Alton R. Cogert, CFA, CPA, CAIA, CGMA
President and Chief Executive Officer
June 25, 2012
NAMIC Management Conference: ...
Investment Policy and Strategy Investment Process Value Chain
Investment Policy & Guidelines
Strategic Asset Allocation ...
Review of Investment Policy and Guidelines
Key components of ‘Best Practices’ Investment Policy:
 Preamble – Who? What...
Question #1
How often does your company review and approve the investment policy?
A.Less Than Annually
B.Annually
C.E...
Strategic Asset Allocation
How to approach Strategic Asset Allocation:
Start with the company’s goals and objectives
...
Question #2
How did your company primarily determine its strategic asset allocation?
A.Efficient Frontier Model
B.“Mat...
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...
Impact of Change in Risk Assets on Surplus
9
Max Loss = 13%
Max Loss = 33%
Max Loss = 52%
Max Loss = 62%
2.5x
4.8x ...
Question #3
What is your company using for its fixed income investment benchmark?
A.A major generic index (e.g. Barclay...
11
Review of Investment Benchmarks
SAA Philosophy
Core fixed income: Over time, 96%+ of total return comes from yield...
12
Review of Investment Benchmarks
Investment Manager Evaluation Process
Evaluating Managers
Investment grade fixed income: Unless they are taking risks ...
Question #4
When was the last time you formally evaluated your investment manager(s)?
A.Within the Past Year
B.Within ...
15
7 Steps to a Successful Investment Manager Search
How to Approach a Manager Search
Have a very specific time line ...
Question #5
When was the last time you conducted a fixed income investment manager search?
A.Within the Past Year
B.Wi...
17
Performance Measurement and Compliance Reporting
What is important about measuring performance and compliance…
Det...
Question #6
1.What is the most important investment issue facing your company?
A.Low rates for longer
B.Credit risk
C....
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NAMIC Management Conference - June 2012

Investment Perspectives presentation for insurers interested in improving their investment process and, thus, their investment results
Published on: Mar 3, 2016
Published in: Economy & Finance      
Source: www.slideshare.net


Transcripts - NAMIC Management Conference - June 2012

  • 1. Alton R. Cogert, CFA, CPA, CAIA, CGMA President and Chief Executive Officer June 25, 2012 NAMIC Management Conference: Investment Perspectives Part I
  • 2. 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
  • 3. 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
  • 4. 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
  • 5. 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’ 5
  • 6. 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 6
  • 7. 7 Efficient Frontier Approach: Common but Flawed
  • 8. 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
  • 9. Impact of Change in Risk Assets on Surplus 9 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.
  • 10. 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 10
  • 11. 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. 12 Review of Investment Benchmarks
  • 13. 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. 13
  • 14. 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 14
  • 15. 15 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.
  • 16. 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 16
  • 17. 17 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’.
  • 18. 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 18

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