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Annual Meeting of 1818 SocietyAnnual Meeting of 1818 Society
Pension Plan Performance
October 22, 2008
2
Pension Plan and Endowments
Roadmap
1. Highlights 2007
2. Update 2008 and Recent Market Stress
3. Determinants of Plan Long Term Performance
4. Concluding Remarks
3
SRP - Funded Status
Funded ratio is (MV of Assets)/(Liabilities)
101%
105%
126%
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
1998 1999 2000 2001 2002 2003 2004 2005 2005 2007
Year ending December 31
Closed Group Funded Ratio Closed Group incl PV of participant conts PBO Funded Ratio
4
Total Bank Contribution Rates for Total Bank Contribution Rates for FY03 - FY09FY03 - FY09
0%
5%
10%
15%
20%
25%
30%
35%
40%
2003 2004 2005 2006 2007 2008 2009
Financial Year ending June 30
Staff Retirement Plan Retiree Medical Plan Other Bank Plans
5
SRP Plan Performance (2007)
Alternative investments continued playing a key role
Plan Return Policy Return Excess Return
TOTAL PLAN 10.3 8.3 2.1
U.S. Equity 5.5 5.1 0.4 Non-U.S. Equity (Unhedged) 18.8 15.8 3.0 Fixed Income 4.6 5.3 (0.7) Hedge Funds 10.4 3.6 6.8 Private Equity 28.6 16.3 12.2 Real Estate 8.0 10.0 (2.0) Currency Overlay (3.2) (3.2) 0.0
6
SRP - Change in Asset SRP - Change in Asset Allocation Policy, October 2007Allocation Policy, October 2007
Old Target New Target
Non US Equity16%
Fixed Income40%
US Equity19%
Hedge FundsUp to 12%
Private EquityUp to 12%
Real EstateUp to 8%
CashUp to
1%
Overlay Strategies
2%
Real Estate12.5%
Infrastructure2.5%
Timber2.5%
Fixed Income for hedging
25%
Cash1%
US Equity4.5%
Non-US Equity4.5%
Hedge Funds Strategies
23%
Private Equity15%
Emerging Market Equity
5%
Commodities2.5%
Equity Strategies
Absolute Return StrategiesFixed Income Strategies
Real Return Strategies
7
Pension Plan and Endowments
Roadmap
1. Highlights 2007
2. Update 2008 and Recent Market Stress
3. Determinants of Plan Long Term Performance
4. Concluding Remarks
8
Pension Plan and Endowments
General Market DevelopmentsUpdate on Recent Market Developments
Unprecedented market conditions have led to losses in most asset classes
Asset Class Returns YTD (as of October 16 2008)
Russell 3000 -37.5%
MSCI World exUS -40.0%
MSCI EM Free -48.7%
DJ AIG Commodity Index -25.7%
EMBI -16.1%
Lehman Global Aggregate exUS 0.9%
Lehman US Aggregate -1.4%
Lehman Brothers U.S. Tips Index -3.1%
9
Pension Plan and Endowments
General Market DevelopmentsUpdate on Recent Market Developments
Equity market gyrations accelerated in October.
Dow drops the most ever in 1 day, and subsequently stages the biggest rally since 1930s, only to fall back again
10
Pension Plan and Endowments
Government interventions to stem the crisisUpdate on Recent Market Developments
Unprecedented government intervention across the world:
• Liquidity and lending guarantees
• Interest rate cuts
• Bank retail deposit guarantees
• Bank recapitalization
• Asset purchase
• Short selling bans
• Blanket deposit guarantees
US• Guarantee all senior debt issued by banks for next 3 years• Cut rates to 1.5% on Oct 8• Increase bank deposit to USD 250K from USD 100K. Non interest bearing accounts unlimited guarantee• Will purchase troubled bank assets up to USD 700bn.• Will use of up to USD250bn of the USD 700bn “bail-out package” to inject in banks. Half in the 9 big banks; other half for smaller lenders and thrifts• Temporarily banned short selling in financial companies. Ban lifted Oct 8.EU• Cut rates to 3.75% on Oct 8• Guarantee deposits for up to EUR100KUK• Guarantee new short and medium-term debt issued by banks• Cut rates to 4.5% on Oct 8• Increase deposit guarantee to GBP50K• RBS and Lloyds get GBP39bn capital injection. Another GBP25bn available for Tier 1 capital to other banks.• Short selling in financial stock until Jan 2009Germany• Provides EUR400bn in bank guarantees• Blanket guarantee for all private bank accounts• Provides EUR100bn in state funds to recapitalize banks•Short selling in financial stock until Jan 2009Australia• Plans AUD8bn purchases of residential mortgage backed securities• Blanket guarantee for entire deposit base
11
Pension Plan and Endowments
SRP PerformanceUpdate on Recent Market Developments
SRP has lost value
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
($ M
illi
on
s)September 30, 2008SRP Market Value:
$13.4b
12
Pension Plan and Endowments
SRP PerformanceUpdate on Recent Market Developments
Diversification has helped cushion losses
A scenario analysis of returns and risk of different hypothetical asset allocations show:
• The target SAA has highest risk adjusted returns in all scenarios
• The actual return of SRP are below the target SAA returns but above all other scenarios
