alternative investments and transparency— two … · steve deutsch, cfa, caia december 10, 2009...
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Steve Deutsch, CFA, CAIADecember 10, 2009
Alternative Investments and Transparency—Two Pension Fund Challenges
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
Research Technology Design
Pensionand LifeStocks
Exchange-TradedFunds
SeparateAccounts/
CITs
MutualFunds
VariableAnnuities
Closed-EndFunds
CapitalMarkets
HedgeFunds 529 Plans PEF
SoftwarePrint Internet and Services
Individuals Advisors Institutions
Core Databases
Core Skills
Media
Audiences
Geography
One central database—to all Morningstar products 3
Data coverage
2001 2002 2003 2004 2005 2006 2007 2008
Hedge Funds 3,000 6,000 7,664
SA/CIT 2,600 5,000 6,000 7,512
Equity 6,800 7,200 13,000 19,452
Offshore Funds 1,500 20,000 32,064
Indexes 10,000 33,031
Morningstar DataLab launched
Hedge funds database launched
Morningstar Direct launched
Acquisition of Ibbotson Associates
Acquisition of S&P fund data business (Europe)
Acquisition of Hemscott Data (UK)
Acquisition of ePIPER separate accounts database
Acquisition of Aspect Huntley (Australia)
Launch hedge fund indexes using MSCI Barra methodology
Acquisition of InvestorForce (separate accounts/CIT database) and Altvest database (hedge funds)
Acquisition of Fundamental Data (UK)
Morningstar Direct 3.0, ownership database, 13-F filings hedge funds
UK Life & Pension Database Launched
Offshore database added
Hong Kong ETF Universe
Pension, endowment, foundation (PEF) database launched
Total Universe Increased to 280,000+ securities
4
Morningstar/Barron’s 2009 Survey of Institutions
Institutions predominant respondent:
3 An investment company (39%)
3 Public and private pension plans, banks, endowments, consultants, RIAs,
and family offices also responded
3 AUM under $11 billion (64%)
3 30% had AUM over $30 billion
3 89 institutions
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7
What is an Alternative Investment (Comparison to 2008)?
Hedge Funds
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
82%86%
83%87%
94%96%
76%79%
84%84%86%
93%
98%
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
Institutions 2009 Institutions 2008
Private Equity/Venture Capital
Managed futures (CTAs)
Infrastructure Private debt Investments linked to natural resources
Investments linked to physical commodities
9
Estimated Average Annual Growth in Alternative AUM (2004–2009)
0%
4%
8%
12%
16%
20%
24%
28%
32%
36%
40%
2%
16%14%
20%
39%
8%
Institutions
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
0% 1–10% 11–20% 21–30% Greater than30%
Usage declined(<0%)
11
Anticipated Importance of Alternatives to Traditional Investments (Comparison to 2008)
0%
5%
10%
15%
20%
25%
30%
35%
13%
17%
33%
24%
13%12%
17%
35%
23%
13%
Institutions 2009 Institutions 2008
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Much less important Somewhat less important
As important Somewhat more important
Much more important
12
Institutions: Alternatives with Largest Proportion of Portfolio (2004–2009)
0%
4%
8%
12%
16%
20%
24%
28%
32%
36%
40%
6%7%7%
11%
35%
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
Hedge funds Private equity/venture capital investments
Capital protected and structured notes/products
Emerging market stocks
Other investments
13
Institutions: Alternative Examined for Increased Allocation (2009–2014)
0%
3%
6%
9%
12%
15%
18%
21%
24%
27%
30%
6%7%7%
11%
27%
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
Hedge funds (arbitrage, L/S, etc.)
Private equity/venture capital investments
Investments linked to natural resources
Real estate (direct investment in)
Distressed debt/bonds
14
What Top Three Investment Objectives Are Driving Alternative Investment Growth?
