addressing risk tolerance: choosing a target date … green, franklin templeton... · addressing...

Addressing risk tolerance: Choosing a target date solution for Canadians

Duane GreenSenior Vice President,Franklin Templeton Institutional

2Franklin Templeton Institutional

Agenda

Examining Canadian investors’ risk tolerance• Asset allocation• Household savings rates• Household debt

Addressing risk tolerance in target date solutions• Diversification• Glide path• Portfolio construction

• Target risk and target date• Single style vs. multi-style• Strategic and tactical asset allocation


“Risk? Canadians have no problem with risk, so long as they don’t lose any money.”


Bond31%

Equity 55%

Cash 11%

Other 3%

Bond 36%

Equity 50%

Cash 10%

Other 4%

U.S. based neutral balanced fund average allocations

Canadian based neutral balanced fund average allocations

Canada: 8.44%U.S.: 10.70%

3 year standard deviationCanada: 0.10%U.S.: 1.66%

Average % in credit rating below B

Source: Morningstar Research Inc. as of December 31st, 2008

Examining Canadian investors’ risk tolerance

Values are presented in local currency


Average neutral balanced fund - U.S. vs. Canadian

Canadian

U.S.

-5.00

0.00

5.00

-15.00 -10.00 -5.00 0.00 5.00 10.00 15.00

5yr annualized return

5yr s

tand

ard

devi

atio

n

Risk - Return

The average U.S. balanced fund assumes more risk

Source: Morningstar Research Inc. as of December 31st, 2008


Values are presented in local currency


Total net assets by type of fund – a look at Canada and the U.S.

Equity45%

Bond8%

Money Market36%

Balanced / Mixed10%

Other1%

Equity50%

Bond15%

Money Market6%

Balanced / Mixed29%

Source: Investment Company Institute, Supplementary tables – table S4 as of October 30th, 2008

Canada U.S.



Total net assets by type of fund – a look at Europe and Asia/Pacific

Equity36%

Bond22%

Money Market16%

Balanced / Mixed21%

Other5%

Equity51%

Bond10%

Money Market5%

Balanced / Mixed15%

Other19%

Source: Investment Company Institute, Supplementary tables – table S4as of October 30th, 2008


Europe Asia/Pacific


$282.60$324.60

$366.50$353.10$337.00$368.90

$432.20

$509.50

$601.30$644.00

$480.60

0

100

200

300

400

500

600

700

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$34.80

$10.00

$24.90

$11.30

$7.50

$3.70

$19.40

$26.40

$21.20

$29.90

-$11.70

-20

-10

0

10

20

30

40

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Net assets (in billions) Net sales (in billions)

Canadians are moving out of equity funds…Examining Canadian investors’ risk tolerance

Source: IFIC, as of November 2008

-25.37%

-139.13%


$35.30

$45.10$42.80

$61.80 $60.50

$54.70$50.20

$46.70 $45.40

$52.20

$71.40

0

10

20

30

40

50

60

70

80

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$0.70

$8.80

-$3.90

$16.80

-$2.50

-$6.50-$5.30

-$4.10-$2.40

$5.30

$15.90

-10

-5

0

5

10

15

20

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

…and are moving into money market funds

Source: IFIC, as of November 2008


+36.78%+200.00%

Net assets (in billions) Net sales (in billions)


0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005

Canada

U.S.

Household savings rates – Canada and the U.S.

Canadians tend to save more…

Source: OECD Factbook 2008: Economic, Environmental and Social Statistics



Household debt – Canada and the U.S.

Over the last 25 years:Canada: per-capita debt has risen 5.2 times ($5,470 in 1980 to $28,390 in 2005)United States: per-capita debt has risen 7.5 times ($6,510 in 1980 to $48,700 in 2005)

$0.00

$10,000.00

$20,000.00

$30,000.00

$40,000.00

$50,000.00

$60,000.00

1980 2005

CanadaU.S.

Source: Chawla, Raj K. Perspectives on labour and Income, Personal debt. January 2007 Statistics Canada



Target date fund managers need to create solutions that provide investors with portfolio choices that meet their level of risk tolerance

Evidence suggests that Canadian investors are more risk averse:

• Canadian balanced funds assume less risk and equity than American balanced funds

• Canadians invest in a high percentage of money market funds• Canadians are moving out of equity funds and are moving in to

money market funds• Canadians save more than Americans• Canadians have less personal debt than Americans



Fixed Income

Domestic Market,U.S., Euro, Global,

High Yield,Emerging Markets

Duration management

Term structure positioning

Sector/security selectionTrading

Equities Currencies Alternatives

Domestic Market,North America,Europe, Japan,

Global,Emerging Markets

GrowthGARPValue

Deep Value

Domestic Market,

U.S. Dollar,Euro, Sterling,

Yen

HedgedNon-hedged

Private Equity,Hedge Funds,Real Estate,

Commodities

Relative ValueArbitrage

Long/Short

Micro CapSmall CapMid Cap

Large Cap

Asset Class

Investment Structure

Strategies

Addressing risk tolerance in target date solutionsDiversification


Addressing risk tolerance in target date solutions

1989-2008: ANNUAL RETURNS OF KEY INDICES (CDN$)

Based on Morningstar Research Inc., as of December 31, 2008

Diversification


Based on Morningstar Research Inc. & Bloomberg as of December 31, 2008

Diversification

1989-2008: 3–YEAR STANDARD DEVIATION OF KEY INDICES:



