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Cayman Captive Forum 2013. Investment Session. Investment Plan: Key components. A Customized Investment P rogram I nvestment objectives Risk tolerance Accounting, tax and regulatory considerations Documentation and Analytics Investment Policy Statement (IPS) Investment guidelines
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Cayman Captive Forum 2013 Investment Session
Investment Plan: Key components • A Customized Investment Program • Investment objectives • Risk tolerance • Accounting, tax and regulatory considerations • Documentation and Analytics • Investment Policy Statement (IPS) • Investment guidelines • Strategic asset allocation • Implementation through “Best Fit” Investment Manager(s) • Portfolio construction around liability structure • Tactical asset allocation optimization • Superior risk-adjusted returns • Review and Revise….Lifecycle Adjustments
The Impact of Quantitative Easing * YouTube video by OmidMalekan
Fed’s Balance Sheet Growth & 10-Year Treasury Rates Since the Start of the Great Recession The Fed’s QE programs following the financial crisis have had the desired effects on financial assets and longer-term interest rates as their balance sheet now approaching $4 trillion Source: Bloomberg, FactSet Information is historical and does not guarantee future results. Quantitative Easing (QE) is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market in an effort to promote increased lending and liquidity. FOR SEPARATE ACCOUNT INVESTOR OR PROFESSIONAL ADVISOR USE ONLY. 100-11-1019-6751113
U.S. Economy Recovering but at Slower Pace • Contributions to % Change in Real Gross Domestic Product
Looking Forward…The Good News • Energy revolution Source: Freerepublic.com Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as an indicator of future results. 100-11-1019-6751113
Looking Forward….The Good News • Energy revolution Oil and Natural Gas Jobs up by 40%since ’07 Unemployment in ND only 3.2% McDonalds in ND paying $18/hr Information is historical and does not guarantee future results. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as an indicator of future results. FOR SEPARATE ACCOUNT INVESTOR OR PROFESSIONAL ADVISOR USE ONLY 100-11-1019-6751113
Predicting interest rate movements is difficult Actual federal funds target rate versus market expectations Sources: Monthly Federal Reserve and Bloomberg data for the federal funds futures market since January 2000.
Rising Interest Rates on Portfolio Returns How Does That Impact A Typical Portfolio? Assumes parallel yield curve shift up by 250bps, no change in spreads, no defaults Source: Bloomberg, FactSet *Returns are shown as gross of fees. Portfolio returns are hypothetical and do not reflect the deduction of any possible management fees. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as an indicator of future results.FOR SEPARATE ACCOUNT INVESTOR OR PROFESSIONAL ADVISOR USE ONLY. 100-11-1019-6751113
Reminder: Bond risk is NOT synonymous with equity risk Source: Vanguard Investment Strategy Group. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Note: When determining which index to use and for what period, we selected the index that we deemed to be a fair representation of the characteristics of the referenced market, given the information currently available. For U.S. stock market returns, we used the Standard & Poor’s 90 from 1926 to March 3, 1957, the S&P 500 Index from March 4, 1957, through 1974, the Dow Jones Wilshire 5000 Index from 1975 through April 22, 2005, and the MSCI US Broad Market Index thereafter. For U.S. bond market returns, we used the S&P High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 to 1975, the Barclays U.S. Aggregate Bond Index from 1976 to 2009, and the Barclays U.S. Aggregate Float Adjusted Index thereafter. Portfolio is rebalanced monthly. Data through May 31, 2013.
Costs: A more reliable “alpha” Average annual returns over ten years ended 2012 Source: Vanguard, using data from Morningstar
Bonds remain the best diversifier of equity market risk Median monthly asset class returns during periods of bottom decile returns for equities,1988-2012 Notes: U.S. stocks are represented by Dow Jones Wilshire 5000 through April 2005 and MSCI US Broad Market Index thereafter; emerging markets stocks are represented by MSCI Emerging Markets Index; REITs by FTSE NAREIT Equity REIT Index; dividend stocks by Dow Jones U.S. Select Dividend Index; commodities by Dow Jones-UBS Commodity Index; high-yield bonds by Barclays U.S. Corporate High Yield Bond Index; emerging markets bonds by Barclays EM Sovereign USD Bond Index; hedge funds by the median fund of hedge funds from Morningstar; investment-grade corporate bonds by Barclays U.S. Corporate Index; U.S. Treasury bonds by Barclays U.S. Treasury Bond Index; and international bonds by Barclays Global Aggregate ex USD Bond Index. The Dow Jones U.S. Select Dividend Index starts in January 1992; Barclays EM Sovereign USD Bond Index starts in January 1993; hedge fund data start in 1994; and Barclays Global Aggregate ex USD Bond Index starts in January 1990. All data through December 31, 2012.Source: Vanguard.
Equity Market Outlook • Our valuation models for the world’s major markets still show attractive valuations relative to long-term norms. For those with a sufficiently long investment time horizon, equity markets offer reasonable/attractive value at these levels • As the remaining issues that are impacting growth and confidence are eventually resolved, a long period of average/superior returns for stocks may lie ahead Fair value is the minimum price level consistent with mild inflation/low interest rates in a growing economy. Above-average price appreciation remains a possibility in an environment where ‘normalcy’ is restored. Moreover, opportunity exists as valuations in the biggest markets still lie below their minimum expected levels. Corrections are always a possibility and valuations will not limit the risk of damage from systemic shocks, but the outlook for equity market returns is generally superior when stocks lie below fair value at the bands’ midpoint.
Strategic vs. Tactical Asset Allocation • Strategic time horizon- 5+ years • Tactical time horizon- 3 -18 months • Asset Class correlations High Correlation Inversely Correlated
Asset Classes Strategic Tactical Short, Intermediate, long Corporate bonds Short, Intermediate, long governments bonds Mortgage/asset backed securities Municipals Large Cap Stocks Mid Cap Stocks • Bonds • Foreign Bonds • US Stocks/Equity • Emerging Equities • Convertible Bonds • Master Limited Partnerships • REITS • Hedge Funds
Portfolio Structure • Investors can achieve their objective of protecting principal and maintaining a consistent level of income through asset allocation and active portfolio management: • Investment managers can utilize strategies to limit interest rate risk such as: • Shortening portfolio duration • Adding interest rate floaters • Increasing allocation to less rate sensitive sectors (i.e. - corporate bonds) • Investors should maintain a portfolio that is diversified across asset classes
Futures Overlay – a Risk Mitigation Strategy Source: Factset, Munder Capital Mangement Example is for illustrative purposes only and should not be relied upon as an indicator of future results. CONFIDENTIAL