structuring real asset portfolios · – treasury inflation protected securities (tips) ... •...
TRANSCRIPT
Structuring Real Asset Portfolios 2012 Wilshire Consulting Client Conference
Mike Dudkowski, Managing Director Jim Neill, CFA, Managing Director
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• Real Assets Overview
• Case Study Part 1: Asset Allocation
• Investment Structure
• Case Study Part 2: Investment Structure / Implementation
• Summary
Agenda
Real Assets Overview
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• Public Markets
– Treasury Inflation Protected Securities (TIPS)
– Commodities
– Real Estate Investment Trusts (REITs)
– Other “listed” investments
Infrastructure and natural resource stocks
Master Limited Partnership (MLPs)
• Private Markets
– Real Estate, Farmland, Infrastructure
– Timberland
– Oil and Gas
Opportunity Set
Real Assets Overview
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• Real assets capitalize inflation in their returns over time – therefore provide a hedge against inflation
• Real assets are represented in both public and private markets
• Wilshire generally supports a diversified approach to increase the beta (sensitivity) of investments to unexpected inflation shocks
– Investments capitalize inflation at different rates
– Investments have varying sensitivities to economic forces and are also driven by unique, asset-specific characteristics
A diversified inflation hedge is the best inflation hedge
Real Assets Overview
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Data sources: Wilshire CompassSM, Bridgewater Associates
Broad Asset Class Correlations to US CPI-U over Multiple Holding Periods, 1971-2011
Real Assets Overview
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
US Stocks US Bonds Private RE Public RES TIPS Commodities
Corr
elat
ion
to U
S CP
I-U
3 Months 6 Months 12 Months 36 Months 60 Months 120 Months
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• Perfect correlation to US CPI-U is unlikely to exist. Instead, we focus on asset classes with positive correlation as being beneficial components for real asset portfolios.
– Financial assets such as stocks and nominal bonds demonstrate negative correlation to inflation over most holding periods.
– Among the four real asset types shown in the chart (private real estate, public real estate securities, TIPS and commodities), the level of correlation varies according to holding period for all but commodities.
– Intuitively, commodities’ behavior is explained by the fact that commodities represent inputs to production and commodity price increases are reflected in US CPI-U very quickly.
• In general, real assets demonstrate positive correlation, particularly over long periods as assets re-price. For example, private real estate may show little immediate reaction but then demonstrates a meaningful valuation change when an automatic rent bump is taken into account.
Correlation to Inflation
Real Assets Overview
Asset Allocation
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Historical Return Environments
High Inflation Bull Market "Lost Decade" Wilshire1802-2011 * 1926-2011 1970-1979 1980-1999 2000-2009 Forecast (%)
Total Returns:Stocks 8.0 9.8 5.9 17.8 -1.0 7.5Bonds 4.9 5.7 7.2 10.0 6.3 2.9T-bills 4.2 3.7 6.4 7.2 3.0 1.5
Inflation: 1.5 3.0 7.4 4.0 2.5 2.0
Returns minus Inflation:Stocks 6.6 6.8 -1.5 13.8 -3.5 5.5Bonds 3.5 2.7 -0.2 6.0 3.8 0.9T-bills 2.7 0.7 -1.0 3.1 0.5 -0.5
Stocks minus Bonds: 3.1 4.1 -1.3 7.8 -7.3 4.7* Returns for 1802-2001 are from "Stocks for the Long Run" (Siegel, 2002) and S&P 500 Index and Barclays Capital Aggregate Index after.
Historical Returns (%)
Case Study Part 1: Asset Allocation
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Wilshire Real Assets Basket
Asset Allocation
• Our “Baseline” allocation is balanced from both a capital and risk perspective
• Publicly traded assets comprise:
– 50% of the capital allocation
– 38% of the risk allocation
• Private assets comprise:
– 50% of the capital allocation
– 62% of the risk allocation
22%
10%
10%8%
20%
15%
15%
Capital Allocation
TIPS
Commodities
Global REIT's
MLP's
Real Estate
Timberland
Oil & Gas
7%8%
12%
11%
25%
16%
21%
Contribution to Risk
TIPS
Commodities
Global REIT's
MLP's
Real Estate
Timberland
Oil & Gas
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Impact on Frontiers – 40% Max allocation
Asset Allocation
• Real Assets can meaningfully improve portfolios that otherwise have no allocation.
• For moderate risk portfolios, less than 8% risk, the diversified basket is an attractive approach.
• For higher risk portfolios, a tailored approach can help maximize returns at the expense of diversification within the Real Assets allocation.
Frontier - Individual Components Frontier - Separate Public/Private
Frontier - Wilshire Basket Portfolio A
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0
Risk
Constrained Efficient Frontier
* Compound Annual Return
Portfolio A
Asset Class Allocation
Global Equity 55%
Private Equity 5%
Core Fixed Income
30%
High Yield 10%
Investment Structure
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• Primary / Secondary Approach
– Primary exposures to largest and most established real asset classes / sub-classes (e.g. TIPS, public and private real estate)
– Secondary (complementary) exposures to markets limited in size, involve a higher degree of risk, or limited number of quality investment managers (e.g. timber, oil and gas partnerships)
• Identify constraints based on the above philosophy
Philosophy and Approach
Investment Structure
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Investment Structure
Asset Class Investable Market Size
Manager Opportunity Set
Risk (Absolute)
Implication(s)
TIPS Large Large Low Suitable for primary exposure
Commodities Large Small (except for index-tracking strategies with limited alpha opportunity)
Moderate to High
Potential for primary exposure
Global RE Securities Large Large Moderate Suitable for primary exposure
Master Limited Partnerships Small Small High Complementary exposure due to small opportunity
set / market
Private Real Estate Large Large Moderate Suitable for primary exposure
Infrastructure Small Small Moderate Complementary exposure
Timber Small Small High Complementary exposure, constrain due to small
opportunity set / market
Oil & Gas Medium Medium High Complementary exposure, constrain due to risk level
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• Customize according to unique investment objectives and portfolio requirements
– Seek to maximize correlation to inflation
– Seek to maximize yield
– Seek to maximize return
– Seek to maximize alpha opportunity
– Seek to maximize liquidity
– Seek to minimize risk
Philosophy and Approach
Investment Structure
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Investors should establish expectations regarding the effectiveness of asset classes in meeting their objectives.
