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Transcript
Local Government Pension Scheme
investment strategies – investments
for the new “normal”Finance
Roy Nolan
The New Normal?
Economic environment for schemes
where low interest rates, higher
inflation and lower investment
returns in developed economies
depress schemes’ real asset
performance while keeping their
liabilities high (PwC)
Slide 2
Newham’s Strategic Asset Allocation
13%
10%
5%
5%
Equities
Property
Private Equity
Infrastructure
Diversifed Alternatives
Bonds
55%
12%
Slide 3
LAPF Investment Magazine 2012
• June – Newham ranked 1st of 107 authorities for investment
income growth in year ended 31/03/2011
• December - Newham ranked 7th of 107 authorities, with three
year average investment income growth of 22.53% (three year
average investment income growth )
Slide 4
Everything’s Rosie?
Slide 5
Speaking of Liabilities……
2007
2013
Active Members
7,180
6,381
11%
Deferred
4,016
6,799
69%
Pensioners
5,709
6,574
15%
Slide 6
Percentage Change
Active Members Profile
74% of active members are over 40:
Age Group
Percentage of Active Members
20-29
8%
30-39
18%
40-49
34%
50-59
33%
60+
7%
Slide 7
Are we in the new normal? Asset prices
are rallying…
•
•
•
All developed economy indices are up sharply from mid-2012
Nikkei up over 50% since November
Bond yields continue to track downwards everywhere – not just in
developed economies
Slide 8
…on paper only
QE
•
The equity rally is mostly about the debasement of paper money
through QE: all real assets (including gold) have increased in cash value –
because cash is losing value
Slide 9
Rally bought with monetary policy…
•
•
•
Policy rates at all-time lows
Central bank balance sheets (cumulated QE) at all-time highs
Combined impact: unparalleled monetary stimulus
Slide 10
…but fundamentals remain weak
•
•
Real fixed investment returns very low now thanks to the credit boom of
the last decade
Private banks in developed economies supplied that credit, and are now
sitting on large stocks of potentially bad assets.
Slide 11
Caution: zombies everywhere…
•
The result of weak fundamentals and massively supportive
monetary policy is creeping zombification of advanced economies.
•
At old-normal monetary policy settings, these zombies would be
financially dead. New-normal monetary policy keeps them alive,
and gradually infecting the rest of the economy, locking us into the
new normal.
•
Zombies do not stay at home watching TV. They like to get out and
about…
Slide 12
…except in the US
•
•
Bad assets in the US banking sector have largely
been written off (zombies have been slain), so
the US economy is poised for growth
Not so in the UK (or elsewhere in the developed
world)
Slide 13
What to avoid in the new normal?
•
Missing the QE inspired rally in all asset prices:
likely to be lots more QE now that Japan has
entered the “ugly currency race”. Some yields
could go negative.
•
Being trapped in low or negative real portfolio
returns after that.
•
Ideally, go overweight in assets that participate
in the QE rally but have a chance of generating
positive real returns in the long run. US and EM
equities fit the bill.
Slide 14
Macro matters, but is difficult
•
•
Outperformance has come not just from diversification but from macro
views, in spite of the fact that consensus macro forecasts have been
dreadful
Vital to think not just about the mean but also (more importantly) the
risks to the macro outlook
Slide 15
Looking ahead
•
•
New-normal returns mean a huge increase in sponsor payments
into the typical Local Government Pension Scheme, according to
Fathom’s model
Correspondingly huge benefits to improving on those returns
Slide 16