Transcript Strategic Asset Allocation

Strategic Asset Allocation
The experience of
Fundo de Estabilização Financeira da Segurança Social
Portugal
ISSA Conference, Merida, Mexico
Henrique Cruz
Instituto de Gestão de Fundos Portugal
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Portugal
Area: 91,951 Km2
Population: 10,6 m
Age Struct.: <15 (17%); 15-64 (66%); 64> (17%)
GDP: $ 188.7 bn
Govnmt: Parliamentary democracy
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Strategic Asset Allocation - FEFSS
 Fundo de Estabilização Financeira da
Segurança Social (FEFSS)
 Social Security Reserve Fund
 Target amount: 200% annual
expenditure with pensions
 As at 31.08.2005: 6 bn € / 80% of
annual expenditure with pensions / 4.4%
Portuguese GDP
 3.99% real rate of return since Dec.’02
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Strategic Asset Allocation - FEFSS
 Inflows:
 Between 2/11ths and 4/11ths of the
employees contributions;
 unless the Portuguese economy is in an
adverse macroeconomic condition
 Annual superavits
 Proceeds from the sale of property
 Reinvestments
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Strategic Asset Allocation - FEFSS
 Investment requirements:
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OECD issuers, currencies and markets;
At least 50% in Portuguese Gvnmt Debt;
Max. 40% in investment grade Debt;
Max. 25% in equities;
Max. 15% in unhedged currency exposure;
Max. 10% in real estate;
Max. 5% in a strategic reserve.
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Strategic Asset Allocation - FEFSS
 Investment Policy:
 in the long run, FEFSS returns must be in
excess of the cost of the Portuguese public
debt portfolio with similar volatility;
 Use of impairment in hold to maturity
bonds;
 Positive average real rate return in
maximum 3 years rolling period;
 Beat the annual benchmark.
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Strategic Asset Allocation - FEFSS
 Asset Allocation Study inputs:
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Max. volatility 4%;
Use of impairment in 25% of the portfolio;
Max. 10% in real estate;
Investment in Euro denominated assets vs
investment in OECD currency den. assets;
 Long term risk and return matrix;
 Correlation matrix.
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Strategic Asset Allocation - FEFSS
 Asset Allocation Study results (Euro):
Public debt
(ACM)
Public
debt
Corporate
Debt
Equities
Real
Estate
Expected
Risk
Expected
Return
Positive real
returns (No. yrs)[1]
25%
52%
7%
6%
10%
4.00%
3.46%
3.6
 Asset Allocation Study results (OECD):
Public
debt
(ACM)
Public
debt
Corporate
Debt
Equities
Real
Estate
Expected
Risk
Expected
Return
Positive real
returns (No. yrs)[1]
25%
24%
22%
19%
10%
4.00%
3.88%
2.9
[1] The estimated maximum number of years (with a 95% confidence level) required to achieve average annual positive real returns is computed as follows:
[risk x INV.NORMAL(95%; 0;1) / return ] ^2
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Strategic Asset Allocation - FEFSS
 Governance model:
 Indexed vs active management
 External management
 New asset classes
 SAA Revision
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Strategic Asset Allocation - FEFSS
Semi-Efficient
Index
+1%
+2%
European Government
Bonds
91
94
US Aggregate
Bonds
89
94
European Corporate
Bonds
86
91
UK Aggregate
Bonds
79
89
US Equities
71
77
83
UK Equities
68
77
83
Global Equities
69
75
81
+4%
Inefficient
Efficient
 Indexed vs active management
Index
+1%
+2%
+4%
Emerging Mkt Debt
59
67
74
84
European Equity
55
64
72
84
EM Equity
54
63
70
82
US Small Cap
42
51
57
67
Japanese Equity
39
51
61
75
“Inverse relationship between the
efficiency in
asset pricing and the
appropriate
degree
of
active
management”
David
Swensen
–
Pioneering Portfolio Management”
History shows that some benchmarks
are much harder to beat than others.
Source: Micropal, Lipper, Schroders; Percentile ranking of widely used indices on a rolling 3-year basis up to 30 June 2005. 100 best 1 worst. Mutual fund returns are
measured after all fees.
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Strategic Asset Allocation - FEFSS
 External management
 Indexed management outsourced on an ‘all-in’
cost basis
 including the cost of trading, settlement,
safekeeping, income collection, tax recovery,
securities lending, etc.
 Balanced portfolios submitted to decision
benchmarking
 internally against the benchmarks and externally by
subcontracting managers to benchmark the excess
return achieved by the in-house team
 Real Estate: buy expertise
 best managers at fair prices
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Strategic Asset Allocation - FEFSS
 New Asset Classes
 Portfolio’s diversified VaR is concentrated
on equities and currencies;
 We need to keep portfolio’s volatility
under 4%.
 Explore benefits of low correlation
between equities and hedge funds and
between equities and commodities
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Strategic Asset Allocation - FEFSS
 New Asset Classes
 The hedge fund industry
 trust
 systems
 credit risk.
 Commodities
 high volatility
 low correlation with equities
 reduction in the diversified value at risk of a
portfolio.
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Strategic Asset Allocation - FEFSS
 SAA revision
 Monitor:
 inflows and outflows of the FEFSS
 pattern of return, risk and correlation of
asset classes.
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Strategic Asset Allocation - FEFSS
 Final Remarks
 Indexed management is dominant in
FEFSS investments;
 FEFSS is invested in classical asset
classes subject to a 4% volatility ceiling;
 Diversification is always under
consideration;
 The current strategic benchmark is
expected to produce an annual real rate
of return of 3.88%.
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