Speakers:
Jeff Geller, CIO Multi-Asset Solutions, J.P. Morgan Asset
Management
Alison MacArtney, Client Portfolio Manager, J.P. Morgan Asset
Management
Managing Liability Driven Investments within a Multi-Asset Framework
Optimal asset mix will evolve over time in response to changes in risks and plan circumstances
Managing defined benefit plans through
their lifecycle is a dynamic process
Required Return
Funded Status
Volatility
Contribution Tolerance
Downside Risk
Shown for illustrative purposes only.
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Optimal asset mix will evolve over time in response to changes in risks and plan circumstances
TRADITIONAL LDI
Traditional LDI has focused on hedging
duration risk
Required Return
Funded Status
Volatility
Contribution Tolerance
Downside Risk
Fixed Income Portfolios Structured Derivatives
HedgingPrescriptive, Rules-based
de-risking
Shown for illustrative purposes only.
3
Optimal asset mix will evolve over time in response to changes in risks and plan circumstances
LIABILITY AWARE INVESTING
TRADITIONAL LDI
Lower risk doesn’t have to mean lower
returns
Required Return
Funded Status
Volatility
Contribution Tolerance
Downside Risk
ALTERNATIVE APPROACHES TO PENSION PORTFOLIO MANAGEMENT
Fixed Income Portfolios Structured Derivatives
HedgingPrescriptive, Rules-based
de-risking
Dynamic De-RiskingTotal Return vs. Pension
Liability
Shown for illustrative purposes only.
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Reaching a funding surplus depends
on a number of factors
Source: J.P. Morgan Asset Management and representative plan cash flows. All liability estimates calculated using 12/31/2015 PPA Full Curve. FOR
ILLUSTRATIVE AND DISCUSSION PURPOSES ONLY. The manager seeks to meet the stated objectives. There can be no assurance this will be met.
Typical Plan Asset Growth Factors
Sponsor Inputs: Starting Funded Ratio: 85.0%
Contribution Policy: assumed no contributions
Goal Funded Ratio: 110.0%
Liability Characteristics: Service Cost: 1.50% (approximate for closed plan)
Benefit Payment Structure and Liability Duration
Market Factors: Interest Cost: 4.35% using 12/31 PPA Full Curve
Duration Impacts due to Change in Interest Rates: assumed static
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Required returns are the anchor of
strategy design
Source: J.P. Morgan Asset Management and representative plan cash flows. All liability estimates calculated using 12/31/2015 PPA Full Curve. FOR
ILLUSTRATIVE AND DISCUSSION PURPOSES ONLY. The manager seeks to meet the stated objectives. There can be no assurance this will be met.
Required Growth to Reach 110% Funding
5.69%
8.82%
5.20%
7.58%
Liability Growth (annualized) Total Required Asset Growth
10 Years 15 Years
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…But achieving them has become more
difficult
J.P. Morgan Asset Management. For illustrative purposes only. Expected returns are based on J.P. Morgan’s Long-term Capital Market Assumptions (LTCMA).
7.33%
7.10%
7.31%7.41%
7.62%
7.89%
6.97%
6.67% 6.63%
6.24%
6.77%
5.84%
6.45%
5.55%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Expected Compound Return of 60% World Equity + 40% Long Gov’t Credit
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Many plan sponsors are still focused on
asset volatilityEfficient Frontier – Asset Volatility
J.P. Morgan Asset Management. For illustrative purposes only. Expected risk and returns are based on J.P. Morgan’s 2017 Long-term Capital Market Assumptions
(LTCMA). Efficient frontiers based on portfolio combinations of Developed World Equity and US Aggregate Bonds.
US Cash
AC World Equity
Developed World Equity
US Large Cap
US Small Cap
Emerging Markets Equity
Diversified Hedge Funds
Commodities
US Long Duration Government/Credit
US Aggregate Bonds
US High Yield
EMD
US Direct Real Estate
Private Equity
2017 Asset Volatility Frontier
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 24.0%
Exp
ecte
d C
om
po
un
d R
etu
rn
Expected Volatility
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…But surplus volatility is more relevantEfficient Frontiers – Surplus vs. Asset Volatility
US Cash
AC World Equity
Developed World Equity
US Large Cap
US Small Cap
Emerging Markets Equity
Diversified Hedge Funds
Commodities
US Long Duration Government/Credit
US Aggregate Bonds
US High Yield
EMD US Direct Real Estate
Private Equity
2017 Asset Volatility Frontier2017 Surplus Volatility Frontier
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 24.0%
Exp
ecte
d C
om
po
un
d R
etu
rn
Expected Volatility
J.P. Morgan Asset Management. For illustrative purposes only. Expected risk and returns are based on J.P. Morgan’s 2017 Long-term Capital Market Assumptions
(LTCMA). Efficient frontiers based on portfolio combinations of Developed World Equity and US Long Government/Credit Bonds and Long Corporate Bonds to proxy
liabilities. Surplus volatility is shown as a percentage of assets and assumes 85% funded ratio.
