A closer look at today s target date fund landscape

Transcription

1 A closer look at today s target date fund landscape DC Investment Forum Toronto, Ontario September 26, 2014 Chhad Aul, CFA Portfolio Manager Sun Life Global Investments 1 ADVISOR USE ONLY

2 Today s agenda A closer look at current market conditions Impact of current markets on plan members Why Target Date Funds make sense Evaluating the merits of different Target Date Funds 2 ADVISOR USE ONLY

3 3 ADVISOR USE ONLY A closer look at current market conditions

4 Six major crises in 25 years Impact remains fresh in plan members minds 80% 60% 40% S&P/TSX Composite TR (CAD) S&P 500 TR USD What s next? 20% 0% -20% -40% Japanese bubble Mexican Economic Crisis Russian Financial Crisis Tech Bubble US Financial Meltdown European Crisis -60% Rolling one year returns. Source: Morningstar as of June 30, ADVISOR USE ONLY

5 Strength of equity markets continues 100% 80% 60% S&P/TSX Composite TR Scaled S&P 500 TR Scaled MSCI EAFE TR Scaled MSCI EM TR Scaled 40% 20% 0% -20% -40% European Crisis -60% US Financial -80% Meltdown Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Source: Bloomberg. Scaled returns from July 1, 2008 to June 30, ADVISOR USE ONLY

6 Now is the time for active management Reduced correlations create opportunity US Financial Meltdown Higher implied correlation European Crisis Index Level Lower implied correlation 30 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 CBOE S&P 500 Implied Correlation Index. Source: Bloomberg as of June 30, ADVISOR USE ONLY

7 Bond yields still at historical lows Cdn 10-year gov't bond yield U.S. 10-year Treasury Yield Source: Bank of Canada, Bloomberg as of June 30, ADVISOR USE ONLY

8 Interest rates What s going to happen when they eventually rise? Bond prices Interest rates 8 ADVISOR USE ONLY

9 DC consultants weigh in MORE THAN Source: PIMCO, April ADVISOR USE ONLY of DC consultants surveyed are concerned about rising rates a low return environment, and high volatility over the next three to five years

10 The impact of current markets on plan members 10 ADVISOR USE ONLY

11 Investors still scarred by financial crisis of investors favour no-risk / low return over risk / high return Source: Wells Fargo/Gallup Investor and Retirement Optimism Survey, Are today s investors too conservative? 11 ADVISOR USE ONLY

12 Millennials feel it too! vs. 23% cash for other investors are invested in cash Average asset allocation is extremely conservative Source: UBS Wealth Management Americas. 12 ADVISOR USE ONLY

13 Are they making informed decisions? Regardless of plan size or the number of options offered, most plan members limit their investments to FUNDS Source: Sun Life Benchmark Report of Capital Accumulation Plans in Canada. 13 ADVISOR USE ONLY

14 Are they making informed decisions? view fixed income as a safe haven Source: Franklin Templeton Investments 14 ADVISOR USE ONLY

15 Canadian consumers among developed world s most indebted OECD household debt-to-income ratio (2011, % of GDI) Source: Capital Economics. 15 ADVISOR USE ONLY

16 Impact of consumer debt on savings 2/3 of Canadians aged currently hold debt MORE THAN 31% save cannot 60% of investors estimate that their current debt level does not allow them to save Source: advisor.ca as at April 28, ADVISOR USE ONLY

17 Resetting plan member behaviour Members need to be proactive to achieve their retirement goals Look beyond North America Stock pickers market need to do more than just index Diversify sources of yield Tactically adjust to market conditions or delegate!! 17 ADVISOR USE ONLY

18 18 ADVISOR USE ONLY WHY Target Date Funds make sense

19 Why target date funds make sense Professional management Automatic rebalancing Glidepath mirrors lower risk tolerance as target date approaches Seamless implementation Simplifies investment decision Removes member s irrational investment behaviour Strong diversification benefits 19 ADVISOR USE ONLY

20 Growth of target date funds $12.8 $9.1 $10.9 $1000 $3.9 $5.0 $5.7 $6.9 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Source: Sun Life Group Retirement Services. Figures are in $ billions. 20 ADVISOR USE ONLY