• Actual SRP losses were less than for a “risk averse” 40% eq / 60% fixed income portfolio
Asset allocation Return Volatility Ratio* Return Volatility Ratio* Return Volatility Ratio*60% Public Equity, 40% Fixed Income (13.5) 9.6 (1.4) 5.4 7.2 0.7 6.0 8.6 0.7 40% Public Equity, 60% Fixed Income (8.9) 6.4 (1.4) 4.7 4.9 1.0 5.9 5.9 1.0
"Target" SAA** (6.4) 4.7 (1.3) 8.8 5.1 1.7 10.9 5.9 1.8
Actual*** (8.3) 6.3 (1.3) 8.6 5.1 1.7 6.7 8.1 0.8
*: Ratio is calculated as Return / Volatility (IR)**: "Target" SAA proxy: 25% Hedge Fund, 15% Public Equity, 25% Fixed Income, 20% Real Estate, 15% Private Equity***: Actual based on Falsh report as of 10/14/08
Rolling 1YR Rolling 5YR Rolling 10YR
Total return comparison of different asset allocations
13
Pension Plan and Endowments
Roadmap
1. Highlights 2007
2. Update 2008 and Recent Market Stress
3. Determinants of Plan Long Term Performance
4. Concluding Remarks
14
Pension Plan and Endowments
Approaches to SRP ManagementCyclicality and Sources of Alpha
Progressive improvement in the amount and consistency of Excess Return over time
Excess Return has increased three-fold in the past 5 years
1989-1995 1996-2002 2003-2007
Actual Return 16.24% 8.14% 12.02%
Benchmark 15.85% 7.30% 9.63%
Excess (+) 0.38% 0.85% 2.38%
I Period 1989-1995I I Period 1996-2001I I I Period 2002-2007
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
SRP Annual Excess Return
15
Pension Plan and Endowments
Approaches to SRP ManagementCyclicality and Sources of Alpha
Gradual improvement in managing downside risk
Period I : 1989-1995 15 -11.01% 2.27% -1.88%Period I I : 1996-2002 8 -6.31% 1.38% -3.34%Period I I I : 2003-2007 1 -0.18% 1.75% -0.18%
Cumulative neg. Alpha
Worst Quarter
Best Quarter
# of neg. Quarters
Since 2002: major effort to increase portfolio diversification and investment in alternatives
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
IV 2
007
IV 2
006
IV 2
005
IV 2
004
IV 2
003
IV 2
002
IV 2
001
IV 2
000
IV 1
999
IV 1
998
IV 1
997
IV 1
996
IV 1
995
IV 1
994
IV 1
993
IV 1
992
IV 1
991
IV 1
990
IV 1
989
SRP Quarterly Excess Return
16
Pension Plan and Endowments
Diversification across Asset Classes Improves ExcessReturns
Greater diversification and low excess returns correlation across asset classes are two main reasons for improvement of excess returns
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
2007200219951989
Fixed Income
Public Equity
Private Equity
Real Estate
Hedge Fund
Commodity
FX Overlay
Portable Alpha*
* Portable Alpha proggram was discontinued after new SAA was approved in October 2007.
17
Pension Plan and Endowments
Diversification within Asset Classes Improves ExcessReturns
Greater diversification within each asset class across active managers has also positively contributed to reduce the overall volatility
0
100
200
300
400
1996 2002 2007
Number of active investments by asset class
Fixed Income
Private Equity
Real Estate
Hedge Fund
Public Equity
Impact is greatest in the highest return producers: alternative asset classes
18
Pension Plan and Endowments
2008 Alpha generation: A Damage-Control YearCyclicality and Sources of Alpha
• Environment has made it difficult for active managers to add Alpha
• Plan has done better than market average in public equities and roughly in line in fixed income
* Market average is composed of 197 different active managers in the Fixed Income space and 293 in the Public Equity space.
** per annum
• Preliminary indicators confirm this trend for the quarter ending September 30th. Data will not be available till mid-November
SRP Excess Return (data till J une 2008)
Jan-June 2008
1YR 2YR ** Jan-June 2008
1YR 2YR **
SRP Portfolio -0.64% -1.27% -0.62% 1.58% 2.05% 2.38%
Market Average * -0.59% -2.54% -1.31% 0.81% 1.49% 1.09%
Overperformance -0.05% 1.27% 0.69% 0.77% 0.55% 1.29%
Fixed Income Public Equity
SRP ExcessReturn (data till J une 2008)
Jan-June 2008
1YR 2YR **
SRP Total Invest. Port. -0.27% -0.34% 1.82%
19
Pension Plan and Endowments
Roadmap
1. Highlights 2007
2. Update 2008 and Recent Market Stress
3. Determinants of Plan Long Term Performance
4. Concluding Remarks
20
Pension Plan and Endowments
Concluding Remarks
• An unprecedented market environment has prompted an unprecedented government response
• Short-term performance will continue to be volatile
• Plan’s increased diversification across asset classes and active managers has been a major determinant of performance and stronger risk management
• Diversification will continue to contribute to the downside protection of the Plan
• Crisis will be tough in the short term but will bring better risk/return metrics: better buying opportunities for the long term investor