REIMAGINING INVESTMENT SUCCESS - County of Fresno Material/NAGDCA/2016... · SPM is the threshold...

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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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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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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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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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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






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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7. Increasing Longevity

SOURCE: Jennifer Ortman, US Census Bureau, Presentation, February 7, 201311










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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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900

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1,000

1,500

2,000

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3,000

3,500

4,000

4,500

5,000

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

Reimagining Investment Success

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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

1. 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

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