Investment Structure
Manager Type Short-term Correlation
to CPI
Long-term Correlation to
CPI
Higher Yield Opportunity
Higher Return Opportunity
(Beta)
Higher Alpha
Opportunity
Liquidity
TIPS X X X
Commodities X X X X
Global RE Securities X X X X
MLP X X X X X
Diversified Public RA X X X X X
Private Real Estate X X X X
Infrastructure X X X
Timber X X X
Oil & Gas X X X X
Diversified Private RA (e.g. FOF)
X X X
Case Study Part 2: Investment Structure /
Implementation
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Example: Alternate Liquidity Scenarios
Case Study Part 2: Investment Structure / Implementation
Frontier w/ 10% Liquidity Frontier w/ > 50% Liquidity
Portfolio A
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0
Risk
Constrained Efficient Frontier
* Compound Annual Return
• Less liquid structure allows for greater enhancement to risk and return.
• A more liquid allocation still provides meaningful portfolio improvement.
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Example: Alternate Yield Scenarios
Case Study Part 2: Investment Structure / Implementation
Real Assets Classes
Expected Yield
Public Basket
Private Basket
Real Assets Basket
Maximum Yield
Balanced Yield
PublicTIPS 1.7% 45% 22.5%Commodities 1.5% 20% 10.0%Global REIT's 4.0% 20% 10.0% 25%MLP's 6.0% 15% 7.5% 50% 25%PrivateReal Estate 4.0% 40% 20.0% 25%Timberland 0.0% 30% 15.0%Oil & Gas 6.0% 30% 15.0% 50% 25%
Total Yield 2.7% 3.4% 3.1% 6.0% 5.0%
Yield of Alternative Allocations• Real Assets provide investors the opportunity to increase the yield in their portfolios.
• Yield can be maximized at the expense of diversification within Real Assets.
• The balanced Real Assets Basket is expected to generate a yield that is similar to Investment Grade Fixed Income.
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Example: Alternate Implementations for Funds of Varying Size
Case Study Part 2: Investment Structure / Implementation
Total Fund Size ($mil) 500 1,000 10,000Real Assets Allocation @ 20% 100 200 2,000
Real Asset Basket Weight Allocation ($mil)PublicTIPS 22.5% 22.5 45.0 450.0Commodities 10.0% 10.0 20.0 200.0Global REITs 10.0% 10.0 20.0 200.0MLPs 7.5% 7.5 15.0 150.0 Public Total 50.0% 50.0 100.0 1,000.0
PrivateReal Estate 20.0% 20.0 40.0 400.0Timberland 15.0% 15.0 30.0 300.0Oil & Gas 15.0% 15.0 30.0 300.0 Private Total 50.0% 50.0 100.0 1,000.0
Hypothetical ImplementationPublicTIPS TIPS Manager Multiple TIPS ManagersCommodities Commodities Manager Multiple Commodities ManagersGlobal REITs Global REITs Manager Multiple Global REITs ManagerMLPs MLP Manager MLP Manager Multiple MLP Managers
Private
Real EstateDedicated Real Estate Manager Real Estate separate account or direct
partnership program
TimberlandTimber separate account or direct
partnership programOil & Gas Direct Oil/Gas partnership program
Diversified Public RA Manager
Private RA Fund of Funds Manager (includes Real Estate)
Private RA Fund of Funds Manager (excludes Real Estate)
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• Private Real Assets
– Consistent and disciplined commitment strategy over time with review and re-adjustment occurring annually
– Diversification according to asset class, investment style and strategy type (e.g. core, value added, opportunistic), fund vintage year
– Utilization of highest caliber investment management organizations and suitable investment vehicles - return spread from top quartile to median can be sizeable
• Public Real Assets
– Implementation approach / market volatility concerns
– Adhere to rebalancing policy
– Funding source for private investments
– Liquidity source for total fund
Commitment Planning
Investment Structure
Summary
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• Perfect correlation to US CPI-U is not realistic. Instead, we focus on asset classes with positive correlation as being potentially beneficial components for real asset portfolios.
• It may be better to employ a real assets basket approach during the asset allocation process and leave the allocation to sub-classes as an investment structure activity. Numerous considerations at the sub-asset class level argue in favor of such an approach:
– Size of market
– Number of quality investment managers
– Complexity of asset class / sub-class
– Degree of risk
– Current valuation /attractiveness
– Other
• Implementation will vary according to each investor’s circumstances and objectives. Fund size will also influence the optimal implementation approach.
Summary
Appendix
Extended History of Real Assets Research
Sample Research Reports in the Wilshire Consulting Research Library:
• Investing in MLPs (August 2011)
• Commodities Market Price Spike: Are Index Investors to Blame? (July 2008)
• Real Asset Investments (August 2007)
• TIPS Correlations (July 2007)
• Timberland Investments (June 2007)
• Infrastructure Investing (2007)
• Private Real Estate Investing (August 2006)
• Global Real Estate Securities (April 2006)
• Commodity Index Comparison (May 2005)
• Commodity Futures Investing: Is All That Glitters Gold? (March 2005)
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