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netwealth educational webinar - The evolution of asset allocation
- 2. Strictly confidential March 2016 Tracey McNaughton The evolution of multi-asset investing Executive Director Head of Investment Strategy UBS Asset Management
- 3. 2 Markets have evolved Bond yields can go negative US can be the world's largest oil producer Donald Trump can become US President Official interest rates can go negative Central banks can become asset managers Multi-asset investing has similarly evolved…and must continue to do so
- 4. Section 1 A look back: "The Great Moderation"
- 5. 4 Simpler times Industry structure and mindset The structure The mindset Two major asset classes – Equities – Bonds Asset classes divided into specialized categories (growth, small cap, etc.) Industry dominated by domestic equities and bonds Regulation cut – repeal of Glass- Steagall Act (1933) Allocate to equities as much as risk budget would tolerate Risk-free returns Market is liquid Buy and hold Investors spent 80% of their time on selecting managers, and only 20% on asset allocation Outperform the benchmark
- 6. 55 Markets validated industry structure Rise of the equity cult Chasing performance 16.1% 6.6% 7.7% 2.6% 0% 5% 10% 15% 20% USEquities, 1990s USequities, 1925-2015 USBonds, 1990s USbonds, 1925- 2015 Source for left hand chart: MSCI, Barclays, Triumph of the Optimists (Elroy Dimson, Paul Marsh and Mike Staunton), Credit Suisse, UBS Global AM. Based on total returns adj. for US CPI. Global Equities/Global Bonds hedged to USD Source for right hand chart: UBS Global Asset Management, DataStream Annualized real returns across asset classes Quarterly changes in the S&P500 Index during the 1990s 1990s – Those were the days… Large sell-offs in the 90s were rare "The Great Moderation" 0 2 4 6 8 10 12 14 16 -15% to - 10% -10% to - 5% -5% to 0% 0% to 5% 5% to 10% 10% to 15% 15% to 20% >20% Frequency Drawdowns were rare and losses recouped quickly
- 7. 66 Industry dynamics: Equities risk premium in the nineties Source: UBS Global Asset Management, Bloomberg 0 100 200 300 400 500 600 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Equityriskpremium USTreasuries S&P 500 Who wouldn’t invest in equities!
- 8. 7 Benchmark 6.9% Active 2.3% Aus Eq Int'l Eq REIT Aus/Global Bond IG & HY TAA Currency Equity Bond Total Risk = 9.2% Benchmark 6.9% Active 2.4% Aus Eq Int'l Eq REIT Aus Bond Global Sov IG & HY TAA Currency Equity Bond Total Return = 9.3% p.a. 1st Generation of Diversified Funds Basic Building Blocks (BBs) are – Australian Shares – International Shares – Property Securities – Diversified Fixed Interest (Aus & Int'l) – Cash Each BB is often "actively managed" by different PMs from the same AM firm Asset Allocation decisions are made jointly by managers of BBs – Deviations from benchmark allocation typically limited Majority of "Alpha" comes from active security selection within each BB Majority of portfolio "return" and "risk" come from benchmark For illustrative purposes only Return and Risk characteristics are calculated based on 50% EQ / 50% Bond Benchmark (2006-2015) and typical active alpha / tracking errors of active managers Source: UBS Asset Management
- 9. 8 Benchmark 7.0% Active 1.9% Aus Eq Int'l Eq REIT Aus/Global Bond IG & HY TAA Currency Equity Bond Total Risk = 8.9% Evolution #1: Multi Manager Diversified Funds Basic Building Blocks (BBs) are often kept very similar to traditional balanced fund Each BB is constructed by combining multiple sub-funds, actively managed by specialist PMs from different AM firms Manager of the total fund has two roles – Making asset allocation decisions between BBs – Manager allocations within each BB among multiple managers selected Asset Allocation decisions tend to be more around manager allocations and less on allocations between asset classes Aim of "multi manager" funds is to reduce volatility of "Alpha" from active security selection through diversification Majority of portfolio "return" and "risk" still come from benchmark Reducing Volatility of "alpha" For illustrative purposes only Return and Risk characteristics are calculated based on 50% EQ / 50% Bond Benchmark (2006-2015) and typical active alpha / tracking errors of active managers Source: UBS Asset Management Benchmark 6.9% Active 2.4% Aus Eq Int'l Eq REIT Aus Bond Global Sov IG & HY TAA Currency Equity Bond Total Return = 9.3% p.a.
