aon hewitt: alternative investments - philanthropy · 2018. 8. 24. · aon hewitt | retirement |...

Aon Hewitt: Alternative Investments

Alternatives – the ‘Alternative’ way to

a better Balanced Portfolio

NZAM – who are we?

• Fund of Hedge Funds – established 1991.

• Privately owned.

• $600 mio funds under management.

• 480 clients – mostly private but also institutional.

• Net returns 8.12% p.a. – worst year -8.64% (1994).

• Recently appointed Sir John Anderson as Advisory Chairman and Jonathan Mason as a Non-Exec Director.

What is an Alternative Investment?• Investments that are not traditional bond, equity or property

investments.

• It’s a meaningless name – they are better described as ‘diversifying investments’. They are not a replacement, they are an additional, diversifying source of return.

• The largest categories of Alternatives are:• Commodities • Private/Venture Equity• Hedge funds

• Alternatives can also include collectibles such as art, coins and classic cars.

• Focus on the most liquid and diverse –hedge funds.

Hedge Funds• A hedge fund is a fund that aims to achieve absolute returns - it seeks

to generate profits for investors irrespective of market conditions.

• Hedge funds invest in equities, fixed income, currencies and commodities.

• Hedge funds can profit from falling markets by going short (selling securities) or by using derivatives to hedge portfolios.

• Hedge funds are designed to manage risk – risk free is 100% cash; not 100% invested.

• Hedge fund managers’ interests are aligned with their investors.

• This is a skill-based business and skill costs.

• The focus should be after fee returns.

Global Trends in Alternative Investing

The survey covered 835 endowments in 2013 managing US$448 billion and was conducted by CommonfundInstitute and the National Assn of College and University Business Officers

53%34%

10% 3%

Alternatives Equities Fixed Income Cash

4%14%

31%13%

28%

Distressed Debt Energy/Nat Resources

Private/Venture Capital Private Real Estate

Hedge Funds

“Houston we have a problem” - The Prospects for the Traditional Balanced Fund

Source: BCA

The benefits of diversification are widely accepted concept but there is very little diversification remaining in the traditional balanced fund – it is dominated by the equity risk premium. Alternatives provide crucial diversification.

Equity Markets – the party’s getting late….

….and the punchbowl’s empty!

Equities are rich…but bonds are worse.

10

It’s looking good for hedge funds.

11

Balanced Fund Sources of Return

• Equities – the ‘equity risk premium’ or ‘beta’.

• Bonds – primarily credit risk and duration risk.

• The equity risk premium completely dominates bond/equity portfolios – that is not ‘balance’.

• Alternatives – components of the above but also ‘alpha’ – the return derived from manager skill independent of markets.

After Fee Returns since 1999

Annualised Return Volatility Drawdown Correlation to HFRI

Global Shares (MSCI World Local) 4.08% 14.32 -50.77% 0.68

Global Bonds (Citi World BIG in NZD Hedged) 7.92% 2.80 -2.35% -0.14

Hedge Funds (HFRI FOF 100% Hedged to NZD) 7.78% 5.42 -17.88% -

Jan 1999- 31 Dec 2014

After Fee Returns in ‘crisis markets’


Global Shares (MSCI World Local) -16.69% 17 -51.86% 0.23


Hedge Funds (HFRI FOF 100% Hedged to NZD) 4.26% 5.08 -4.95% -


Global Shares (MSCI World Local) -24.57% 18.24 -50.77% 0.74

Global Bonds (Citi World BIG in NZD Hedged) 9.54% 3.62 -0.74% 0.06

Hedge Funds (HFRI FOF 100% Hedged to NZD) -2.61% 8.36 -17.88% -

"Tech Wreck"

Global Financial Crisis

After Fee Returns post GFC


Global Shares (MSCI World Local) 17.25% 12.54 -17.22% 0.81


Hedge Funds (HFRI FOF 100% Hedged to NZD) 7.37% 4.04 -6.30%

Post-GFC

Adding Hedge Funds to a Traditional 60/40 Balanced Fund – Global Perspective.

$500.00

$700.00

$900.00

$1,100.00

$1,300.00

$1,500.00

$1,700.00

$1,900.00

$2,100.00

$2,300.00

Dec

-98

No

v-9

9

Oct

-00

Sep

-01

Au

g-02

Jul-

03

Jun

-04

May

-05

Ap

r-0

6

Mar

-07

Feb

-08

Jan

-09

Dec

-09

No

v-1

0

Oct

-11

Sep

-12

Au

g-13

Jul-

14

Val

ue

of

Po

rtfo

lio

60% Equity, 40% Bond

60% Hedge, 40% Bond

40% Equity, 40% Bond, 20% Hedge

Equity = MSCI WORLD FREE - Net - Local

Bond = Barclays Capital Aggregate Bond Index

Hedge = HFRI Fund of Funds Composite Index

Adding NZAM to a Traditional 60/40 Balanced Fund – NZ Perspective.

