HEK December 2012 Investment Strategy Webcast

7/27/2019 HEK December 2012 Investment Strategy Webcast

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Investment Strategy Webinar

December 19, 2012


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2

Presenters

Steve Cummings, President & CEO

Phone: 847.442.0064Email: [email protected]

Mike Sebastian, Partner


Tapan Datta, Principal

Global Asset AllocationPhone: 011 + 44 020 7086 9076

Email: [email protected]

Eric Friedman, Senior Consultant



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Market outlook entering 2013

Tapan Datta


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Fiscal Cliff: What are the risks?

SCENARIOS INDICATIVE PROBABILITIES/MARKET

OUTCOMES

FULLY AVOIDED LITTLE FISAL DRAG

NO CREDIBLE LONG-TERM DEFICIT

REDUCTION PLAN

30% - Risky assets benefit short-term

AVOIDED SOME FISCAL DRAG

(2% of GDP

20% - potentially large (double digit %) market

sell-off


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Approaching the Cliff: Consumers have limited ability to weather tax rises

CONSUMERS: PERSONAL INCOME GROWTH IS

MEDIOCRE(% growth on year ago)

-8

-6

-4

-2

0

2

4

6

8

10

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Source: Datastream

HOUSEHOLD SAVINGS RATES DO NOT HAVE ROOM

TO FALL MUCH FURTHER

0

1

2

3

4

5

6

7

8

9

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

%

Source: Datastream

Consumer spending is

vulnerable in the event of notrolling over the payroll tax cut

less so with the higher income

tax cuts


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Approaching the Cliff: Business reactions have been felt already

CAPITAL SPENDING INTENTIONS ALO WEAK

15

17

19

21

23

25

27

29

31

33

35

Nov-

06

May-

07

Nov-

07

May-

08

Nov-

08

May-

09

Nov-

09

May-

10

Nov-

10

May-

11

Nov-

11

May-

12

Nov-

12

$

bn

SMALL BUSINESS HAS TURNED MORE PESSIMISTIC(NFIB Optimism Index)

80

85

90

95

100

105

Nov-06

May-07

Nov-07

May-08

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

May-12

Nov-12

Business spending

has already slowed. Avoidingthe cliff could bring a mild

rebound..


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Going into 2013: Weak global growth environment

After what seemed initially to be

a normal recovery fromrecession, the global economy

has looked quite soft through

2011-12.

CHINA: EXPORT GROWTH (%)

-40

-30

-20

-10

0

10

20

30

40

50

60

Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11

Global Growth


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Long-term problem with 2013 impact: Public debt

In developed economies,

thoughprivate debt has been

coming down, highpublicdebt

is a key obstacle to sustained

recovery.

For the US economy which

has so far performed better

than its peers, this has the

potential to become a major

drag on growth.

RISING PUBLIC DEBT IS A KEY OBSTACLE TO SUSTAINED

RECOVERY

(Ratio of Gross Public Debt to GDP)

0

50

100

150

200

250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Euro Area Japan USA


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Summary of medium-term market views

Equities Limited return prospects but prefer to bonds

Stay at target non trivial risk of poor outcomes

Favour non-US markets on any rebalancing

Prefer large cap to small, but case is becoming less compelling

Bonds Low yields unattractive and risky

Credit still preferred to government bonds, but reduce relative

positioning Long credit spreads more attractive than intermediate, but

duration is the difficulty.

Favour Investment grade and secured loans to high yield

Alternative Asset Classes Favour real estate, hedge funds, infrastucture and selected private

equity investments


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2012 In Review: Looking Forward to 2013

Mike Sebastian


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2012 Thought Leadership Update: White Papers

Risk Parity and the Limits of Leverage (Journal of Investing, Fall 2012)

Are Custom Target Date Funds Right for Your Plan?

Funding Stabilization and PBGC Premium Increases: Strategic Implications for Pension

Plan Sponsors

Go Big or Go Home: The Case for an Evolution in Risk Taking

Tales from the Downside: Risk Reduction Strategies

Inflation Risk and Real Return

Public Funds Can Compete

Conviction in Equity Investing

Harvesting the Equity Insurance Risk Premium

Measuring Success in Fixed Income

Fiduciary Considerations for Target Date Funds

Reinsurance Funds: Are they the ultimate diversifier? (From UK Idea Development

Group)

Carbon-Related Investment: The long term is not simply a series of short terms (From

UK IDG)


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Preview: 2013 Thought Leadership

Risk evolution

Custom solutions

Renewed focus on investment foundations


14/20

New Thought Leadership: Fiduciary

Considerations with Target Date Funds

Eric Friedman


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15

Fiduciary Considerations with Target Date Funds

Target Date Funds (TDFs) have taken on an increasingly important role in DC

plans. We view this trend favorably.

TDFs do not necessarily present greater fiduciary risks than other investments.

Because TDFs bundle a number of investment aspects and decisions together,analyzing them is more complex.

The outsourced nature of these may provide fiduciaries a false sense of comfort

because the day-to-day responsibilities appear to no longer lie with them.

Fiduciaries retain the responsibility for evaluating the vendors ability to provide an

appropriate solution.

For the full version of our white paperFiduciary Considerations with Target Date Funds,

please ask your consultant or visit our website at http://www.hewittennisknupp.com.


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Fiduciary governance best practice strongly supports plan sponsor consideration

of each element of target date fund strategies.

Key Elements of Target Date Funds

Funds

Glide Path

Fees

participant

outcomes


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HEK Preferences

HEK Prefers HEK Does Not Prefer

Glide Path Risk level consistent with

participant needs Supportable rationale for shape

and slope of glide path

Diversification of asset classes

Risk level set without regard to

participant circumstances Limited rationale for glide path

structure

Minimal diversification

Funds Passive management

High conviction active

management

Best-in-class active managers for

each asset class

Closet indexing

Low quality active management

Fees Appropriate fee levels for value

provided

Excessive fees for value provided


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TDF Solutions

Plan sponsors should evaluate their TDF approach regularly:

Quality of current approach may have changed

Decline in fund quality

Participants needs or plan sponsors views may have changed

Change in participant circumstances (e.g. DB freeze)

Change in views on active/passive management

Change in views on diversification

Alternative options may have improved Emergence of custom TDF solutions


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Question & Answer

Questions may be submitted at any time during the web

seminar by typing the question in the "Ask a Question"

text field and clicking "Submit." Questions will be

answered live as time permits during the question and

answer sessions.


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Our next investment strategy update call is scheduled

for Wednesday, January 16th, at 10 a.m. CST.

Documents

HEK December 2012 Investment Strategy Webcast