21 Growth of target date funds as default option of DC plans who've joined Sun Life Financial have added TDFs to their lineup and are using them as the default option. Source: Sun Life Financial. Data since ADVISOR USE ONLY

22 Not enough or too much equity? Equity exposure (%) by age for plan members who choose their own portfolio Under Equity Fixed Income Source: Sun Life Benchmark Report of Capital Accumulation Plans in Canada. 22 ADVISOR USE ONLY

23 Target date funds increase investor confidence of TDF investors vs. 41% non-tdf investors Source: Voya Investment Management and ING Retirement Research Institute, February ADVISOR USE ONLY are confident they will reach their RETIREMENT GOALS

24 Higher confidence leads to higher contribution levels of TDF investors vs. 23% non-tdf investors Source: Voya Investment Management and ING Retirement Research Institute, February ADVISOR USE ONLY report contributing over 10% of their income

25 Higher returns with target date funds Investment strategy for SLF plan members 1 year (%) 2 year (%) 3 year (%) 5 year (%) Target date funds only No target date funds Excess return *Includes all Target Date Funds offered on the Sun Life Group Retirement Services investment platform. Data provided by Group Retirement Services, as at December 31, National Account client segment returns. 25 ADVISOR USE ONLY

26 26 ADVISOR USE ONLY Evaluating the merits of different Target Date Funds

27 27 ADVISOR USE ONLY Target Date Funds with a static glidepath The plain vanilla option

28 Strategic asset allocation Glidepath becomes more conservative as it approaches retirement Life Stage Early Saver Midlife Saver Pre Retiree Retiree 100% 80% Equity Weight 60% 40% 20% Risk is systematically and gradually reduced as participants get closer to retirement 0% Time Remaining 28 ADVISOR USE ONLY

29 29 ADVISOR USE ONLY Target Date Funds with a tactical glidepath TAKING ADVANTAGE of current market conditions

30 Tactical allocation Assessing current market environment for tactical opportunities Economic indicators Current yield Market confidence Valuations Tactical asset allocation Volatility Foreign exchange rate movements Asset class correlations 30 ADVISOR USE ONLY

31 Target date funds with a tactical glidepath Life Stage Early Saver Midlife Saver Pre Retiree Retiree 100% 80% Equity Weight 60% 40% 20% Key features: Manager has the ability to move within a predetermined range (+ or 10%) to take advantage of market movements Asset class weights can change within defined tolerance bands 0% Time Remaining 31 ADVISOR USE ONLY

32 Evaluating the contribution of tactical asset allocation & active management Skilled investment managers must demonstrate value added Basis points Return over benchmark* due to: Tactical Asset Class Tactical Asset Mix Manager selection Q Since inception Annualized 93 (Jan. 17 to Dec. 31, 2012) 122 Annualized (Jan. 17, 2012) Analysis done June 30, Returns of Sun Life Granite Balanced Fund are shown gross of fees. *Benchmark = 10% FTSE TMX Canada 91-day T-bill; 10% FTSE TMX Canada Short Term; 40% FTSE TMX Canada U.; 10% JPM Global Gov t C$; 12% S&P/TSX Capped Comp.; 9% S&P 500 C$; 9% MSCI EAFE C$. The value add does not include other effects such as those resulting from cash flows which impacts the total value added. Asset allocations are subject to change without notice. 32 ADVISOR USE ONLY

33 33 ADVISOR USE ONLY Target Date Funds Active vs Passive The best of both worlds

34 And the winner is Nobel Prize in Economic Sciences awarded to contradictory theories Active Passive Robert J. Shiller Eugene Fama His work shows limitations of efficient market theory Known as father of efficient market hypothesis The Sverges Riksbank Prize in Economic Sciences In Memory of Alfred Noble is the actual name of the award. 34 ADVISOR USE ONLY

35 Complementary approaches to portfolio construction Active managers are added to: Help manage portfolio risk Enhance potential returns through alpha Access diversifiers where affordable Reduce volatility (vs. index profile) and seek to reduce downside capture Help navigate through turbulent market environments Overcome the fact that some standard passive indices are inefficiently constructed (e.g. Infrastructure) Passive funds are used to: Help gain efficient market exposure (e.g. where potential value add from active management expected to be lower or to provide low-cost exposure) Provide the ability to increase or decrease the portfolios active/passive exposure up or down depending on outlook for performance of active managers Control manager style risk 35 ADVISOR USE ONLY

