Portfolio Development and      Implementation in Uncertain TimesJune 28, 2011© 2010 Towers Watson. All rights reserved.
Discussion     Economic and Market Uncertainty     Portfolio Positioning in Uncertain Times     Role of Valuations    ...
Shorter ViewGrowth rate                Scenario           Probability                                Positives            ...
Shorter ViewGrowth rate                Scenario           Probability                               Positives             ...
Politics (Policy) Will Matter Greatly                  “Indebted markets”                                                 ...
Longer ViewGrowth rate                                                            • Capitalism reinventing itself         ...
Investment Framework                                      Asset Allocation                                    Supporting O...
What makes a good return driver?  Return driver                      Easy to access                                       ...
TWIS Return-Driver Framework                                                                            Risk PremiaAsset C...
Valuations Matter – Our Current ViewsAsset class- Few clear dislocations in major global markets relative to cash         ...
Portfolio Construction: Return-seeking portfolioconsiderations                                                        Clie...
Spending the Risk Budget: Economic scenario analysis                                               Speed of global rebalan...
DB Pension Fund                             Traditional                                                Unconstrained      ...
Higher-Risk Fund Asset Structure                          Unconstrained                                                  H...
Portfolio Construction: Return-Seeking                      Typical RSA   Low Fee                           Liquidity Cons...
Impact of Uncertainty on Liability-Driven Investing               105%               100%                   95%           ...
Don’t Forget about Risk Management: Left-Tail Riskstowerswatson.com                                                       ...
Assessing the value of Treasurys relative to cashTW and the market       This chart shows the market’s and our expectation...
“Rates are low, don’t you know?”G4 core inflation (CPI excluding the volatile energy and food prices)                     ...
“Rates are low, don’t you know?”Growth rate                Scenario           Probability                                 ...
Liability Hedging Portfolio Construction                               Representative Cash Flow Distribution - 30%        ...
So, what now?     Decide how to factor in your views on the markets and risks     Review your portfolio structure     B...
Contact Details   Chris DeMeo       335 Madison Avenue, New York, NY 10017-4605       212-309-3845       christopher.d...
Upcoming SlideShare
Loading in …5
×

Towers Watson: Portfolio Development and Implementation in Uncertain Times

1,416 views

Published on

Ongoing economic and capital market uncertainty presents institutional investors with both investment challenges and opportunities. In times like these, it’s important for you to properly align your portfolio to capture potential opportunities and manage likely risks so you can achieve your investment objectives.



This presentation examines how to develop and implement an ideal investment portfolio in the face of uncertainty.

Published in: Business, Economy & Finance
0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
1,416
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
42
Comments
0
Likes
2
Embeds 0
No embeds

