Challenges and opportunities for financial market globalisation

IFoA CANUK Joint Event 2016

金融市场全球化的机遇与挑战

1


The globalization of financial market

2

Due to current control on capital account, China’s contribution to global financial integration is significantly lagged behind its contribution to world trade and GDP.

The gap is largely seen in portfolio investment and derivatives.

Source: IMF, Bank of England Quarterly Bulletin 2013 Q4


The globalization of financial market

Japan as a case study

3

Source: IMF

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Japanese External Assets as % of GDP

Assets, Direct investment Assets, Portfolio investment Assets, Other investment Assets, Reserve assets

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Japanese External Liabilities as % of GDP

Liabilities, Direct investment Liabilities, Portfolio investment Liabilities, Other investment


The changes brought in by financial market globalization

4

Challenges Opportunities

Potential source of economic growth

Enhanced market depth and breadth

Increased sources of finance for domestic borrowers

Expanded opportunity set

More prone to external shocks

Lower profit margin from traditional sources

Higher liability costs for domestic FIs

Increased competition

Integration brings China closer to the world financial markets


The static business model is not sustainable in the new business environment

5

Net Interest Income and Net Interest Margin - US Banking Sector

Source: Bloomberg

• Observable cycle in NIM

• Curve flattening pressed

down NIM

• Net interest income

growth slowed down

significantly in the last

decade

• Need to explore

alternative sources of

revenue to maintain

growth


Facing the challenge

6

•Dynamically position market exposures based on views of the economic cycle

•Subject to capital charge and risk budgeting

•Expand opportunity sets into new territories

•Employ revolutionary investment philosophies

•Seek true alpha and smart beta – enhanced portfolio efficiency

•i.e. ABS, MBS and other Credit derivatives etc.

•Equity release mortgages

•Investment and advisory business

•Expand traditional business

•Increased leverage on traditional business

•Optimize capital structure to reduce financing costs and improve profit margin

Optimize Traditional Business

Innovative Products

Dynamic Market

Positioning

Alternative Investments


The Evolution of UK Insurance Industry

7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

UK Insurance Asset Balance Sheet

Fixed Income Equity Real Estate Other Investments

Source: Bloomberg on the four largest insurance groups in UK, AVIVA, Prudential, Legal & General and Standard Life

A typical case of change in insurance asset allocation in the UK market.

Moving away from the traditional bond and equity allocation towards more dynamic asset allocations


Multi-Dimensional Challenge

Business Decisions

Finance

Risk Investment

Product


• Enables timely and effective strategic decision-making by providing “calls” to actions when the client diverges from its goals.

• Provides a clear framework for assessing investment opportunities against the client’s specific requirements.

• Ultimately allows the Client to exercise better control over the investment strategy.

The Value of a Investment Risk Management Framework

9

Providing Transparency, Clarity and Structure to the Decision-Making Process

Objective Measurement Performance Indicators Performance (June 12) RAG

Primary Funding

Objective

To reach 110% funded on a swaps flat

basis by 2029

Expected Returns (ER) > Required

Returns (RR)

RR: Libor + 308bps

ER: Libor + 189bpsDifference: -120bps

Secondary

Funding Objective

To reach 100% funded on a

Gilts+100bps by 2022

Expected Returns (ER) > Minimum

Required Returns (MRR)

RR: Libor + 277bps

ER: Libor + 189bpsDifference: -88bps

Investment

Strategy

Actual Returns should exceed

Expected Returns

Actual Returns (AR) > Expected Returns

(ER)

AR: Libor + xxxbps

ER: Libor + 189bpsDifference: xxbps

n/a

Risk Budget

The investment strategy should not risk

the deficit worsening by £600mm over a 1 year period

VaR95 < £600mm VaR95: £656mm

Hedging Strategy

Nominal and inflation hedge ratio

should be maintained within +/- 5% of the funding ratio

Funding Ratio (swaps flat) 67% n/a

Nominal Hedge Ratio (swaps flat) 46.0%

Inflation Hedge Ratio (swaps flat) 94.6%

Collateral

Maintain sufficient eligible for the

purposes of covering margin calls that may arise from the Scheme’s current

derivative positions over a 1 year

period.

Total available eligible collateral £936mm

Remaining collateral after VaR95 event £610mm

RAG Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away

“The Investment Risk Management Framework has put us in

control of the investment risk in our scheme.”

Penny Green – Chief Executive & Managing Director, SAUL Trustee

Company


60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

GHG Funding Level Comparison, 01/10/2010 - 31/12/2015

Original Strategy (Annual Vol. 15.82% since inception) (1 YRVol. 17.22%)

Dynamic De-Risking Strategy (Annual Vol. 12.31% sinceinception) (1 YR Vol. 7.86%)

Dynamic Asset Allocation

Case Study

De-risking

10

Dynamic Risk Management Strategy

driven by a FrameworkLimited Governance Resources Efficient Implementation

“Redington helped us to establish a robust pension risk management framework as well as devising and implementing a new investment strategy which enabled us to

be nimble and cost effective in making changes to our asset allocation to reduce risk as opportunities arose. The strategy has delivered outstanding results allowing

us to reduce the Scheme’s overall risk while taking us closer to our objective of full funding.”

