reimagining investment success - county of fresno material/nagdca/2016... · spm is the threshold...
TRANSCRIPT
9/2/2016
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REIMAGINING INVESTMENT SUCCESS
September 19, 2016
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TOPICS & PANEL
MODERATORROD CRANE MANAGING DIRECTOR, GOVERNMENT & RELIGIOUS MARKETSTIAA/FINANCIAL SERVICES
EMERGING TRENDS IN THE ECONOMY JAMIE KALAMARIDESHEAD OF FULL SERVICE SOLUTIONS, PRUDENTIAL RETIREMENT, CEO PRUDENTIAL BANK & TRUST
THE EVOLVING INVESTMENT UNIVERSE MICHAEL T. BUCKIUSGATEWAY INVESTMENT ADVISERS, LLC
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DO WE NEED A NEW INVESTMENT PLAYBOOK?
• Every Historical Moment is Unique – But Some are More Unique Than Others
• Participants Rely on Us to Help Call the Plays – But “Unusual” Conditions Makes This More Challenging
• The Old Playbook is Suspect – So it’s Time to Start Thinking Creatively
Seven New Economy Trends Critical to Reimagining Investment Success
Jamie Kalamarides
Head of Full Service Solutions, Prudential Retirement
CEO, Prudential Bank & Trust, F.S.B.
Twitter: @Kalamarides
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Seven New Economy Trends
1. Widespread Liquid Asset Poverty
SOURCE: http://scorecard.cfed.org 2011 data
Liquid Asset Poverty is a measure of the liquid savings households hold to cover basic expenses for three months if they experienced a sudden job loss, a medical emergency or another financial crisis leading to a loss of stable income
Liquid Asset Poverty Rate
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Seven New Economy Trends
1. Widespread Liquid Asset Poverty
2. Rising Income Volatility
SOURCE: http://www.USfinancialdiaries.org 2014 data
Coefficient of Variation (CV) equals the standard deviation of monthly income for a household, divided by that household’s average monthly income.SPM is the threshold of the supplemental poverty measure.
Twice the volatility with half the income
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Seven New Economy Trends
1. Widespread Liquid Asset Poverty
2. Rising Income Volatility
3. Growing Racial Wealth Gap
SOURCE: http://cfed.org 2016
$58 $85 $107 $67 $98
$165
$355
$656
$1,200
1983 2013 2043
Average Household Wealth ($000)
Black Latino White
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Seven New Economy Trends
1. Widespread Liquid Asset Poverty
2. Rising Income Volatility
3. Growing Racial Wealth Gap
4. Expanding 1099 Economy
SOURCE: The 1099 Economy – Elusive but Diverse and Growing, Bay Area Council Economic Institute, Sept 2015. 8
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Seven New Economy Trends
1. Widespread Liquid Asset Poverty
2. Rising Income Volatility
3. Growing Racial Wealth Gap
4. Expanding 1099 Economy
5. Growing Use of Education Debt 26.00%
33.61%
41.43%
11.90%14.71%
28.65%
5.19%
10.58% 12.00%
0%
10%
20%
30%
40%
50%
2001 2004 2007 2010 2013
Percent of Families with Education Debt by Age of Household Head
Less than 35 35–44 45–54 55–64 65–74
SOURCE: 2013 Survey of Consumer Finances, www.FederalReserve.gov9
Seven New Economy Trends
1. Widespread Liquid Asset Poverty
2. Rising Income Volatility
3. Growing Racial Wealth Gap
4. Expanding 1099 Economy
5. Growing Use of Education Debt
6. Delayed Household Formation
SOURCE: Fred Furlong, “Household Formation Among Young Adults” FRBSF Economic Letter, May 23, 2016.