No notes for slide

Towers Watson: Portfolio Development and Implementation in Uncertain Times

  1. 1. Portfolio Development and Implementation in Uncertain TimesJune 28, 2011© 2010 Towers Watson. All rights reserved.
  2. 2. Discussion  Economic and Market Uncertainty  Portfolio Positioning in Uncertain Times  Role of Valuations  Impact on Liability-Driven Investingtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  3. 3. Shorter ViewGrowth rate Scenario Probability Positives Negatives High growth (‘indebted’) High inflation Bumpy ride to recovery Global slowdown Deflation (‘indebted’) Debt crisis (‘indebted’)2010 2015 Time towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  4. 4. Shorter ViewGrowth rate Scenario Probability Positives Negatives High growth (‘indebted’) 5% Equities s nd High inflation Credit bo 15% ign re ve Bumpy ride to So recovery 40% Commodities 20% Equities Global slowdown s nd Deflation 10% Credit bo (‘indebted’) ign re ve So Debt crisis 10% Commodities (‘indebted’)2010 2015 Time towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  5. 5. Politics (Policy) Will Matter Greatly “Indebted markets” “Growth markets” Tight fiscal policy  Exchange rate    RebalancingLoose monetary vs Tight monetary policy policy   Loose fiscal policy towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  6. 6. Longer ViewGrowth rate • Capitalism reinventing itself • Jobs being recycled into new areas • Confidence returning  Sovereign nominal bonds  Equities, credit, commodities Policies favored growth  Equities, credit, commodities(?) • Caught in a debt / liquidity trap • Western financial system crisis-prone  • Wealth and power shifting East Sovereign nominal bonds Debt more powerful than policies2015 2025 Time towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  7. 7. Investment Framework Asset Allocation Supporting Objectives Stage 1: Investment Liability-matching Return-seeking Strategy Development Investment grade Non-investment bonds Equities Alternatives grade bonds Stage 2: Treasury Corporate Domestic High yield Hedge FOF Portfolio Construction Non-U.S. Private real Bank loans ABS/MBS Non-U.S. estate Convertibles Private equity Stage 3: Manager selection and monitoring of strategy Risk Budgetingtowerswatson.com 7 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  8. 8. What makes a good return driver? Return driver Easy to access Reliable Attractive distribution Capacity Governance Macro consistent High IR Positive skew Correlation ERP    -  - Credit       Illiquidity       Insurance       Term     -  Inflation       Currency       Skill    * -  * Assumes skilled managers are picked across multiple asset classes with a low correlation between their alphas.towerswatson.com 8 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  9. 9. TWIS Return-Driver Framework Risk PremiaAsset Classes Equity Credit Illiquidity Insurance Term Inflation Currency SkillDeveloped market equity Alternative credit   hgAlternative betas Reinsurance Commodities Volatility arbitrageEmerging Wealth           Emerging market equities   Emerging market debt      Emerging market currency Hedge funds     Illiquid assets Core global property    Core Infrastructure    Private market funds   Bonds Corporate bonds     Nominal government bonds (AAA)   Inflation-linked govt bonds (AAA)  towerswatson.com 9 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  10. 10. Valuations Matter – Our Current ViewsAsset class- Few clear dislocations in major global markets relative to cash Three-Year HorizonAsset Class ViewGlobal Government Bonds NeutralGlobal Inflation-linked Bonds NeutralGlobal Credit (Investment Grade) NeutralGlobal Equities NeutralCommodities NeutralReturn Drivers- Few clear dislocations in major global markets relative to cash towerswatson.com 10 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  11. 11. Portfolio Construction: Return-seeking portfolioconsiderations Client portfolio dependent on:  Time horizonUnconstrained  Opportunities re annuitization  CashflowsLong-Horizon Long-Horizon Iliquid Liquid Portfolio Portfolio Emerging Market Currency Developed Equity EM Equity Private Equity Property Reinsurance Infrastructure Liquid Hedge Funds Loans EM Debt IG Credit High Yield LT Gov Deb Illiquid Hedge Funds All Government Debt Assets and Cash-Like Instrumenttowerswatson.com 11 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  12. 