0%
8%
16%
24%
32%
40%
48%
56%
64%
72%
80%
17%17%
37%
51%
80%
Institutions 2009
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
Addressing portfolio diversification with a low correlating asset
Absolute returns Different investment techniques (like arbitrage or shorting)
Filling portfolio allocations (core-satellite model)
Poor stock market returns
16
Top Reasons to Hesitate to Invest in Alternatives (Comparison to 2008)
0%
14%
28%
42%
56%
70%
45%
18%
45%
54%
39%
13%
63%
68%
Institutions 2009 Institutions 2008
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Lack of liquidity Lack of transparency Lack of understanding Fees
17
In the Wake of Recession Institutions Have Increased Allocation to Alternatives
0%
6%
12%
18%
24%
30%
25%
10%
16%17%
20%
12%
1%
19%
6%
8%
14%
21%22%
11%
26%
1%
8%
14%
22%
25%
4%
Institutions 2009 Institutions 2008 Institutions next 5 years
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0% 1–5% 6–10% 11–15% 16–20% 21–25% Over 25%
19
In Light of the Performance of Alternative Investments Since Late 2008, Has Your Institutional Investment Committee Rethought
Investing In Alternatives? If Yes, How?
Institutional responses to this question were generally mixed, with a significant portion indicating that they have not made any changes
“It remains that the asset classes are as interesting as ever but better tackled in a different way: more focused and transparent products.”
“More diligent review process”
Reconsidering alternative investments with respect to:
3 Liquidity requirements
3 Regulatory oversight
3 Transparency
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20
Institutions Don't Want Alternatives with Following Features
0%
14%
28%
42%
56%
70%
18%
29%
41%
44%
53%
20%17%
14%15%17%
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
Redemption gate Redemption fee Side pockets Clawbacks
Unwilling to invest Less likely to invest
Capital calls
21
Institutions Want Alternatives with These Features
0%
14%
28%
42%
56%
70%
3%
12%8%
19%
17%
41%39%
45%45%
53%
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
Transparent/frequent method of valuation
Holdings/portfoliotransparency
Liquidity guarantees—no long lockups(>1yr)
Third party due diligencereport
More likely to invest Required to invest
Hurdle rates
22
Institutions: Some Preference for Alternative Strategies Within Traditional Investment Vehicles
0%
10%
20%
30%
40%
50%
3%
3%
7%9%8%
14%
36%36%34%
36%
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
Open-end mutual fund
Separately (managed) account
40 Act registered ETF or ETN
More likely to invest Required to invest
Registered commodity trading advisor
23
Overall Conclusions: Morningstar/Barron’s 2009 Alternative Investment Survey
3 Transition, adoption of alternatives still underway—shift, increased
importance relative to traditional investments
3 Recession has just increased diligence, research
3 For institutions investing in alternatives, the predominant
objective—more than ever—remains the “best of both worlds”— portfolio diversification and absolute returns, but with the positive traits
of traditional investment vehicles—liquidity, transparency
3 Alternatives becoming available in numerous investment vehicles despite
strong association to hedge funds
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
24
Transparency—The Concept
3“The United States, once a bastion of trust for its transparency…is beginning
to be viewed with some skepticism around the world…”
3“…no sensible market participant I know questions any longer the need for
greater transparency…”
3“…transparency is a key to the long-term stability of global financial markets…”
David Smick in “The World is Curved: Hidden Dangers to the Global Economy.”
26
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Transparency—The Reality
3 After economic and financial correction: “transparency”—obtaining
agreement on specific and meaningful measures is the challenge.
3 In comparison to individual investors, are institutional investors
second-class citizens?
27
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“This is The Institutional Market?”
3 Availability of information—economic disincentive for intermediaries
(consultants/advisors)
3 Lack of transparency ≠ outperformance.
3 Lack of transparency = inefficient institutional market
3 Who watches the watchmen—delegation
3 Voluntary codes of conduct—with low hurdles toward compliance
3 Too many conferences where presenters are paying
28
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Solutions. Not Just Problems.
3 It’s 2010.
3 Share the information. In public databases and don’t pay to be included
in the database.
