ALM & Strategic Asset Allocation

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Nov 18, 2013 (3 years and 11 months ago)

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ALM & Strategic Asset Allocation


Investment management for insurance companies and pension funds

DeAM Insurance Solutions

June 2006

Evgenij Minkin

1


Organization of Deutsche Bank

*

As rated by Standard & Poor’s/Moody’s Investors Service as at 31 December 2005

Private Banking

Personal Banking

Corporate Finance

Sales & Trading

Transaction Banking

Industrial

Shareholdings

Private Equity

Asset Management

Corporate and

Investment Bank

Private Clients and

Asset Management


Global financial institution


100 years of experience


AA
-
/Aa3 rated financial institution*

Corporate

Investments

Alternative Investments

Real Estate

Infrastructure

Hedge Funds


Retail

Mutual Funds

Retail Structured Products


Traditional Institutional

Insurance Asset Management

Fixed Income

Equity

Quantitative Strategies

Cash

2


As at 31 December 2005

Due to rounding, numbers may not add up to total

Note: Equity and Fixed Income Assets above include assets managed as a part of the Balanced mandates

Global Assets under Management

EUR 535.8 billion

Insurance assets are
22% of global assets
under management

Fixed Income
225.2
Real Estate
51.9
Equity
129.3
Balanced
35.9
Alternative
Investing
9.4
Cash
Management
84.1
3


DeAM’s global insurance presence


A diversified global
insurance asset
management organization


USD 142 billion in assets

under management


90 dedicated insurance
employees including
investment professionals


Broad range of capabilities,
tailored to client objectives


Clarity of purpose: value
creation for clients

As at 31 December 2005

*

Joint venture with Harvest Fund Management

Asia/Pacific offices

Other offices managing Asian assets

Asia joint venture

United States

New York

Chicago

Boston

Europe

Frankfurt

London

Zurich

Asia/Pacific

China*

Hong Kong

Tokyo

Mumbai

Seoul

Singapore

Sydney

4


As at 31 December 2005

*

By service area

Due to rounding, numbers may not add up to total

Assets shown exclude the Stable Value product, which is manufactured by DeAM’s global insurance business unit; they do not in
clu
de assets in which we
provide sub
-
advisory management of assets distributed at third
-
party insurance companies

Global Insurance Assets under Management

EUR
119.8 billion total

Asset allocation

Regional breakdown*

Fixed Income
90.0%
Cash
0.6%
Balanced
2.5%
Alternatives
0.3%
Equity
6.6%
Americas
51.5%
Europe
43.3%
Asia Pacific
5.2%
5


…it seems that optimists are working for insurances


The history shows the pro
-
cyclic behavior of insurance asset management.

Rising equity exposures with increasing or high stock prices, the asset management was
not able to reduce this exposure due to unrealized losses.

Equity exposure and equity prices

Equity exposure, unrealized losses and equity prices

Source: GDV, Thomson Financial Datastream

Source: GDV, Thomson Financial Datastream

0
5
10
15
20
1980
1990
1995
1999
2000
2001
2002
2003
2004
% of total assets
0
1000
2000
3000
4000
5000
6000
7000
8000
Index
Equities (l. h.s.)
Equities and major shareholdings (l. h. s.)
DAX (r. h. s.)
0
5
10
15
20
1997
1998
1999
2000
2001
2002
2003
2004
% of total assets
0
1000
2000
3000
4000
5000
6000
7000
8000
Index
Unrealized gains/losses (l. h. s.)
Equity exposure (l. h. s.)
DAX (r. h. s.)
6


What are usually taken as reasons for high equity
exposures?



Protection from inflation


Grow shareholder value / surplus

7


Agenda


The arguments towards high equity exposure revisited


Which process assures the systematic optimization of the Strategic Asset
Allocation with respect to liabilities?