12. Spending the Risk Budget: Economic scenario analysis Speed of global rebalancing (EM policy choices) Fast Slow (EM FX appreciation) (EM inflation, DM deflation) High (Fiscal stimulus, High DM EM Overheating high market liquidity) inflation DM Consideration of these scenarios High Public policy DM growth sovereign debt should form a qualitative overlay to and financial Bumpy ride to recovery crisis the outcomes from the risk- conditions (DM policy choices) budgeting analysis DM Deflation Low Global growth slowdown (Fiscal austerity, tight market liquidity) EM: Emerging Markets DM: Developed Markets Growth High DM Sovereign Bumpy ride DM deflation High DM growth EM crisis slowdown inflation default Probability 40% 20% 15% 10% 15%Nominal Bonds (developed market) =      Inflation linked bonds = =     Global Equities       EM Wealth       Alternative Credit =      Inv. Grade Credit =      Insurance = = = = = = =KEY: positive,  very positive, = broadly neutral,  negative,  very negative towerswatson.com 12 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  13. 13. DB Pension Fund Traditional Unconstrained Emerging wealth Emerging wealth Private markets Alternative beta Private markets Hedge funds Alternative beta Developed equities Developed equities Alternative credit Corporate bonds Corporate bonds Treasuries and cash Treasuries and cash Source: Towers Watsontowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  14. 14. Higher-Risk Fund Asset Structure Unconstrained Higher-risk fund Emerging wealth Sustainability Private markets Emerging wealth Hedge funds Alternative beta Private markets Developed equities Alternative credit Hedge funds Alternative beta Corporate bonds Developed equities Treasuries and cash Alternative credit Cash Source: Towers Watsontowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  15. 15. Portfolio Construction: Return-Seeking Typical RSA Low Fee Liquidity Constrained UnconstrainedDeveloped EquityAlternative CreditInsuranceEmerging WealthHedge FundsPrivate MarketsBondsExtreme Risk HedgesLiquidity towerswatson.com 15 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  16. 16. Impact of Uncertainty on Liability-Driven Investing 105% 100% 95% 90% 85% 80% 75% 70% 65% 60% Funded Statustowerswatson.com 16 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  17. 17. Don’t Forget about Risk Management: Left-Tail Riskstowerswatson.com 17 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  18. 18. Assessing the value of Treasurys relative to cashTW and the market This chart shows the market’s and our expectations for future cash interest rates (ie forward rates). Please noteexpect interest rates that our expectations are focused around a long-term yield level for Treasurys (and swaps) of 4% pa.to rise Both we and the market expect cash interest rates to rise over the next few years as monetary policy normalizes. Treasury forward cash rates 6.0 Our assumption below market expectation 5.0 Market expectation above 5% 4.0 Yield (% pa) 3.0 2.0 Interest rates expected to Market f orward Treasury cash rate increase from 1.0 current low TW expected Treasury cash rate levels 0.0 0 5 10 15 20 25 30 Term Source: Towers Watson as at 3 May 2011 towerswatson.com 18 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  19. 19. “Rates are low, don’t you know?”G4 core inflation (CPI excluding the volatile energy and food prices) High unemployment puts strong pressure on US wages in the short termmodestly rising7.0 US co re inflation UK co re in flation 5.0 % yo y6.0 Euro lan d core in flation Jap an core inflation Expected change in fam ily incom e 4.5 (next 12 m onths), median response5.0 4.0 Smoothed series (moving average)4.0 3.53.0 3.0 Percent (%)2.0 2.51.0 2.00.0 1.5 1.0-1.0 0.5-2.0 0.0-3.0 90 92 94 96 98 00 02 04 06 08 10 00 01 02 03 04 05 06 07 08 09 10 11 Source: University of Michigan, Towers WatsonSource: Bloomberg LP towerswatson.com 19 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  20. 20. “Rates are low, don’t you know?”Growth rate Scenario Probability Progression To Goal High growth 5%  (‘indebted’) Low probabillty/modest upside High inflation 15%  Bumpy ride to 40%  recovery Global slowdown 20%  High probabillty/greater downside Deflation 10%  (‘indebted’) Debt crisis 10%  (‘indebted’)2010 2015 Time towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  21. 21. Liability Hedging Portfolio Construction Representative Cash Flow Distribution - 30% Fixed Income 40% 30% 20% 10% 0% 0-5 6-10 11-20 21-30 30+ Government Credit Liabilities Representative Cash Flow Distribution - 70% Fixed Income 40% 30% 20% 10% 0% 0-5 6-10 11-20 21-30 30+ Government Credit Liabilitiestowerswatson.com 21 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  22. 22. So, what now?  Decide how to factor in your views on the markets and risks  Review your portfolio structure  Be alert to investment opportunities arising  Understand and manage left tail risktowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  23. 23. Contact Details Chris DeMeo  335 Madison Avenue, New York, NY 10017-4605  212-309-3845  christopher.demeo@towerswatson.com Matt Stroud  335 Madison Avenue, New York, NY 10017-4605  212-309-3835  matthew.stroud@towerswatson.comtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

×