PRIVATE FIXED INCOME ASSETS: CAPTURING THE LIQUIDITY PREMIUM

Transcription

1 PRIVATE FIXED INCOME ASSETS: CAPTURING THE LIQUIDITY PREMIUM EUGENE LUNDRIGAN CHIEF OPERATING OFFICER SUN LIFE INVESTMENT MANAGEMENT INC.

2 AGENDA Challenging times for pension funds Search for FI opportunities Private fixed income and commercial mortgages Pension plan liquidity Conclusions Page 2

3 CHALLENGING TIMES FOR PENSION PLANS Interest rates are low Canadian Govt Bonds 10 Year Note 1 0 Source: Bloomberg Page 3

4 CHALLENGING TIMES FOR PENSION PLANS the OECD predicts lower growth going forward Source: OECD Economic Outlook, November 2014 Page 4

5 CHALLENGING TIMES FOR PENSION PLANS and funding levels of most Canadian pension plans have been on a roller coaster ride for the last 10 years Source: Mercer news release, Funded status of Canadian pension plans dips in third quarter, October 1, 2014 Page 5

6 SAMPLE PLAN ASSETS: FIXED INCOME ALLOCATION Fixed Income Asset Mix Plans $500 million to $2 billion 40% 38% 35% 30% 25% 20% 15% 10% 5% 18% 13% 4% Universe Long RRB Global LDI Corp 0% Fixed Income 1% Source: Mercer 2013 Asset Allocation Survey, Canadian Defined Benefit Pension Plans Page 6

7 SEARCH FOR OPPORTUNITIES: HIGH YIELD 2,500 2,000 bps 1,500 1,000 U.S. HY Corporate Index OAS Source: Barclays Page 7

8 SEARCH FOR OPPORTUNITIES: GLOBAL CAD/US Exchange Rate Source: Bank of Canada Page 8

9 SEARCH FOR OPPORTUNITIES: PRIVATE ASSETS Canadian commercial mortgages Short to Medium Term First mortgage loans secured by high quality incomeproducing properties Office, retail, industrial and multi-family Located in Canadian urban markets Page 9

10 SEARCH FOR OPPORTUNITIES: PRIVATE ASSETS Private Fixed Income Project Finance Long Term Power projects - hydro, wind, co-generation, geothermal and solar Public Private Partnership (P3) - infrastructure projects such as hospitals, bridges, court houses and public transit Private Debt Medium Term Credit Tenant Leases, Mortgage bonds Corporate loans Mid-Market Finance Medium Term Companies with revenues of less than $500 million which tend to have limited access to public capital markets Private Securitization Finance Short Term Secure lease/loan obligations purchased from small and medium-sized leasing companies Page 10

11 THE OPPORTUNITY: WHY PRIVATES AND MORTGAGES? Diversification Different sectors, borrowers Strong covenants Downside protection Liquidity premium Not that illiquid; coupon payments and amortization Structuring premium Fees earned Page 11

12 PRIVATE FIXED INCOME: SAMPLE ACCOUNT PERFORMANCE Spread between corporate bonds and new annual investments in private fixed income portfolio Average spread to corporate bonds (bps) Performance for Sun Life Financial s general account private fixed income portfolio; Sources are Bank of Canada, Sun Life Financial. Spreads are dollar weighted. Past performance does not guarantee future results, which may vary. The returns presented are not of the Sun Life Private Fixed Income Plus Fund. These results are presented for illustrative purposes only and do not represent that which may be achieved by the Fund. All private bonds are managed by the private fixed Income team for Sun Life Financial s General Account. Lease transactions have been excluded since such investments are not expected to be offered as part of the investment management services and products offered to third party clients. Page 12

13 COMMERCIAL MORTGAGES: SAMPLE ACCOUNT PERFORMANCE 400 Spread between Government of Canada bonds and new annual investments in commercial mortgage portfolio Average spread to government bonds (bps) Sources: Bank of Canada, Sun Life Financial Spreads are dollar weighted. Past performance is not necessarily indicative of future returns. All mortgages managed by the commercial mortgages team for Sun Life Financial s General Account. Actual account or fund performance can be expected to differ from the general account performance shown. Page 13