Household Formation Among Young Adults
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Seven New Economy Trends
1. Widespread Liquid Asset Poverty
2. Rising Income Volatility
3. Growing Racial Wealth Gap
4. Expanding 1099 Economy
5. Growing Use of Education Debt
6. Delayed Household Formation
7. Increasing Longevity
SOURCE: Jennifer Ortman, US Census Bureau, Presentation, February 7, 201311
Seven New Economy Trends
1. Widespread Liquid Asset Poverty
2. Rising Income Volatility
3. Growing Racial Wealth Gap
4. Expanding 1099 Economy
5. Growing Use of Education Debt
6. Delayed Household Formation
7. Increasing Longevity
SOURCE: Jennifer Ortman, US Census Bureau, Presentation, February 7, 201312
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Seven New Economy Trends
1. Widespread Liquid Asset Poverty
2. Rising Income Volatility
3. Growing Racial Wealth Gap
4. Expanding 1099 Economy
5. Growing Use of Education Debt
6. Delayed Household Formation
7. Increasing Longevity
SOURCE: Jennifer Ortman, US Census Bureau, Presentation, February 7, 201313
Seven New Economy Trends
1. Widespread Liquid Asset Poverty
2. Rising Income Volatility
3. Growing Racial Wealth Gap
4. Expanding 1099 Economy
5. Growing Use of Education Debt
6. Delayed Household Formation
7. Increasing Longevity
SOURCE: Jennifer Ortman, US Census Bureau, Presentation, February 7, 201314
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The Evolving Investment UniverseMichael T. Buckius
Chief Investment Officer
Gateway Investment Advisers, LLC
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1984to2014: The Golden Era for investment returns Equity and bond returns were far above the long-term averages in the United States and Western
Europe from 1985 to 2014.
Datasource: McKinsey & Co Please see footnote page for more information
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Bull market comparison
The average post-WWII bull market lasted 5.8 years; the current bull market (started in 2009) is the third longest in history
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1970 1962 1942 1957 1982 2002 1974 2009 1949 1987
TotalS&
P500®IndexR
eturn(%)
DurationinDays
YearBullMarketStarted
LongestBullMarkets(Since1942)asof3/31/16
Duration(Days) TotalReturn(%)
2.5
3.64.1 4.2
5.0 5.06.2 7.1
8.1
12.4
Duration in Years
Datasource: Bloomberg, L.P.
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Bond returns and Treasury yields
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%
U.S.10‐YearTreasuryYieldsvs.BarclaysU.S.AggregateBondIndexReturnsJanuary1,1990– March31,2016
U.S.10‐YearTreasuryYield BarclaysU.S.AggregateBondIndexRolling3‐YearReturn
Over time, investment grade bond returns have declined as Treasury yields have dropped
Datasource: Morningstar DirectSM
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*VIX® chartisbasedonpublishedVIXdatawhichbeganonJanuary1,1990.**Asof3/31/16Datasource:ChicagoBoardOptionsExchange® (CBOE)andBloomberg,L.P.Pastperformanceisnoguaranteeoffutureresults.
A history of market index volatility
January1,1990*– March31,2016
CBOEVolatilityIndex(VIX®)
Volatility RegimeHigh Low High Low High Low High
1990‐1991 1992‐ 1996 1997‐2003 2004‐ 2006 2007‐6/2012 7/2012‐ 7/2015 8/2015– Present**
High 36.47 23.87 45.74 23.81 80.86 26.25 40.74Average 20.72 14.18 24.38 13.70 25.11 14.72 19.52
Low 13.95 9.31 15.58 9.90 9.89 10.32 12.23
Indicates LowVolatilityRegime
VIX® average:19.83
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VIXMonthlyClose
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Re-imagining investment success
Yesterday’s decisions… Today’s implications
Sell risky assets, increase bond allocation
If interest rates rise, increased bond exposure will likelynot reduce risk/loss
Sell risky assets, move to cash Cash & equivalents will likely lose value in ‘real’ terms if not in nominal terms
Move ‘up in quality’ (i.e., higher credit ratings)
Higher quality bond portfolios are more interest rate sensitive
Seek lower/negative correlations In a flight to quality, correlations among ‘risky assets’ tend to rise Asset allocation (stocks/bonds/cash mix) will remain a key driver of portfolio risk, however…
Bonds and cash are not likely to be as effective going forward
Investors may be pushed into portfolios that are too aggressive
Lower returns on stocks and bonds = find new sources of return/risk management
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Re-imagining investment success Equity returns are likely to be sub-par
– Secular stagnation: Earnings growth will be modest
– Equity valuations are elevated and no longer cheap
– Equity rally is long in the tooth by historical standards
Low yields project low bond returns – with increased interest rate risk
Cash yields are below inflation rates implying negative real returns
Central bank accommodation will eventually dissipate, leading to higher volatility
ETFs & Derivatives: Market beta is cheap and easily accessible – increased episodic volatility
– Higher correlations during risk-off markets
New Sources of Return
Traditional, long-only stocks and bonds will not provide the same tailwind to participant portfolios
New Sources of Risk Management
High quality bonds and cash will be a less effective way to manage portfolio volatility
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Source: MIT/Natixis project. Based on findings from the Natixis 2016 Global Survey of Individual Investors conducted by CoreData Research, February–March 2016, which included 7,100 investors in 22 countries, and the 2015 Global Survey of Institutional Investors conducted by CoreData Research, October 2015, which included 660 institutional investors in 29 countries.