Addressing risk tolerance in target date solutionsDiversification

Diversification provides the best returns from the least amount of risk and the ultimate diversification

comprises all assets in the world

Therefore, solution providers require adequate tools, experience, and

expertise locally and globally


Source: Ibbotson Associates Research Report, Lifetime Asset Allocations: Methodologies for Target Maturity Funds, 2007

Year

Perc

enta

ge o

f equ

ityGlide path - different glide path methodologies and the many assumptions that underpin them lead to many different glide paths



2020

2030

2040

Target dateTarget risk

Conservative

Moderate

Aggressive

An ideal solution

Portfolio construction - target risk and target dateAddressing risk tolerance in target date solutions


Source: Mercer Investment Consulting, as of December 31, 2008

Portfolio construction - style selection

Monthly rolling one year differential of the MSCI World Index:growth vs. value

-60

-40

-20

0

20

40

Dec-198

6

Dec-198

7

Dec-198

8

Dec-198

9

Dec-199

0

Dec-199

1

Dec-199

2

Dec-199

3

Dec-199

4

Dec-199

5

Dec-199

6

Dec-199

7

Dec-199

8

Dec-199

9

Dec-200

0

Dec-200

1

Dec-200

2

Dec-200

3

Dec-200

4

Dec-200

5

Dec-200

6

Dec-200

7

Dec-200

8

Twel

ve m

onth

retu

rn (%

)

Differential (Growth - Value)

Growth wins

Value wins



Source: Franklin Templeton Investments, as of December 31, 2008

Timing and length of style out-performance is difficult to predict

1.31%-24.77%-26.07%2008

41.47%

12.52%

17.01%

14.90%

-16.31%

14.52%

6.63%

36.49%

13.60%

18.10%

15.43%

21.29%

24.51%

10.87%

4.06%

-9.17%

-20.38%

13.70%

10.58%

7.54%

25.46%

-11.72%

MSCI World - VALUE

39.80%

8.71%

11.00%

12.62%

-15.99%

22.76%

3.47%

19.83%

10.26%

17.95%

13.68%

21.43%

43.61%

25.67%

-22.94%

-14.09%

-20.44%

5.13%

3.11%

6.99%

15.04%

-2.36%

MSCI World - GROWTH

1.66%

3.81%

6.01%

2.28%

0.32%

8.24%

3.16%

16.66%

3.34%

0.15%

1.75%

0.15%

19.10%

14.81%

27.00%

4.92%

0.05%

8.57%

7.47%

0.55%

10.42%

9.36%

Absolute Gap

1989

1988

1987

1991

1990

2006

2005

2004

2003

2002

2001

2000

2007

1999

1998

1997

1996

1992

1995

1986

1993

1994

57.38%

51.74%

42.08%

7.29%

24.01%

9.36%

1.31%

Portfolio construction - style selectionAddressing risk tolerance in target date solutions


Based on Morningstar Research Inc. and Zephyr, as of December 31, 2008

Portfolio construction - style selection

1989-2008: ANNUAL RETURNS OF KEY EQUITY STYLE INDICES (CDN$)



Tacticalasset allocation

Strategicasset allocation

Portfolio construction - asset allocation (tactical and strategic)

Asset class assumptions are developed and

strategic models are selected which offer the highest return given levels of risk

Global economic and financial indicators are reviewed and

asset mix recommendations are implemented within guidelines



S&P/TSX TR vs. Canadian Equity Category Net Sales

5000

5500

6000

6500

7000

7500

8000

8500

9000

Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03(500,000)

(300,000)

(100,000)

100,000

300,000

500,000

700,000

900,000

1,100,000

S&P/TSX TR Index Canadian Equity Category Net Sales

Investors were selling as recovery resumed...

Market Bottom

Net Flows

* Source: Bloomberg and IFIC

Portfolio construction - asset allocation (tactical and strategic)Addressing risk tolerance in target date solutions


0

10%

20%

30%

40%

50%

60%

70%

80%

90%

Tactical asset allocation

Strategic asset allocation

2010 2015 2020 2025 2030 2035 2040

The above example is hypothetical and is intended for illustrative purposes only

Portfolio construction - asset allocation (tactical and strategic)Addressing risk tolerance in target date solutions


Portfolio diversification:• How are target date portfolios diversified?• Do solution providers offering target date portfolios have adequate resources to effectively

diversify?

Glide path:• Does the glide path represent a plan member’s risk profile and target retirement date?

Portfolio construction:• Are determinants other than age taken into consideration when designing target date

portfolios?• How are portfolios constructed in terms of style?• How do they address changes in the market?

Does your target date solution meet the needs of Canadian investors?

Addressing risk tolerance in target date solutionsSummary – thoughts and questions


Tactical management

Target risk

Benefit from the best of both worlds while adding

a tactical management component*

Targetdate

An ideal

solution

*For more information please visit www.smartlifecycle.ca

An ideal target date solution

For more information please visit:

www.franklintempletoninstitutional.cawww.smartlifecycle.ca

Franklin Templeton Institutional200 King Street West, Suite 1400, Toronto, ON M5T 3T4Tel: 416.957.6000 Toll-free: 1.800.897.7286 Fax: 416.364.1320Calgary 403.266.7866 Toll-free: 1.800.267.3862

addressing risk tolerance: choosing a target date … green, franklin templeton... · addressing...

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