3 Use the information and re-examine all relationships and
assumptions regularly
3 Codes with teeth and precision
3 Form your own conferences, designations for trustees and drop out
of free conferences
29
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The Case for a PEF database
Size: $26.5 Trillion (2005 Estimate)
3 United States: $14.5 Trillion
3 $7.4 DC, $7.1 DB
3 United Kingdom: £1.9 Trillion
3 Eurozone: Over €3.8 Trillion
3 Canada: CAD 1.3 Trillion
3 SWF: $2.2 Trillion
3 Foundation & Endowment: $951 BillionSource: Allianz Global Investors. Data as of 2005. http://www.pensionfundsonline.co.uk/pdfs/Country-Overviews.pdf
30
The information contained in this document is the proprietary material of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, is prohibited.
The Case for a PEF database
3 Recognized Opportunity
3 2007 Pilot Study
3 Feedback & Support from Industry
3“Public plans impact everyone—not just trustees, managers, and participants.” Hank Kim, Executive Director, NCPERS
3“While corporate plans are subject to ERISA…there is no federal, state, or local
agency—other than the executives of the public pension itself—that looks out for the best interest of public pension beneficiaries.” Scanlan and Lyons, Journal of Investing, Summer 2006
31
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The relative performance record and asset allocation of public defined benefit plans—released December 2007
3 On balance, the NCPERS public plans that participated in this Morningstar
analysis seem to have been allocating their capital well
3 On a 10-year time-weighted return basis, public plan investor returns outpaced
retail mutual funds by 170 basis points
3 For any time period evaluated and whether measured by time-weighted or by investor returns, public plans outperformed retail mutual funds
3 This return pattern holds for every time period and for every group of public plans
analyzed by Morningstar: states, counties, cities, and fire/police/teachers’ funds
32
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The relative performance record and asset allocation of public defined benefit plans—released December 2007
3 The 2006 year-end portfolios of the public plans are broadly diversified,
with 41% of assets allocated to U.S. equity, 25% to fixed income, 20% to international or global equity and 8% to real estate and REITs
3 Besides real estate, the other common allocations Morningstar found to
alternative investments were 3% to private equity and 1% to hedge funds.
Cash holdings averaged 2%
33
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The Case for a PEF database
3 “Investors First”
3 Lack of Oversight
3 Fiduciary responsibility of trustees & consultants v/s dearth of
benchmarking opportunities
3 Confusing disclosures: assumptions vary wildly and impact
reporting significantly
3 Information disconnect between beneficiaries, fiduciaries,
and asset managers
3 Abundance of Information—disaggregated
3 Demographic wave—help prepare
34
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The Case for a PEF database
3 Deliver an even more compelling database to institutional users
3 Direct & Document Interface: bring pension plan information into 2010—
electronic, comprehensive, searchable, screenable
3 Rate Consultants’ Plans
3 Profiles
3 Insight for trustees at meetings
3 Plan pages for participants
35
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Steering committee
3 Senior staff from both Morningstar and Ibbotson Associates
3 Dr. P. Brett Hammond, managing director and chief investment strategist for
TIAA-CREF Asset Management
3 T. Britton Harris, CIO, Teacher Retirement System of Texas
3 Hank Kim, executive director and counsel for the National Conference on Public
Employee Retirement Systems
3 Dr. Olivia S. Mitchell, professor at the Wharton School of the University of
Pennsylvania and executive director of The Pension Research Council
3 Anna M. Rappaport, past president of The Society of Actuaries and founder of
Anna Rappaport Consulting
36
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Key takeaways of pension, endowment, foundation database
3 Greater transparency and easy information access into these bedrock
vehicles for preparing for retirement, funding education institutes, or charities is long overdue
3 Donors are more involved and want to monitor their “investments” and future
retirees need to understand how they and their plan choices are doing on a truly
relative and regular basis
3 Morningstar wants to contribute to better plans, more efficiencies on a
national scope
37
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For information on the Pension/Endowment/Foundation databaseSteve Deutsch