71% of institutions increase equity
allocation
17% of individualsVS41% of individuals decrease equity
allocation
20% of institutionsVS
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The advantages of behaving like an institutional investor
When volatility hits, institutions find opportunity
When asked if they would change their asset allocation if the S&P 500® declined between -10% and -20% during the next six months, individual investors react very differently from institutional investors
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Will I have enough to retire?
26% MygovernmentpensionorSocialSecuritywon’tbeenough
29% Insufficientinvestmentreturns
35% Notsavingenough
42% Inflation
57% Healthcarecostsnotcoveredbyinsurance
59% Long‐termcarecostsnotcoveredbyinsurance
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Natixis Global Asset Management Global Individual Investor Survey conducted by CoreData Research (February 2015). Of the 7,000 total respondents, 750 are from the U.S.
Threats to retirement security in the U.S.
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80%ofinvestorsgloballyexpectthisyeartobebetterthanoratleast
asgoodaslastyear.
27%ofinvestorsgloballysaytheyareconcernedaboutanassetbubble.
Investors appear to be more optimistic
Natixis Global Asset Management Global Individual Investor Survey conducted by CoreData Research (February 2015).Survey included 7,000 investors with 200K+ in assets (USD).
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Individual investor expectations
High return expectations
On average, individual investors believe they need a real annual return of 9.5% above inflation to achieve their investment goals
64% believe their return expectations are realistic
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Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February‐March 2016. Survey included 7,100 investors from 22 countries.
Discussion and Questions
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Reimagining Investment Success
• Widespread Liquid Asset Poverty
• Rising Income Volatility
• Growing Racial Wealth Gap
• Expanding 1099 Economy
• Growing Use of Education Debt
• Delayed Household Formation
• Increasing Longevity
1. Expand Access to Workplace Savings
2. Create a “Soon” Savings Vehicle
3. Assist with Financial Wellness Tradeoffs
4. Expand Use of Auto‐Enroll & Escalation
5. Offer Packaged Institutional Investments that
• Consider longer investment horizons • Use a core of passive funds• Supplement with active funds• Diversify with liquid alternatives• Address sequence of returns risk• Offer lifetime income solutions
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New problems require new solutions
Problems Solutions
High volatility Low-volatility equity
Low rates Flexible fixed-income
Unstable correlations Volatility targeted alternatives
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BIG QUESTIONS BEFORE US
Is it Time for an Expectations Reset?
Do Old Asset Allocation Rules Still
Apply?
Where Will Reliable Income be Found?
Switzerland
USA
Hong Kong
United Arab Emirates
Norway
Kuwait
Brunei Darussalam
Singapore
Luzembourg
Quatar
Per Capita Wealth ‐ 2015
Source: Gallup Poll 2014: Highest/Lowest Percentages of People Experiencing Positive Emotions Daily Source: Global Finance, “The World’s Richest & Poorest Countries,” 2015
Discussion and Questions
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Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT or its affiliates. PRIAC is a Prudential Financial Company.
This presentation is not intended to provide information about the products and the related services that may be offered by Prudential Retirement.
© 2016 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc., and its related entities, registered in many jurisdictions worldwide.
0295905-00001-00
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Footnotes
Page 161. European returns are weighted average real returns based on each year's Geary‐Khamis purchasing power parity GDP for 14 countries in Western Europe: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Austria, Germany, and Italy are excluded from 100‐year calculations and from exhibit. Each country’s consumer price index is used to calculate its real returns.2. For Europe, duration varies by country, but the Dimson‐Marsh‐Staunton database targets bonds having a 20‐year duration.3. Time frame between 1914 and 1927 calculated using Dimson‐Marsh‐Staunton data. Bond duration for 1928 and later is ten years.
SOURCE: Dimson‐Marsh‐Staunton Global Returns database; Damodaran database, Stern School of Business, New York University; Jutta Bolt and Jan Luiten van Zanden, The first update of the Maddison Project: Re‐estimating growth before 1820, Maddison Project working paper number 4, University of Groningen, January 2013; Conference Board; McKinsey Global Institute analysis