8


Protection from inflation: The connection between
inflation and equity performance

Intercept of the

regression:

17.73%

Slope of the

regression:

-
3.1

R
-
square:

6.44%

During the last 40 years, the dependence of equity performance on inflation rates was
negative and statistically insignificant

A better protection against inflation is provided by inflation linked bonds

-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
-2%
0%
2%
4%
6%
8%
Inflation
Performance of DAX
9


The Shareholder Value approach


Diversification assumption: symmetric participation at asset performance


The shareholder is interested in insurance
-
specific risk


Asymmetric participation in returns: lower participation at the upside


The shareholder covers all guarantees, small participation on assets outperforming
the guarantees


The Principal
-
Agent
-
Conflict


Incentive to load systematic risk

10


Agenda


The arguments towards high equity exposure revisited


Which process assures the systematic optimization of the Strategic
Asset Allocation with respect to liabilities?

11


Which process assures the systematic optimization of
the Strategic Asset Allocation with respect to
liabilities?

Modeling of
Liabilities

Calibration of
immunizing
portfolio

Determinatio
n


of an
efficient SAA

Overlay/

-

䵡湡来浥n
t

12


The modeling of liabilities:

The interdependence with assets

The dependence of technical reserves and the path of the book yield

0
100
200
300
400
500
600
700
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Technical reserves
Book yield
13


Cashflow der Liabilities und Assets

Optimizing the SAA I:

The immunizing portfolio

Cashflow of liabilities and assets

Additional requirements (bonus)

Assets

Minimum requirements of liabilities (fulfillment of garantees)

Planned book yield

-600
-500
-400
-300
-200
-100
0
100
200
300
400
500
600
2004
2007
2010
2013
2016
2019
2022
2025
2028
2031
2034
2037
2040
2043
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Assets
Liabilities
Add. CF requirements
NN
14


0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0,23%
0,33%
0,44%
0,63%
0,88%
0,83%
1,10%
1,37%
1,65%
1,92%
3,01%
3,07%
3,07%
3,07%
3,07%
3,07%
3,07%
3,07%
3,07%
Corporates
Geldmarkt
Aktienquote
Governments
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0,23%
0,33%
0,44%
0,63%
0,88%
0,83%
1,10%
1,37%
1,65%
1,92%
3,01%
3,07%
3,07%
3,07%
3,07%
3,07%
3,07%
3,07%
3,07%
Corporates
Geldmarkt
Aktienquote
Governments
Optimizing the SAA II:

The efficient frontier (1)

The immunizing portfolio is a critical benchmark to be outperformed by the portfolio
management and a key reference point calibrating the efficient frontier

0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Excess risk
Excess return
Efficient frontier
Current portfolio
Highest Sharpe Ratio
Corporates

Money market

Equity exposure

Governments

15



The usual argumentation towards high equity exposures is questionable


No relationship between equity performance and inflation


Due to the asymmetric participation, shareholder should prefer low systematic risk


The portfolio immunizing the liabilities is the key reference calibrating the
efficient frontier


The capacity to take risks should determine the choice of one portfolio of the
efficient frontier as benchmark for the portfolio management


The performance attribution should show the performance of the immunizing
portfolio, of the efficient portfolio implemented as benchmark and of the
portfolio effectively invested in and therefore make the "real"
α transparent


Executive summary


16


Contact

DWS Investment Russia

Ul. Shepkina 4

129090 Moscow


Elena Loginova, CEO

Tel.

+7 (495) 797
-

5230

elena.loginova@db.com


Arsen Manoukian, Head of Corporate Sales

Tel.

+7 (495) 981
-

4955

arsen.manoukian@db.com


Although the information herein has been obtained from sources believed to be reliable, we do not guarantee its accuracy, com
ple
teness or fairness. Opinions
and estimates involve a number of assumptions which may not prove valid and may be changed without notice. Neither Deutsche A
sse
t Management nor its
affiliated enterprises assume any form of liability for the use of this publication or its contents.


Past performance is no guarantee of future results and no assurance can be given that any structure described herein would yi
eld

favourable investment results
or that the Fund's investment objectives will be achieved or that the investor will receive a return of all or part of their
inv
estment.