Managing Risk in Investment Strategy and Presenting Risk to Members. Alistair Barker

Transcription

1 Managing Risk in Investment Strategy and Presenting Risk to Members Alistair Barker Alistair Barker, AustralianSuper This presentation has been prepared for the Actuaries Institute 2014 Financial Services Forum. The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute and the Council is not responsible for those opinions.

2 Super..Risky? Are we putting in place risk management practices that are in members best interest?

3 Three areas of interest 1. Integrating risk & investment strategy 2. Disclosing investment risk to members 3. Implications for product design

4 Issue #1: How to measure risk and integrate risk with investment strategy? Surprisingly few direct precedents Need to tailor approach Fit for purpose Consider investment beliefs and how markets behave Use data and models correctly

5 Many investors remain anchored to short-term risk timeframes If a 60% equity/40% bond portfolio returns below average, are equities the cause? Equity returns below average Equity returns above average 92.3% 85.1% 81.7% 70.1% 58.6% 7.7% 14.9% 18.3% 29.9% 41.4% 1 Year Timeframe 3 Year Timeframe 5 Year Timeframe 10 Year Timeframe 30 Year Timeframe Source: Schiller, Bloomberg, US Equities and Bonds ( )

6 Index value Market crashes focus on losses from a peak What about before and after? Cumulative market returns through downturns >10% Years Before/After Major Market Downturn Source: Schiller, US Equities ( ) Average

7 Investment philosophy and risk interact. This leads to choices Static Asset Allocation Dynamic Asset Allocation Live with short-term risk De-risk assets to reduce short-term risk Ignore short term risk, focus long-term Adjust to market cycles/sentiment to manage short-term risk Adjust to economic/valuation cycles to manage longer-term risk Each choice requires varying degrees of skill, risk & cost

8 Managing risk short-term risk in a market downturn Returns to Risk during Turbulent and Nonturbulent Periods Source: Kritzman and Li, 2010, Skulls, Financial Turbulence, and Risk Management

9 Managing risk longer-term risk through a market downturn Source: Schroders, Global Financial Data

10 Use of models and data requires planning and research Model choice depends on assets, objectives and risk attribution needs Data is a major challenge Time horizon and frequency Level of detail Stability of relationships between assets Unlisted and non-traded assets

11 Issue #2: Disclosing risk to members Long-term returns matter unless members can contribute significantly more CPI+4% Return, 9.25% Contribution Real Retirement Income p.a. CPI+2% Return, 9.25% Contribution CPI+2% Return, 18.5% Contribution $42,100 $32,300 $41,700 Source: Contributions from age 25, salary $50,000 p.a. real. Retirement income to age 90, incl. Age Pension.

12 On average, switching between investment options has been very costly Accumulation of $50,000 over the last 14 years $133,070 $50,000 $111,984 $88,779 $104,412 $93,169 Balanced then cash after 2008 Balanced Cash Source: AustralianSuper Investment Option Returns

13 Disclosure should balance timeframes Source: AustralianSuper Investment Choice Guide

14 Issue #3: Implications for Product Design Member balances change over time with contributions and withdrawals Time-weighted returns less relevant Lifecycle investing is very intuitive, but does it work? Sequencing risk is real, but is often misunderstood

15 Lifecycle investing is very intuitive, but does it work? Source: Schroders, Global Financial Data

16 Accumulated Value vs CPI_+4% (cpi+4% =1) In accumulation, sequencing is more about missing out on very positive runs in equities Accumulated Portfolio after 30 years 100% Equities CPI+4% Year Period Commencing Source: Schiller, AustralianSuper, $50,000 starting balance with $5,000 contributions p.a.

17 But in/near retirement, sequencing is driven the start (and size of) withdrawals Risk of missing CPI+4% over 30 years 100% Equities Percentage of Sample which does not exceed CPI+4% 35% 30% 25% 20% 15% 10% 5% 0% 0% 1% 2% 3% 4% 5% 6% Withdrawal Rate (% of Starting Balance, increased with CPI each year) Withdrawals from year 10 to year 30 Withdrawals from year 1 to year 30 Source: Schiller, AustralianSuper

18 Are we putting in place risk management practices that are in members best interest? Clarity about what risks to measure Consider investment principles and markets Understand the models Guide members to appropriate choices Product design from analysis not intuition Funds responses to these issues may (should?) be different