- 10. Section 2 Where are we now: "The Great Volatility"
- 11. 10 More complicated times Industry structure and mindset The structure The mindset Many asset classes – Equities - DM and EM – Bonds – IG, HY, bank loans, cat bonds – Infrastructure – Hedge funds – Private equity Industry dominated by many more players New risks – longevity, credit default risk, illiquidity Greater regulation – Basel III, Dodd Frank Return-free risk investing Hunger for yield Which benchmark is right? Forget "set and forget" Shorter investment horizons More cost conscious Investors spent 20% of their time on selecting managers, and 80% on asset allocation
- 12. 0 2 4 6 8 10 12 14 16 18 <-20% -20% to -15% -15% to -10% -10% to -5% -5% to 0% 0% to 5% 5% to 10% 10% to 15% 15% to 20% Frequency 1111 "The Great Volatility" 3.8% 6.6% 5.3% 2.6% 0% 1% 2% 3% 4% 5% 6% 7% USEquities, 2000-2015 USequities, 1925-2015 USBonds, 2000- 2015 USbonds, 1925- 2015 Source for left hand chart: MSCI, Barclays, Triumph of the Optimists (Elroy Dimson, Paul Marsh and Mike Staunton), Credit Suisse, UBS Global AM, Merrill Lynch. Based on total returns adj. for US CPI. Global Equities/Global Bonds hedged to USD Source for right hand chart: UBS Global Asset Management, DataStream. Financial Times, 2/10/12 Annualized real returns across asset classes Quarterly changes in the S&P500 Index 2000-15 Sell offs more present in the 2000s …
- 13. 1212 Industry dynamics: forget "set and forget" Equity risk premium in the noughties Source: UBS Global Asset Management, Bloomberg 0 50 100 150 200 250 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16 Equityriskpremium S&P 500 US Treasuries
- 14. 13 Evolution #2 – Adding Dynamic Allocation Basic Building Blocks (BBs) are often kept very similar to traditional balanced fund Each BB is typically "actively managed" by different PMs, often from the same AM firm Asset Allocation decisions are made independently by a specialist PM – Deviations from benchmark allocation can change in dynamic fashion reflecting asset allocator's outlook for each asset class – With increased use of derivatives, asset allocation specialist can add additional layers of active positions to add alpha and control risk Aim of this evolution is to increase sources of "alpha" including not only active security selection but also active asset allocation Majority of portfolio "return" and "risk" still come from benchmark Increasing "alpha" through Active Allocation Benchmark 6.9% Active 3.9% Aus Eq Int'l Eq REIT Aus Bond Global Sov IG & HY TAA Currency Equity Bond Total Return = 10.8% p.a. Benchmark 6.8% Active 2.8% Aus Eq Int'l Eq REIT Aus/Global Bond IG & HY TAA Currency Equity Bond Total Risk = 9.6% For illustrative purposes only Return and Risk characteristics are calculated based on 50% EQ / 50% Bond Benchmark (2006-2015) and typical active alpha / tracking errors of active managers Source: UBS Asset Management