36 Active vs passive by asset class Calendar year excess returns Canadian Equity US Equity Global Fixed Income YTD % YTD % YTD % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % 0.0% 2.0% 4.0% 6.0% Outperformance Active median manager 0.0% 1.0% 2.0% 3.0% Passive index Outperformance 0.0% 5.0% 10.0% 15.0% Outperformance Based on monthly Mercer MPA Pooled Canadian Equity, U.S. Equity and Global Fixed Income (PFS) gross returns from January 1, 2004 to June 30, Canadian equity passive index is the S&P TSX Capped Composite; U.S. equity passive index is the S&P 500; Global Fixed Income passive index is the Citygroup World Broad Investment Grade Index (Citi WBIG). 36 ADVISOR USE ONLY

37 37 ADVISOR USE ONLY Target Date Funds with a risk overlay Providing members with choice based on risk profile

38 Target date funds with a risk overlay Customized approach considers plan members risk tolerance 100% 90% 80% 70% Equity Weight 60% 50% 40% 30% Aggressive glidepath Moderate glidepath Conservative glidepath 20% 10% 0% Time Remaining For illustrative purposes only. 38 ADVISOR USE ONLY

39 39 ADVISOR USE ONLY Target Date Funds with a guarantee For risk-averse plan members seeking capital protection

40 Wealth preservation is priority OF INVESTORS are taking LESS RISK with their portfolio now, compared to before the 2008 crash* *Source: 2014 Sun Life Canadian Unretirement Index +Source: Voya Investment Management and ING Retirement Research Institute,. February ADVISOR USE ONLY

41 Majority favour security over high growth of investors favour no-risk / low return risk / over high return Source: Wells Fargo/Gallup Investor and Retirement Optimism Survey, ADVISOR USE ONLY

42 Target date funds with a guaranteed maturity value No matter what the path of the market, fund locks in the highest net asset value at month end This provides a safety net, the plan member s risk is reduced as they meet their target obligation (retirement, college expenses, etc.) $18.50 $18.00 $17.50 $17.00 $16.50 $16.00 $15.50 $15.00 $14.50 $14.00 $13.50 $13.00 $12.50 $12.00 $11.50 $11.00 $10.50 $10.00 $9.50 Guaranteed Maturity Value 2040 Fund returns Investment opportunity for members who are saving long term and whose objectives have not changed. For illustration purposes only. Data for the Sun Life Milestone 2040 Fund as of June 30, The returns provided are stated before investment management fees and include the reinvestment of all distributions. They do not take into account any administrative charges or taxes payable that would have reduced returns. Past performance may not be repeated. Group Retirement services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies. 42 ADVISOR USE ONLY

43 Summary Capital markets impact members ability to prepare for retirement Target date funds can help alleviate emotional & investment stress Not all target date funds are created equal: evaluate product features & benefits 43 ADVISOR USE ONLY

44 This presentation contains information in summary form, for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this summary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. Information is subject to change. The views and/or opinions expressed may be those of the author or subadvisors and are not necessarily the views and/or opinions of Sun Life Global Investments (Canada) Inc. Please note, any future or forward looking statements contained in this summary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this summary. Mutual and segregated fund values change frequently and past performance may not be repeated. Mutual funds are not generally guaranteed, although the Sun Life Milestone Financial Funds benefit from the guarantee described below. We have structured each Sun Life Financial Milestone Fund so that it will have sufficient assets to pay the Guaranteed Value per unit on its respective maturity date. Each Fund participates in a Sun Life Assurance Company of Canada guarantee, effective at the respective maturity date, assuring payment to the unitholders of the highest month end unit value achieved during the life of the Fund, or its ending unit value, or $10.00, whichever is the highest. Additional terms and conditions which govern the guarantee are outlined in the Description of Fund Operations attached to the group annuity policy issued to the plan sponsor. Sun Life Assurance Company of Canada and its affiliated companies respectively own or properly license all the trade-marks used on or in connection with the goods and services which they provide. The trade-marks are protected by Canadian and foreign trade-mark laws. All rights reserved. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies. Group Retirement Services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies. Sun Life Global Investments (Canada) Inc., ADVISOR USE ONLY