14 HIGHER YIELD; LOWER RISK; LESS LIQUIDITY Return (p/a) Standard Deviation FTSE TMX Canada Universe Bond Index to FTSE TMX Canada All Corporate Bond Index FTSE TMX Canada Universe Bond Index to Private Fixed Income / Commercial Mortgage Blend Based on 10-year quarterly returns from July 1, 2004 to June 30, 2014 Source: Sun Life Assurance Company of Canada, Morningstar EnCorr, Bloomberg and Barclays Live Page 14

15 STRUCTURAL LIQUIDITY 30.0% SLIM Mortgage CF 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% SLIM Mortgage CF Source: SLIM Mortgage Fund (September ) Page 15

16 PENSION FUND LIQUIDITY Why do you need liquidity? Honour cash commitments Insurance/ rainy day Take advantage of market opportunities Page 16

17 SAMPLE PLAN LIABILITY 7.0% Sample Pension Cash Flow 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Sample Pension Cash Flow Source: Sun Life Investment Management. Sample pension plan with duration 15 liabilities (mix of pensioners and active lives). Page 17

18 SAMPLE PLAN ASSETS Fixed Income Asset Mix Plans $500 million to $2 billion 60% 50% 40% 30% 20% 10% 0% 50% 2% 8% 38% 7% 18% 48% 20% 31% 13% 12% 13% 4% 12% 1% Fixed Income Equity Alternatives Alt EM US EAFE Cdn Universe Long RRB Global LDI Corp Source: Mercer 2013 Asset Allocation Survey, Canadian Defined Benefit Pension Plans Page 18

19 CONCLUSIONS In a low-growth, low interest rate environment, you need to look for every edge Liquidity is an asset that pension plans may be overlooking as an opportunity Can earn additional yield, reduce risk by incorporating investment grade private assets in the FI asset mix Page 19

20 IMPORTANT NOTES, DISCLAIMERS AND DISCLOSURES This presentation is intended for Canadian institutional investors only. It is not for retail use or distribution to individual investors. Sun Life Investment Management Inc. is a Canadian registered portfolio manager, investment fund manager, exempt market dealer and is the manager of the Sun Life Private Fixed Income Plus Fund, the Sun Life Canadian Real Estate Fund, and the Sun Life Canadian Commercial Mortgage Fund. The information and content contained in this presentation relating to investment management solutions and services available through Sun Life Investment Management Inc. and/or its affiliates is provided for general information and reference purposes only. It should not be construed as, nor replace, professional investment advice. Products and services offered by Sun Life Investment Management Inc. are intended to be offered on a private placement basis only, through applicable exemptions from prospectus and registration requirements under applicable securities laws only to those persons where and to whom such products may be lawfully sold/provided and only by persons lawfully permitted to sell such securities products and services. Information shown is at December 31, 2013 unless otherwise noted. Page 20

21 IMPORTANT NOTES, DISCLAIMERS AND DISCLOSURES All performance data shown represent past returns and are not necessarily indicative of future returns. Performance data provided herein is the quarterly performance data, based on market values, from July 1, 2004 to June 30, 2014 for certain Sun Life Assurance Company of Canada general account segments, as follows: For private fixed income bonds: All private bonds managed by the Canadian Private Fixed Income team for Sun Life Financial s general account denominated in CAD, with a net book or market value of at least $5,000 and a term to maturity of at least one year. Lease transactions have been excluded. For commercial mortgages: All mortgages managed by the Canadian Commercial Mortgages team for Sun Life Financial s general account denominated in CAD, with a net book or market value of at least $5,000 and a term to maturity of at least one year. Index data was sourced from Morningstar EnCorr, Bloomberg and Barclays Live. Actual account or fund performance can be expected to differ from the general account performance shown. 2014, Sun Life Investment Management Inc. Page 21