1/3, 1/3) Bonds Titres d’emprunt (1% mm et 44% obl.) 45,0Canadian Institutional Investment Summit Oct. 2011 Les rendement sont exprimés en termes réels
  • CANADIAN AND FOREIGN STOCK MARKETS COMPARED VOLATILITIES 17 R a n g e o f R e t u r n s f o r 3 In v e s t m e n t C a t e g o r ie s J a n u a ry 1 9 8 8 - A u g u st 2 0 1 1 R e tu r n Legend 3 0 .0 % H i g h e s t: 2 8 .0 % 2 6 .0 % 2 4 .0 % 2 3 .0 % 2 3 .3 % 2 2 .0 % 2 2 .0 % 2 0 .0 % 1 8 .0 % 1 6 .0 % 1 4 .0 % 1 2 .0 % 1 0 .0 % 8 .0 % 6 .0 % 4 .0 % 2 .0 % 0 .0 % A v e ra g e : -2 . 0 % -4 . 0 % -6 . 0 % -8 . 0 % -1 0 . 0 % -1 2 . 0 % -1 4 . 0 % -1 6 . 0 % -1 8 . 0 % -1 7 . 9 % -2 0 . 0 % -2 2 . 0 % COMMODITIES -2 1 . 1 % -2 4 . 0 % -2 4 . 2 % -2 6 . 0 % -2 8 . 0 % -3 0 . 0 % L o w e s t: S&P GSCI TR CAD M S C I E M A sia U S D S & P /T S X E n e rg y T RCanadian Institutional Investment Summit Oct. 2011
  • ALTERNATIVE PORTFOLIOSCOMMODITIES VARYING FROM 0% TO 50% 18 R E LAT IV E S P E R FO R M AN C E S AN D R IS K S De ce m be r 1999 - De ce m be r 2010 R e tu rn (A M ) 0 .9 % Alternative portfolios 0 .8 %• (% of total port.) 1 2 3 4 5 0 .7 % 50% COMMODITIES• Commodities 16,7 0 20 25 50 0 .6 % 1 P o rtfo lio (5 ) 0 .5 % P o rtfo lio (4 )• Large Cap. US 20 20 25• (Russell 1000) 0 .4 % P o rtfo lio (1 ) P o rtfo lio (2 )• MSCI EAFE 20 0 0 .3 % P o rtfo lio (3 ) NO COMMODITIES 0 .2 %• Large Cap. Can. 0 25• (S&P/TSX 60) 0 .1 %• DEX Real Retrn. 20 25 0 .0 % -0 .1 %• DEX All Gov. 20 0 50 1 .0 % 1 .3 % 1 .6 % 1 .9 % 2 .2 % 2 .5 % 2 .8 % 3 .1 % 3 .4 % 3 .7 % 4 .0 % 4 .3 % 4 .6 % 4 .9 % 5 .2 % 5 .5 % 6 .0 % R isk (S T D ) Canadian Institutional Investment Summit Oct. 2011
  • COMMODITIES –INFLATION AND INTEREST RATESWHO COMES FIRST ? 19 Consumption Wars, Catastrophes, OPEC Demand Offer Oil Other Products GSCI Commodity Index MONETARY Inflation US POLICIES US Interest rates Inflation CDN Canadian Interest rates Real estate Real Return BondsCanadian Institutional Investment Summit Oct. 2011
  • COMMODITIES AND INFLATIONCORRELATION FROM 1996 to 2011 20 Correlation Rolling Period 24 M onths C o rre la ti o n V a lu e s 80.0% 75.0% 76.3% 70.0% 65.0% 60.0% 55.0% 50.0% 45.0% 40.0% 35.0% FINANCIAL CRISIS 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% De c De c De c Ju n 1996 2000 2005 2011 I n te rv a l : 2 4 S & P G S C I T R v s. IA S B B I U S In fl a tio nCanadian Institutional Investment Summit Oct. 2011
  • MATURE PENSION FUNDSPARTICULAR NEEDS 21 Constraints  An urgent need to finance or match the annuities adjusted for inflation ;  Strategy (depending on each pension fund)  Matching inflows and outflows in terms of :  Dollars matching,  Sensibilty to market movments,  Timing of entry-exit, perfect synchronisation when implementingCanadian Institutional Investment Summit Oct. 2011
  • 22 COMMODITIES AND IMPLEMENTATION ISSUESCanadian Institutional Investment Summit Oct. 2011
  • PORTFOLIO IMPLEMENTATIONTHE BEST IS HAVING GOOD TIMING…. (easy to say !) 23Canadian Institutional Investment Summit Oct. 2011
  • COMMODITIES AND THE CURRENCY EFFECTTO AVOID A « ZERO-SUM GAME » BECAUSE OF AN APPRECIATIONOF THE CDN $ 24 COMMODITIES profits losses CANADIAN DOLLARCanadian Institutional Investment Summit Oct. 2011
  • AFTER IMPLEMENTATION OF COMMODITIES VARIOUS CORRELATIONS 25 C o r r e la t io n R o llin g P e r io d 6 0 M o n t h s ( C D N $ ) C o r r e l a ti o n V a l u e s 6 0 .0 % 5 8 .0 % 5 6 .0 % 5 4 .0 % 5 2 .0 % 5 0 .0 % S&P/TSX60 TR 4 8 .0 % 4 6 .0 % 4 4 .0 % 4 4 .2 % 4 2 .0 % REAL RETURN BONDS 4 0 .0 % 3 8 .0 % 3 8 .2 % 3 6 .0 % 3 4 .0 % 3 2 .0 % 3 0 .0 % 2 9 .4 % 2 8 .0 % 2 6 .0 % 2 4 .0 % 2 2 .0 % 2 0 .0 % 1 8 .0 % 1 7 .4 % 1 6 .0 % 1 4 .0 % 1 2 .0 % 1 1 .0 % 1 0 .0 % 8 .0 % 6 .0 % 4 .0 % 2 .0 % 0 .0 % -2 . 0 % -4 . 0 % -6 . 0 % -8 . 0 % -1 0 . 0 % -1 2 . 0 % -1 4 . 0 % -1 6 . 0 % -1 8 . 0 % FINANCIAL CRISIS -2 0 . 0 % Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Aug 2004 2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 In te r v a l: 6 0 D J U B S C o m m o d i ty T R U S D v s. R u sse l l 1 0 0 0 T R U S D D J U B S C o m m o d i ty T R U S D v s. M S C I E A F E U S D D J U B S C o m m o d i ty T R U S D v s. S & P / T S X 6 0 T R D J U B S C o m m o d i ty T R U S D v s. D E X R e a l R e tu r n B o n d T R D J U B S C o m m o d i ty T R U S D v s. D E X L T A l l G o v e r n m e n ts T RCanadian Institutional Investment Summit Oct. 2011