- 15. 14 Evolution #3 – Efficient product design to keep cost down Basic Building Blocks (BBs) are often kept very similar to traditional balanced fund Each BB is made up of "passively managed" sub-funds / sleeves Asset Allocation decisions can be "active" or "passive" – UBS Tactical Beta Funds employ dynamic active allocation with derivative overlay to generate alpha – Other competitor funds are managed with fixed allocation against benchmark which is reviewed periodically (eg. Annual) Aim of this evolution is to minimise the cost for investors Majority of portfolio "return" and "risk" still come from benchmark Minimising cost at expense of some "alpha" Benchmark 6.9% Active 1.9% Aus Eq Int'l Eq REIT Aus BondGlobal Sov IG & HY TAA Currency Total Return =8.8% p.a. Benchmark 7.0% Active 1.7% Aus Eq Int'l Eq REIT Aus/Global Bond IG & HY TAA Currency Total Risk = 8.7% For illustrative purposes only Return and Risk characteristics are calculated based on 50% EQ / 50% Bond Benchmark (2006-2015) and typical active alpha / tracking errors of active managers Source: UBS Asset Management
- 16. 15 Comparison of Return / Risk Profile Benchmark is Important Return Risk SR EQ Bond Asset Alloc Currency Global Balanced 9.3% 9.2% 0.52 √ √ √ √ Multi Manager 9.3% 8.9% 0.54 √√√ √√√ √ √ Dynamic Allocation 10.8% 9.6% 0.65 √√ √√ √√√ √√√ Lower Cost 8.8% 8.7% 0.49 X X √√√ √√√ Benchmark 6.9% 7.4% 0.32 * based on 50% EQ + 50% Bond Mix, using index data for Jan 2006 - Dec 2015 and typical active alpha / tracking errors of active managers 10 yr Simulation* Active Management For illustrative purposes only Source: UBS Asset Management 80 100 120 140 160 180 200 220 240 260 280 300 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Benchmark Global Balanced Multi Manager Dynamic Alloc Lower Cost
- 17. 16 Diversified Funds: Effective choice for long term Investors Portfolio Outcome links closely with "Return / Risk" characteristics of benchmark Source: Bloomberg, UBS Asset Management *Inception date: 3 November 1992. **Inception date: 15 June 1992. Performance data has been prepared in accordance with 2011 GIPS standards. Performance is quoted gross of fees and expenses. The performance data quoted are historical. Performance can be volatile and future returns can vary from past returns. 100 200 300 400 500 600 700 800 Sep92 Sep93 Sep94 Sep95 Sep96 Sep97 Sep98 Sep99 Sep00 Sep01 Sep02 Sep03 Sep04 Sep05 Sep06 Sep07 Sep08 Sep09 Sep10 Sep11 Sep12 Sep13 Sep14 Sep15 Sep16 WealthIndexA$ Balanced Investment Fund Neutral Allocation Since Inception: GrossReturns8.78% pa Neutral Allocation 8.27% pa Actual Volatility7.63% pa 100 200 300 400 500 600 700 Jun92 Jun93 Jun94 Jun95 Jun96 Jun97 Jun98 Jun99 Jun00 Jun01 Jun02 Jun03 Jun04 Jun05 Jun06 Jun07 Jun08 Jun09 Jun10 Jun11 Jun12 Jun13 Jun14 Jun15 Jun16 WealthIndexA$ Defensive Investment Fund Neutral Allocation Since Inception: GrossReturns8.05% pa Neutral Allocation 7.51% pa Actual Volatility4.27% pa Fund Avg Risk Budget (standard dev %pa) LT Performance Characteristics %pa Investment Horizon UBS Balanced Investment Fund 9-10% pa CPI plus 6-8% 3-5 years UBS Defensive Investment Fund 5-6% pa CPI plus 4.5-6.5% 3-5 years
- 18. Section 3 Unchartered territory – from ZIRP to NIRP
- 19. 18 -6 -4 -2 0 2 4 6 8 10 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 3-month US T-Bill yield minus US CPI inflation (% yr/yr) Lower real rate regime here for "protracted" period Central bank regimes are visible Source: Federal Reserve and Bureau of Labor Statistics via Haver; UBS Global Asset Management. Sample: 1970-2014.
- 20. 19 Risks are higher- bonds "safe-haven" status at risk 30 21 18 16 6 2 1 Australia 10yr U.S. 10yr U.K. 10yr Italy 10yr France 10yr Germany 10yr Japan 10yr Source: Bloomberg, UBS, Data as at 31 March 2016 How much would yields need to rise in a year before you get a negative total return on bonds (bpts)?