$-

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

$3,000.00

$3,500.00

Jan

-99

Au

g-…

Mar

…

Oct

-…

May

…

Dec

-…

Jul-

02

Feb

-…

Sep

-…

Ap

r-…

No

v-…

Jun

-…

Jan

-06

Au

g-…

Mar

…

Oct

-…

May

…

Dec

-…

Jul-

09

Feb

-…

Sep

-…

Ap

r-…

No

v-…

Jun

-…

Jan

-13

Au

g-…

Mar

…

Oct

-…

Val

ue

of

Po

rtfo

lio (

NZD

)

60% Equity, 40% Bond

60% NZAM, 40% Bond

40% Equity, 40% Bond,20% NZAM

NZAM is Net of fees

Equity = MSCI WORLD FREE - Net(unhedgedto NZD)

Bond = Citi World BIG

Hedge Funds - A Superior Risk Adjusted Return

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%

Ret

urn

p.a

Maximum Decline

Maximum Drawdown/Return Plot Sep 1991-Sept 2014

NZAM Global (Net)

Cash

Global Equities (NZD)

Conclusions• Hedge funds provide critical diversification benefits to ‘balanced’

portfolios.

• They have attractive stand alone risk/return characteristics.

• They reduce overall portfolio volatility.

• The timing is right – neither bonds nor equities have much left to give.

• NZAM is ready to help.

Prepared by Aon HewittRetirement | Investment Consulting

Alternative InvestmentsDo you have the tools to fix the roof when the sun is shining?

Aon Hewitt | Retirement | Investment Consulting

April 2015 21

Agenda

Exposure to Alternatives in NZ

Why is it low?

Product Structure

Products

Performance


April 2015 22

Exposure to Alternatives

Global Pension Funds

Endowments and Charities

KiwiSaver Funds


April 2015 23

Global Pension Assets

Asset Allocation

Scheme 1995 1999 2003 2007 2014e

Cash 6% 3% 1% 2% 2%

Equities 49% 61% 51% 55% 42%

Bonds 40% 30% 36% 28% 31%

Other 5% 6% 12% 15% 25%

Source:Towers Watson


April 2015 24


The largest endowments have average allocations of:

13% US Equity, 17% Non-US Equity, 11% Fixed Interest and Cash

23% Hedge Funds, 20% PE/VC, 16% Real Assets

Endowments with over $1 billion AUM allocate 59% to alternative

investments,

the average endowment allocates just less than 30% [CFA Society, 2013]


April 2015 25


‘The predominant focus of both types of funds rests on diversification away

from traditional asset classes to alternative asset classes’.

‘The outlook over the next three years is likely to be one of diversification

from core asset classes into alternatives, with real estate, infrastructure,

private equity and hedge funds attracting the strongest interest’.

Scheme

Endowment

s Foundations

Equity 33% 39%

Fixed Income 14% 13%

Cash 2% 2%

Real Estate 5% 3%

Infrastructure & Commodities 10% 8%

Alternatives (Hedge Funds and

PE)

36% 35%

Source: DHR International 2012

DHR surveyed and reported on a total

of 118 endowments and foundations,

representing a total market value of

$420.9 billion.


April 2015 26

KiwiSaver Schemes

Allocation to Alternatives – Balanced Funds

Scheme

Benchmar

k Actual

AMP Capital 7% 4% Commodities/Infrastructure

ANZ 0% - 10% 0%

Kiwi Wealth 0% 0%

Aon Nikko 18% 19% Multi-Strategy/Options

ASB 0% 0%

BNZ 0% 0%

Fidelity/Grosven

or

0% 0%

Mercer 14.5% 12% Alternatives, Infrastructure and Natural

Resources

Fisher Funds 0% 0%

Westpac 0% - 15% 6% Westpac Alternative Investments Trust


April 2015 27

KiwiSaver Schemes

Estimated KiwiSaver Market Asset Allocation at 31/12/14

Sector Weight

Cash & NZ Bonds 33.4%

Overseas Bonds 19.5%

NZ Shares 8.2%

Australian Shares 5.0%

International Shares 27.8%

NZ Property 2.7%

International Property 1.9%

Other 1.4%

Total 100.0%

Source: Morningstar


April 2015 28

Why is exposure in NZ so low?

