Wealth management and asset allocation tools


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Wealth management and asset allocation tools

  1. 2. Asset Allocation and Stochastic Modelling Effective use in financial planning
  2. 3. Introduction <ul><li>Decline in guaranteed products changes the emphasis of advice </li></ul><ul><ul><li>Clients need good investment advice </li></ul></ul><ul><ul><li>And they need it explained to them </li></ul></ul><ul><li>Asset allocation is the most important investment decision </li></ul><ul><li>Decisions on long term asset allocation are always based on some sort of model </li></ul><ul><ul><li>Investments are uncertain </li></ul></ul><ul><ul><li>So mathematical models are stochastic </li></ul></ul>
  3. 4. Individual investors with institutional problems <ul><li>As defined benefit products disappear, investment risk becomes more important for retirement planning </li></ul><ul><li>Responsibility falls to advisers </li></ul><ul><li>That means </li></ul><ul><ul><li>Making good decisions </li></ul></ul><ul><ul><li>Making sure investors understand </li></ul></ul><ul><li>Fortunately faster computers, the internet and the market allow </li></ul><ul><ul><li>Institutional solutions for individual investors </li></ul></ul>
  4. 5. Decisions and explanations <ul><li>Advice process typically involves </li></ul><ul><ul><li>Needs analysis </li></ul></ul><ul><ul><li>Risk profile (ATR) </li></ul></ul><ul><ul><li>Product selection (Asset allocation) </li></ul></ul><ul><li>In moving from needs to product solutions, we need to </li></ul><ul><ul><li>Explain risk to investor </li></ul></ul><ul><ul><li>Compare alternative strategies </li></ul></ul><ul><ul><li>Decide on a course of action </li></ul></ul><ul><ul><li>Monitor and update </li></ul></ul><ul><li>We can help do this </li></ul>
  5. 6. For long term investors high equity exposure doesn’t mean high risk
  6. 7. Fund Profile Modelling and portfolio efficiency
  7. 8. But in the short term cash can be king
  8. 9. With income drawdown you can be too cautious
  9. 10. With profits vs. unit linked
  10. 11. Where do these comparisons come from? <ul><li>A model! </li></ul><ul><li>What does a model need to do </li></ul><ul><ul><li>Forecast outcomes – need sensible returns </li></ul></ul><ul><ul><li>Range of outcomes – need a stochastic model </li></ul></ul><ul><ul><li>Range of assets – need a multi asset model </li></ul></ul><ul><ul><li>Global markets – need currency and global model </li></ul></ul><ul><ul><li>Retirement planning – need annuity prices and interest rates </li></ul></ul><ul><ul><li>Real understanding – real terms results need inflation forecast </li></ul></ul><ul><li>It’s a complex world that’s being modelled </li></ul>
  11. 12. Many models are available <ul><li>Our tools aren’t tied to a particular model </li></ul><ul><li>But, any model that meets the requirements from the previous slides will be complex </li></ul><ul><li>Our stochastic model Global CAP:Link meets these requirements and more…. </li></ul><ul><li>Actually built for a greater list of requirements </li></ul><ul><li>In development for over 15 years </li></ul><ul><li>Originally used for institutional asset and liability management </li></ul><ul><li>Cheaper computers mean it can now be used for retail investors </li></ul>
  12. 13. Global CAP:Link – main relationships Short & Long Interest Rates and Full Treasury Yield Curve Price Inflation Equity Earnings Yield Equity Earnings Growth Rate Cash & Treasury Bond Income and Total Return Equity Income and Total Return Real GDP Currency Strength
  13. 14. Global CAP:Link – relationships extended Derived Asset Classes, e.g. property, small cap equities, etc Core Wage Inflation Additional Inflation Aa Corporate Yield Curve B Corporate Yield Curve Index-Linked Yield Curve Additional GDP Additional Economic Variables Additional Yield Curves
  14. 15. And made global <ul><li>Key Links Are: </li></ul><ul><li>Currencies </li></ul><ul><li>Bond yields </li></ul><ul><li>Earnings yields </li></ul>Japan UK & Europe U.S.A Other Countries
  15. 16. Global CAP:Link – how is it built? <ul><li>Start with the relationships it needs to model </li></ul><ul><li>Write down equations which capture those relationships </li></ul><ul><ul><li>dr t = f 1 ( r u - r t ) dt + f 2 ( r t , p t ,…) dt + f 3 ( r t ) dZ 1 </li></ul></ul><ul><li>Calibrate parameters to match </li></ul><ul><ul><li>Historical data </li></ul></ul><ul><ul><li>Current market conditions </li></ul></ul><ul><li>Test the calibration and its implications for the required purposes </li></ul>
  16. 17. Obtaining results from the model – theory <ul><li>Model determines a distribution of future outcomes for the economy and the market </li></ul><ul><li>There is no simple formula for the distribution </li></ul><ul><li>But an equation is what is needed for a Monte Carlo calculation </li></ul><ul><li>A set of scenarios can be generated that matches the equation and calculates outcomes for an investment product or strategy </li></ul><ul><li>From these outcomes, a range, average, maximum, as appropriate, can be determined </li></ul>
  17. 18. CAP:Link in practice <ul><li>Calibration updated quarterly </li></ul><ul><li>Agreed with </li></ul><ul><ul><li>Historical record </li></ul></ul><ul><ul><li>Current market </li></ul></ul><ul><ul><li>Regulators (FSA etc.) </li></ul></ul><ul><li>Scenarios generated off-line in advance </li></ul><ul><li>Number of scenarios and modelled assets are produced as required for each deployment </li></ul><ul><li>Holistic product range taking account of assets, contributions, income, fees/charges, tax and guarantees </li></ul>
  18. 19. New challenges for any model <ul><li>Side by side comparison of variable annuities to help decide between products </li></ul><ul><ul><li>Range of funds is a key consideration so need to capture fine distinctions between funds in a systematic way </li></ul></ul><ul><ul><li>Also need links to: </li></ul></ul><ul><ul><ul><li>Inflation </li></ul></ul></ul><ul><ul><ul><li>Guarantee terms </li></ul></ul></ul><ul><ul><ul><li>Fee structures </li></ul></ul></ul><ul><li>We can do this with CAP:Link </li></ul>
  19. 20. Thanks to all our sponsors