- 21. Choice of benchmark matters Source: Merrill Lynch Global Broad Market Index, Bloomberg; Global Balanced is 50/50 Global Broad Market, Global MSCI Past performance does not ensure against loss. -50 0 50 100 150 200 250 300 350 Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Global equities - Rolling 10-year periods 26 down periods out of 293: 8.9% Match your investment time horizon to your benchmark horizon 0 5 10 15 20 25 30 35 40 45 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 0 down periods out of 173: 0% Global Composite Bond – Rolling 3-year returns 0 1 2 3 4 5 6 7 8 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 0 down periods out of 220: 0% Cash- Annual returns -20 -10 0 10 20 30 40 50 60 Dec-03 Dec-06 Dec-09 Dec-12 6 down periods out of 125: 4.8% Global Balanced– Rolling 7-year returns
- 22. 21 Increases the importance of risk management Winning by not losing Successful long-term investing is more to do with avoiding catastrophic losses than it is to do with capturing unrealised gains S&P/ASX 200 relative to pre-crisis peak 40 50 60 70 80 90 100 05 06 07 08 09 10 11 12 13 14 15 IndexOct-07=100 Source: Bloomberg, UBS, Loss percentage Gain percentage required -10% 11% -20% 25% -30% 43% -40% 67% -50% 100% -60% 150% -70% 233% -80% 400% -90% 900%
- 23. Section 4 New Generation MAI: Outcome Oriented Solutions
- 24. 23 New Generation MAI: think smarter & look further for ideas 1. Unconstrained - broaden opportunity set – Long and short positions – Wide asset class bands – Choice of benchamrk 2. Need to flexible – Flexible in choice of instrument – Nimble tactical asset allocation – Liquid 3. Risk risk management – manage the journey – Tail/event risk hedges – Scenario analysis – Stress testing Lower for longer environment– implications for investors
- 25. 24 0% 2% 4% 6% 8% 10% 12% 14% 16% 6.78% Diversification benefit Portfolio Risk 6.17% Equity options Equity linear Directional fixed income Relative value market Relative currency Unconstrained + flexible = efficient risk allocation Directional equity 25% Directional credit 25% Relative value markets 25% Relative value currency 25% Trade diversification Time diversification 0 – 6 months 22% 7 – 18 months 52% > 18 months 26% For illustrative purposes only Instrument diversification Equity futures 65% Equity options 35%
- 26. 25 The cost of constraints – benchmark risks can change 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Modified duration of the AusBond Composite 0+ Year Index (years) Source: Bloomberg Capital impact of a 1% rise in yield for benchmark investor -3.2% -4.6%
- 27. 26 Integrate risk management into return management Charts are for illustrative purposes only Trade design • Anticipate risk-return impacts of new trades to the overall portfolio • Help to avoid doubling risks with the inclusion of new trades % in GAAC 3.6% 0.7% 12.3% 2.7% ST LT AAT74 AAT66 AAT34 AAT53 AAT74 1.0 -0.2 0.2 0.4 AAT66 -0.2 1.0 -0.2 -0.7 AAT34 0.1 -0.3 1.0 0.4 AAT53 0.2 -0.8 0.4 1.0 % in Fund Trade 1 Trade 1 Trade 2 Trade 3 Trade 4 Trade 2 Trade 3 Trade 4 ST LT Portfolio Construction • Optimize the risk-return profile of the total portfolio (efficient frontier) • Identify sources of alpha in the portfolio (negative and positive) Expected Return 100% Cash Benefit of Risk Diversification and Efficient Portfolio Construction Risk Tail-risk management • Identify the tail-risks to protect the portfolio • Sophisticated risk measures beyond simple volatility %Returns Time Maximum Drawdown
- 28. 27 The end game - achieving an asymmetric portfolio For illustrative purposes only Stress test summary Scenario Total Return Horizon EQ down IR down spreads widen -5.64% 1 month All markets down -5.34% 1 month Flight to quality currency pegs hold -5.18% 1 month IR up spreads widen -3.03% 1 month USD weakening (currency only) 0.29% 1 month IR down spreads narrow 10.17% 1 month EQ up IR up spreads narrow 10.17% 1 month All markets up 11.04% 1 month
- 29. 28 Risk parity – different way of thinking about risk 28 Source: UBS Global Asset Management For illustration purposes only Traditional Approach (example) Risk Parity Approach (example) Asset Weights Risk Contributions Asset WeightsRisk Contributions Allocating units of risk versus amounts of money Traditional 60/40 versus risk parity allocation Equity 60% Fixed Income 40% 0% 20% 40% 60% 80% 100% 120% Asset weight Equity 90% Fixed Income 10% Asset weights drive risks Equity 18% Fixed Income 95% Commodities 20% 0% 20% 40% 60% 80% 100% 120% 140% Asset weight Commodities 33% Fixed Income 33% Equity 33% Risk allocation drives asset weights