Performance of traditional asset classes

Consultants

Complexity

Fees

Products


April 2015 29

Performance of a typical Balanced Fund

100

120

140

160

180

200

220

240

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14

Annualised return of 14% over the last 6 years


April 2015 30

Why is exposure in NZ so low?

Consultants

Complexity

Fees

Products


April 2015 31

Product Structure

New Zealand vehicle (PIE)

New Zealand based manager

NZ$ hedged

Multi strategy

Multi manager


April 2015 32

Products

Domestic Products

Milford Active Growth Fund

Salt Long/Short Fund

Global Products

AMP Capital Global Multi-Asset Fund (PIE)

Nikko Multi-Strategy (PIE)

Nikko Option (PIE)

Mercer Liquid Alternatives (PIE)

NZAM Alpha (PIE)

Standard Life GARS (SICAV)


April 2015 33

Domestic Products

Milford Active Growth Fund

Has an Absolute Return benchmark/objective – 10% p.a.

Multi-Sector – 10% Global Fund, 20% Cash & Bonds, 70% Domestic Equity (25% Aus)

Global Fund includes one global long/short manager and 1 global macro manager

Long equity and bonds

A ‘Growth Fund’ – with high domestic equity exposure


April 2015 34

Domestic Products

Salt Long/Short Fund

Has an Absolute Return benchmark/objective – OCR + 5% p.a.

At end February it had 51 Long positions and 29 Short positions

Over the course of February, the Fund held 105 different positions. 65 of these went up and

40 fell

High volatility, low correlation

Single manager, single strategy


April 2015 35

Global Products

AMP Capital Global Multi-Asset Fund

Has an Absolute Return benchmark/objective – CPI + 5.25% p.a.

Two managers

– AMP Capital Multi-Asset Fund

– Schroder Real Return Fund

Traditional and alternatives sources of return

Diversified fund


April 2015 36

Global Products

Nikko Multi-Strategy Fund

Has an Absolute Return benchmark/objective – Cash + 2.5% p.a.

Managed by JP Morgan

– 40 underlying managers

Long redemption period

High Fees

Multi-manager, multi strategy


April 2015 37

Global Products

Nikko Option Fund

Has an Absolute Return benchmark/objective – Cash + 4% p.a.

Single strategy

– Sells options on long term government bonds

Low correlation with equity/bond markets

High volatility

NZ manager


April 2015 38

Global Products

Mercer Liquid Alternatives Fund

Has an Absolute Return benchmark/objective – Cash + 3% - 5% p.a.

Target correlation with equities


April 2015 39

Global Products

NZAM Alpha Fund


Correlation with equities = 0.06

Volatility 4% - 6%

Multi-manager (


April 2015 40

Global Products

Standard Life GARS Fund


Single-manager, multi strategy

Traditional and alternative strategies

SICAV


April 2015 41

GARS – performance attribution

Stock Selection

Security Selection -0.10%

Market Beta

Global Equity 0.52%

Global REITs 0.52%

Global Equity Oil Majors -0.09%

Chinese Equity -0.16%

Directional Strategies

Long US Dollar vs Euro 1.22%

Australian Short-term Interest Rates 1.21%

Short UK Real Yield -0.83%

Short US Duration -0.93%

Relative Value

US Equity Technology Sector vs US Equity Small Cap 0.97%

European v US and Japanese Duration 0.71%

Asian Basket vs US Variance -0.11%

Global Miners vs Swiss Equity -0.97%

GARS total 6.4%


April 2015 42

GARS – traditional v advanced sources of return


April 2015 43

Performance dispersion

The spread between first

and fourth quartile

performers has averaged

19.6%.

The spread has tended to

be higher in times of market

stress.

Over the period 1990–2012,

only 21% of first-quartile

performers in one year

remained first-quartile

performers in the next.

Conversely, 23% of bottom-

quartile performers made

the top quartile the next

year.


April 2015 44

Recap

Globally, exposure to Alternatives is increasing

Exposure to Alternatives among NZ investors is low

Lack of product is an issue…

…but so is lack of demand


April 2015 45

Contact List

Guy Fisher

Investment Consultant

Aon Hewitt

+64.4.819.4054

[email protected]

Greg Lee

Actuary & Principal

Aon Hewitt

+64.9.362.9825

[email protected]

mailto:[email protected]:[email protected]

Aon Hewitt: Alternative Investments

aon hewitt: alternative investments - philanthropy · 2018. 8. 24. · aon hewitt | retirement |...

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