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Balancing risk and return
Asset Allocation
Active Risk
Leverage
Illiquidity Premiums
Opportunistic
investing
Drivers of Returns
Duration mismatch to liability
Level of equity risk
Drivers of Surplus Risk
The manager seeks to achieve the stated objectives. There is no guarantee they can be met.
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60.00% 70.00% 80.00% 90.00% 100.00% 110.00% 120.00%
Building portfolios with better expected
outcomesNormal Distributions of Funded Status Outcomes: 5 Year
Source: J.P. Morgan Asset Management. Normal distributions approximated with expected portfolio and liability returns and calculated surplus volatility as percentage of liability.
All data as of December 31, 2015. FOR ILLUSTRATIVE AND DISCUSSION PURPOSES ONLY. Average Pension based on Russell 3000 filings as of December 31, 2015.
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60.00% 70.00% 80.00% 90.00% 100.00% 110.00% 120.00%
Higher expected returns lead to a better
base caseNormal Distributions of Funded Status Outcomes: 5 Year
Source: J.P. Morgan Asset Management. Normal distributions approximated with expected portfolio and liability returns and calculated surplus volatility as percentage of liability.
All data as of December 31, 2015. FOR ILLUSTRATIVE AND DISCUSSION PURPOSES ONLY. Average Pension based on Russell 3000 filings as of December 31, 2015.
Better Base Case
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60.00% 70.00% 80.00% 90.00% 100.00% 110.00% 120.00%
And much lower left tail riskNormal Distributions of Funded Status Outcomes: 5 Year
Reduced Downside Tail Risk
Source: J.P. Morgan Asset Management. Normal distributions approximated with expected portfolio and liability returns and calculated surplus volatility as percentage of liability.
All data as of December 31, 2015. FOR ILLUSTRATIVE AND DISCUSSION PURPOSES ONLY. Average Pension based on Russell 3000 filings as of December 31, 2015.
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Leverage is a useful tool for managing
surplus volatilityEfficient Frontiers – Surplus volatility with and without leverage
J.P. Morgan Asset Management. For illustrative purposes only. Expected risk and returns are based on J.P. Morgan’s 2017 Long-term Capital Market Assumptions
(LTCMA). Efficient frontiers based on portfolio combinations of Developed World Equity and US Long Government/Credit Bonds and Long Corporate Bonds to proxy
liabilities. Surplus volatility is shown as a percentage of assets and assumes 85% funded ratio. Leveraged frontier adds US Long Treasury futures to approximate 70%
hedge ratio given underlying frontier weights.
US Cash
AC World Equity
Developed World Equity
US Large Cap
US Small Cap
Emerging Markets Equity
Diversified Hedge Funds
Commodities
US Long Duration Government/Credit US Aggregate Bonds
US High YieldEMD
US Direct Real Estate
Private Equity
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0%
Exp
ecte
d R
etu
rn
Expected Surplus Volatility
Constant hedge ratio with leverage
60/40 portfolio with leverage has 2.75% less surplus volatility
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Optimal asset mix will evolve over time in response to changes in risks and plan circumstances
LIABILITY AWARE INVESTING
TRADITIONAL LDI
Lower risk doesn’t have to mean lower
returns
Required Return
Funded Status
Volatility
Contribution Tolerance
Downside Risk
ALTERNATIVE APPROACHES TO PENSION PORTFOLIO MANAGEMENT
Fixed Income Portfolios Structured Derivatives
HedgingPrescriptive, Rules-based
de-risking
Dynamic De-RiskingTotal Return vs. Pension
Liability
Shown for illustrative purposes only.
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Important disclosures
J.P. Morgan Asset Management Long Term Capital Market Assumptions: Given the complex risk-reward trade-offs involved, we
advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note
that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not
intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that
these asset class and strategy assumptions are passive only—they do not consider the impact of active management.
References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions,
opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or
sell securities.
NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional/wholesale/professional
clients and qualified investors only as defined by local laws and regulations.
Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on
certain assumptions and current market conditions and are subject to change without prior notice. All information presented
herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any
error or omission is accepted. This material does not contain sufficient information to support an investment decision and it
should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should
make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with
their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors
should ensure that they obtain all available relevant information before making any investment. It should be noted that
investment involves risks, the value of investments and the income from them may fluctuate in accordance with market
conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield
may not be a reliable guide to future performance.
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