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NAMIC Management Conference - June 2012
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Transcript of NAMIC Management Conference - June 2012
Alton R. Cogert, CFA, CPA, CAIA, CGMA
President and Chief Executive Officer
June 25, 2012
NAMIC Management Conference:
Investment Perspectives
Part I
Investment Policy and Strategy
Investment Process Value
Chain
Investment Policy &
Guidelines
Strategic Asset Allocation
Peer Group Analysis
Investment Manager
Evaluation & Selection
Portfolio Monitoring
Performance Measurement &
Analysis
Strong investment results require a
strong investment process. This goes
beyond choosing the right investment
manager.
2
Review of Investment Policy and Guidelines
Key components of ‘Best Practices’ Investment Policy:
Preamble – Who? What? Roles and Responsibilities
Investment Return and Management Objectives
Asset Allocation and Risk Management Guidelines
Investment Performance and Reporting
Investment Policy and Guidelines Evaluation
3
Question #1
How often does your company review and approve the investment policy?
A. Less Than Annually
B. Annually
C. Every Two Years
D. As Needed
E. Other
4
Strategic Asset Allocation
How to approach Strategic Asset Allocation:
Start with the company’s goals and objectives
Understand the company’s lines of business
Understand the Board’s and senior management’s risk appetite
Don’t be fooled by fancy models, and never use historical stats without skepticism; common
sense is the final arbiter
Over 90% of investment returns are determined by asset allocation
Core fixed income versus ‘risky bucket’
Components of the ‘risky bucket’
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Question #2
How did your company primarily determine its strategic asset allocation?
A. Efficient Frontier Model
B. “Matching” to the Duration of Liabilities
C. Stress Testing
D. Comparison with Peers
E. Some of the above
F. All of the above
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7
Efficient Frontier Approach: Common but Flawed
210% of Surplus (Net Assets) allocated to risk assets
8
Case Study ( Early 2008)
Asset Class% of
Portfolio
Expected
Return
Expected
Volatility
Investment Grade Core Fixed Income 69% 4.50% 3.75% 1.00
Risk Assets (US Equity, International Equity, High Yield) 32% 7.50% 16.50% 0.15 1.00
Ratio of Risk Asset Metric to Core FI 166.7% 440.0%
Net Assets as % of Total Portfolio 15%
Risk Assets as % of Net Assets 210% 7.50% 16.50%
Core Fixed Income as % of Net Assets 0% 4.50% 3.75%
Total Portfolio 5.45% 6.13%
Net Asset Portfolio 15.75% 34.65%
Correlation
Impact of Change in Risk Assets on Surplus
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Max Loss = 13%
Max Loss = 33%
Max Loss = 52%
Max Loss = 62%
2.5x 4.8x
4.0x
Downside exposure is measured by:
1. The magnitude of the downside movement;
2. The frequency of downside movement; and
3. The duration of downside movement.
Question #3
What is your company using for its fixed income investment benchmark?
A. A major generic index (e.g. Barclays’ Aggregate Index)
B. Customized from parts of the generic index
C. Required (or budgeted) minimum book yield
D. Required (or budgeted) investment income
E. Other
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11
Review of Investment Benchmarks
SAA Philosophy
Core fixed income: Over time, 96%+ of total return comes from yield. Thus, the manager
is biased in choosing a benchmark with a heavier allocation of low yielding US Treasuries.
Your benchmark should reflect your risk tolerance, but still be tilted toward higher yielding
“spread” products that produce better risk-adjusted returns over time.
Benchmarks must be investable, measurable and provide a ‘high hurdle.’
Most managers will stay close to benchmark because they do not want to be fired.
Benchmark must be tied to strategic asset allocation.
12
Review of Investment Benchmarks
Investment Manager Evaluation Process
Evaluating Managers
Investment grade fixed income: Unless they are taking risks well outside the benchmark, it is
very difficult for a manager to consistently add value, after fees and taxes.
Equities: The more “efficient” the market, the more difficult it is for active management to
consistently add value, after fees and taxes.
Thus, it is always important to consider constraints under which the manager has operated
Managers change (style, people, etc.) and sometimes they even tell you in advance…
For insurer investment grade fixed income, managers are usually terminated for non-
performance, qualitative reasons.
Fees for managing insurance core fixed income are substantially lower than other institutional
assets.
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Question #4
When was the last time you formally evaluated your investment manager(s)?
A. Within the Past Year
B. Within the Past Three Years
C. Within the Past Five Years
D. Longer than Five Years
E. No Formal Evaluation Conducted
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7 Steps to a Successful Investment Manager Search
How to Approach a Manager Search
Have a very specific time line and plan
Know the current state of the market
Understand trends in manager fees
Use a specialized database for best results
7 Steps to a Successful Investment Manager Search
1. Determine the company’s initial preferences. Set criteria for search.
2. Screen for initial list of managers (company may include/exclude)
3. Develop and transmit a confidential company specific questionnaire
4. Recommend a final set of managers. Transmit refined questionnaire, as necessary.
5. Schedule and attend finals presentation, assisting in final selection.
6. Schedule and attend manager due diligence visits, as necessary.
7. Negotiate acceptable fees. Establish service standards, including specific manager
expectations.
Question #5
When was the last time you conducted a fixed income investment manager search?
A. Within the Past Year
B. Within the Past Three Years
C. Within the Past Five Years
D. Within the Past Ten Years
E. Longer than Ten Years
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Performance Measurement and Compliance Reporting
What is important about measuring performance and compliance…
Determine what is more important and why: Total Return (Economic Value) versus Yield
(Investment Income)
Performance must be net of fees and, where applicable, after tax
Performance must be risk adjusted
Don’t stop with judging just one manager, look at the entire portfolio
Understand the ‘whys’ behind performance
Compliance is more than a comparison to limits
Determine if you got what you paid for: Was manager’s actual investment style expected?
Manager must be actively updating your company on potential problems and issues. They
must act like they are just ‘down the hall’.
Question #6
1. What is the most important investment issue facing your company?
A. Low rates for longer
B. Credit risk
C. Manager communication
D. Adequacy of risk culture for investments
E. Efficiently managing the portfolio with limited resources
F. Other
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