  • AFTER THE IMPLEMENTATIONA PERPETUAL MONITORING 26 YEAR 1 : Two managers, same index : GSCI Core, index approach YEAR 4: One manager, one index : GSCI Light Energy (agriculture under represented) YEAR 7: New manager (3rd) : Dow Jones, more “balanced” Fees less than 30 pb, no incentive, Continual challenge : strict disciplineCanadian Institutional Investment Summit Oct. 2011
  • DEMOGRAPHY AND URBANIZATION 27 A GROWING DEMAND FOR COMMODITIESCanadian Institutional Investment Summit Oct. 2011
  • WORLD GROWTH AND DEMOGRAPHYPOPULATION OF “LDC’S” INCREASES BY 50% 28 100% Source : United NationsCanadian Institutional Investment Summit Oct. 2011
  • URBANIZATION AND POTENTIAL DEMANDFOR COMMODITIES 29 Source : United NationsCanadian Institutional Investment Summit Oct. 2011
  • OTHER CONSIDERATIONS AND CONCLUSIONS 30Canadian Institutional Investment Summit Oct. 2011
  • A FIDUCIARY PERSPECTIVE 31  Pros’  Cons’ A proven diversification  Source of nervosity or source of tool exuberance  Test your capacity to maintain Technical factors discipline while assuming your  No default risk, clearing choice (decided allocation and house indexing, if any)  Extreme liquidity  The investment is original and rapidly appear a conflict  Efficient if you manage between prudence and the adequately the collateral optimal allocation to maintainCanadian Institutional Investment Summit Oct. 2011
  • COMMODITIES AND CURRENT YIELDA CHALLENGE FOR MATURE PENSION FUNDS 32• Bet on the performance instead of the current yield ; – Commodities : generate a pretty weak yield from the money market, the price appreciation makes the difference : – Real estate : generate positive cash-flows on a monthly basis, the cash-flows may be indexed depending on the sector ; – Real return bonds : generate a series of coupons fully indexed with a possible capital appreciation.Canadiani Institutional Investment Summit Oct. 2011
  • COMMODITIESDIVERSIFICATION TOOL 33 The « tolerance point » is intuitive and seems to be around 10% of the total portfolio although… The « optimal point » may reach » up to 25% of the total portfolio (rarely seen…); A target around 8% is a risk-reducer which keeps constant the performance of the total portfolio; The real value behind commodities is its weak correlation with traditional invesments. Caution : the « ups’ and downs’ are frequent and may be important.Canadiani Institutional Investment Summit Oct. 2011
  • COMMODITIES – LITTLE-KNOWN ASPECTSA COMBINATION OF CHALLENGES 34 LUCK TO INTRODUCE THE PRODUCT (YOU NEVER KNOW WHEN) DISCIPLINE TO MAINTAIN THE PRODUCT RATIONAL AND (IN ADVERSE MEMORY TO CONDITIONS) JUSTIFY THE PRODUCT (DIVERSIFICATION VERSUS SPECULATION)Canadiani Institutional Investment Summit Oct. 2011
  • CONCLUSIONS 35 Since we measure our performance attribution, commodities added up to 40-50 pb. To the total performance You should consider to hedge the US position on commodities, our hedge ratio is 50% of the US exposure (based on a frequent evaluation of the market value) Ask your consultant to :  Identify the “good” index, test more than one ;  To do not try to time the market when implementing and after and,• Remain indexed until you feel comfortable with the asset classCanadiani Institutional Investment Summit Oct. 2011