Rita Powell – Independent Chairman of Trustees

Outperformed original strategy by

c.15% at significantly lower risk

Buy and Maintain


DGF –动态成长基金

11

Sub CategoryPopular Example

Product

Asset Allocation

Approach

Long-Only or

Long/ShortEquity Weighting

Correlation to Equity

Markets

Expected Maximum

Drawdowns

1. Strategic

Allocation

Traditional

Balanced FundsRelatively Static Long-Only High (>50%) Very High Large

2. Dynamic

AllocationRuffer Total Return Highly Dynamic

Mostly Long-Only

(can hold some

relative value

strategies)

High Variability (10-

60%) Through the

Cycle

Varying Over Time Small-Medium

3. Absolute Return

Relative ValueStandard Life GARS

Risk-Based

Allocation, Not Asset

Allocation

Long/ShortN/A (risk-based

approach)Low Small


DGF –动态成长基金

12

Sample Dynamic Allocation DGF Manager Asset Allocation since 2001

(2)

(3)

(4)

(1) Other

IFoA CANUK Joint Event 2016 13

Style Premia –风格溢价

Alpha

Style Premia

Market Risk Premia

Returns due to manager skill; a

feature of (successful!) active

management

Returns that provide

compensation for taking on

market exposure (e.g. risk

parity, synthetic equities)

Often disguised as “alpha”,

returns that are associated

with style factors

Value Momentum

Carry Defensive

Style Premia



14

0

50

100

150

200

250

300

350

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Regressed Invesco High Income Fund FTSE All Share

Market Value Momentum Defensive

Portfolio Weights 75% 13% 19% 52%

Source: Deutsche Bank, Invesco, Bloomberg; Calculations: Redington

Neil Woodford’s annualised

outperformance over the FTSE All

Share: 3.4% p.a.

Replicating

Portfolio



Cumulative excess return of the style premia factors vs. MSCI World

-50%

0%

50%

100%

150%

200%

Dec-89 Dec-92 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13

Cu

mu

lati

ve R

etu

rn

Value Momentum Carry Defensive MSCI World


Multi-Class Credit –多种信用投资

16

Long Only Managers Long/Short Credit Hedge Funds

Benchmark Credit Absolute Return

Credit

Multi-Class Credit Credit Relative Value

Universe Long-only managers Long-only managersLong-only managers &

alternative managersAlternative managers

Credit

BetaLong only

Managed over the cycle

to avoid drawdownsLong-biased

Long and short over the

cycle

Return

TargetBenchmark + % Cash + 200-400bps Cash + 400-800bps Absolute return target

Interest

Rate Risk+/- Benchmark Typically neutral Typically long-biased

Varies widely on an

active basis

Credit

ProfileAs per benchmark

Mainly investment

gradeMainly high yield Varies



17

Wide Range of Assets

Dynamic Asset Allocation

Benchmark Agnostic Approach

Strategic Efficiency

Access to Specialist Manager Skills



2007 2008 2009 2010 2011 2012 2013 2014 2015

2.08%

US LEV

LOANS

-9.44%

EUR IG

70.44%

EUR HIGH

YIELD

10.33%

EUR HIGH

YIELD

1.51%

US LEV

LOANS

22.07%

EUR HIGH

YIELD

9.95%

EUR HIGH

YIELD

4.47%

EUR LEV

LOANS

5.50%

EUR LEV

LOANS

-0.57%

EUR LEV

LOANS

-21.20%

EM CORP

57.77%

US HIGH

YIELD

10.13%

US LEV

LOANS

0.72%

EUR LEV

LOANS

18.07%

EM SOV

9.19%

US HIGH

YIELD

2.12%

EUR IG

4.91%

EM CORP

-1.44%

EUR IG

-24.69%

US IG

51.62%

US LEV

LOANS

9.85%

EUR LEV

LOANS

-1.67%

EM CORP

14.54%

EM CORP

8.59%

EUR LEV

LOANS

1.83%

EUR HIGH

YIELD

3.17%

EM SOV

-3.29%

EM SOV

-29.10%

US LEV

LOANS

43.43%

EUR LEV

LOANS

9.32%

US HIGH

YIELD

-2.65%

US HIGH

YIELD

12.64%

US HIGH

YIELD

5.29%

US LEV

LOANS

1.60%

US LEV

LOANS

0.07%

EUR HIGH

YIELD

-4.07%

EM CORP

-30.01%

EUR LEV

LOANS

39.04%

EM SOV

7.93%

EM SOV

-2.66%

EUR IG

9.74%

EUR LEV

LOANS

3.58%

EM SOV

0.04%

US IG

-0.69%

US LEV

LOANS

-4.76%

US IG

-33.78%

EM SOV

25.17%

EM CORP

2.68%

EM CORP

-3.45%

US IG

9.67%

US LEV

LOANS

2.86%

US IG

-1.19%

US HIGH

YIELD

-1.07%

EUR IG

-5.23%

EUR HIGH

YIELD

-39.99%

US HIGH

YIELD

22.93%

US IG

2.31%

US IG

-7.25%

EM SOV

7.41%

US IG

2.14%

EM CORP

-1.35%

EM CORP

-3.18%

US IG

-6.97%

US HIGH

YIELD

-44.12%

EUR HIGH

YIELD

9.43%

EUR IG

0.46%

EUR IG

-8.27%

EUR HIGH

YIELD

5.34%

EUR IG

2.13%

EUR IG

-3.73%

EM SOV

-6.70%

US HIGH

YIELD

161%

45%

-49%


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For professional investors only. Not suitable for privatecustomers.

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近期获奖情况

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电话: +44 (0) 203 326 7118

[email protected]

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电话: +44 (0) 203 326 7109

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19

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Economy & Finance

Challenges and opportunities for financial market globalisation