- 30. 29 21794 29 Multi-asset investing must evolve or… Copyright © 2002 The Parking Lot is Full
- 31. 30 UBS Multi-Asset Fund evolution Balanced Investment Fund Defensive Investment Fund Tactical Beta Funds Dynamic Alpha Strategy Fund A Global Balanced w/ dynamic allocation Global Balanced w/ Lower Cost Approach and Dynamic Allocation Real Return Strategy Total FUM (A$m) 1,082m 466m 1,511m Managers Keiko Kondo/ Tom Rivers Keiko Kondo/ Tom Rivers Andreas Koester/ Tom Rivers Benchmark Custom SAA benchmark Custom SAA benchmark UBS Bank Bill SAA TAA Currency exposure Active overlay Active overlay Active overlay Building blocks Active Passive Mainly derivatives Target alpha CPI + 6-8% / CPI + 4.5-6.5% CPI + 4.5-6% 3.5-5.5% Average risk budget 9-10% / 5-6% 8-9% for Balanced 7-10% Inception Nov/June 1992 May/Oct 2012 June 2007 Source: UBS Global Asset Management. As at 29 February 2016
- 32. 31 Disclaimer This presentation and accompanying documents is intended to provide general information only and has been prepared by UBS Asset Management (Australia) Ltd (ABN 31 003 146 290) (AFS Licence No. 222605) without taking into account any particular person’s objectives, financial situation or needs. Investors should before acting on the information provided in this presentation, consider the appropriateness of the information having regard to their personal objectives, financial situation or needs. Any opinions expressed in this material are those of UBS Asset Management (Australia) Ltd, a member of the Asset Management division of UBS AG, and are subject to change without notice. Although all information in this presentation and documents is obtained in good faith from sources believed to be reliable no representation of warranty, express or implied is made as to its accuracy or completeness. Neither UBS AG nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material. The information provided during this presentation must not be relied on to make an investment decision. It is not an offer or recommendation to acquire an interest in the UBS Managed Investment Funds (UBS Funds) or recommendation to purchase or sell any particular security. Offers of interests in the UBS Funds are contained in the relevant current Product Disclosure Statement (PDS). An investment in any of the UBS Funds does not represent deposits or other liabilities of UBS AG or any other member company of the UBS Group. Your investment is subject to investment risk, including possible delays in repayment and loss of income and capital invested. The repayment of capital or income is not guaranteed by any company in the UBS Group. Performance can be volatile and future returns can vary from past returns. Up-to-date performance information can be obtained by contacting UBS Asset Management (Australia) Ltd. A copy of the PDS is available from UBS Asset Management (Australia) Ltd, the issuer of the UBS Funds, on (02) 9324 3222 or freecall on 1800 023 043. You should consider that PDS and obtain professional advice before making any decision about whether to acquire or continue to hold an investment in the Fund(s). This document may not be reproduced or copies circulated without prior authority from UBS Asset Management (Australia) Ltd. © UBS 2016. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.
- 33. netwealth Educational Series DISCLAIMER FOR FINANCIAL ADVISER USE ONLY This information has been prepared and issued by netwealth Investments Limited (“netwealth”), ABN 85 090 569 109, AFSL 230975, ARSN 604 930 252 for the general information of its advisor clients only. It is a general summary only and contains opinions on some publically released information and is not advice. While care has been taken in the preparation of this information (using sources believed to be reliable and accurate), netwealth does not warrant or represent that the information is accurate, complete or current. netwealth, any other member of the netwealth group of companies, their officers, employees or representatives will not be liable for any loss or damage suffered by any person arising from reliance on any of this information. Anyone proposing to rely on or use the information should first obtain appropriate independent professional advice.