1. Strategic Asset Allocation for Employee Retirement Funds Pakistan Society of Actuaries Mir Muhammad Ali, CFA May 14 th 2013

2. Retirement Savings Main Vehicles ©2013 UBL Fund Managers. All rights reserved.2  Defined Benefit Plans (DB)  Defined Contribution Plans (DC)  Voluntary Pension Schemes (VPS)

3. Retirement Savings On the Ground Situation ©2013 UBL Fund Managers. All rights reserved.3  DB not being offered by all  More emphasis on DC managed by the employer  Not much awareness on VPS  Asset Allocation generally towards low risk  Individuals managing their own retirement savings

4. Retirement Savings DC Investing Key Issues in Pakistan ©2013 UBL Fund Managers. All rights reserved.4  Extremely risk averse investing focusing on short term government securities  Safety first approach  No concern for real rate of return  Expertise and Time for quality decision making missing

5. Retirement Savings Factors Affecting Strategic Asset Allocation ©2013 UBL Fund Managers. All rights reserved.5  Investor Psychology  Focus on nominal returns not real returns  Approach towards long term investing

6.  Would the savings outlive expenses  Accumulation is simple but real challenge is investing Retirement Savings Key Investor Concerns ©2013 UBL Fund Managers. All rights reserved.6

7. Retirement Savings Behavioral Challenges ©2013 UBL Fund Managers. All rights reserved.7 Blackrock Survey on Retirement Savings 54% are worried about outliving their savings 75% want their money to be safe and secured than to try to generate the returns they need for the future Source: Blackrock Retirement Survey 2013

8. ©2013 UBL Fund Managers. All rights reserved.8 - Daniel Kahneman Nobel Laureate and leading behavioral economist People’s investment behavior is not as rational as most economic theories assume. Retirement Savings Behavioral Challenges

9. Strategic Asset Allocation Behavioral Challenges ©2013 UBL Fund Managers. All rights reserved.9  Investors feel more pain when they lose money  Too much concerned about the noise out there  System wired towards short term

10. They can assist the Plan Sponsors in: – Developing and reviewing Investment Policy Statements – Designing Strategic Asset Allocation – Managing the investment funds – Developing models for determining the amount of periodic contributions needed to achieve objectives ©2012 UBL Fund Managers. All rights reserved.10 Overcoming Behavioral Issues Appoint Investment Advisors

11. ©2012 UBL Fund Managers. All rights reserved.11 Focus on nominal returns not real returns

12. Time Value of Money A fixed monthly expense of PKR 30,000 p.m. today over time…. Inflation assumed @ 10%

13. While the value of your savings erodes over time, thanks to inflation Inflation assumed @ 10% Time Value of Money

14. The expense – savings mismatch (Lets discuss) Inflation assumed @ 10% All figures in PKR (‘000)

15. Investors need to save regularly into assets that can beat inflation to meet their financial goals Asset Allocation Course of action

16. Pakistan Nominal and Real Returns Jan’01 – Oct’12 16©2013 UBL Fund Managers. All rights reserved. Data Source: Magnus Investment Advisors

17. ©2013 UBL Fund Managers. All rights reserved.17 An Employee Fund employing a conservative low risk asset allocation strategy has in fact taken a bigger risk…

18. Problem realized, what next? 18©2013 UBL Fund Managers. All rights reserved.  The ‘low risk’ strategy may not have the least risk  Appetite to take some risk to generate real returns  Combination of ‘low risk’ and ‘return generating’ assets

19. Optimal Asset Allocation Scientific Approach

20. Methodology 20  Risk return profiles of readily investable asset classes (stocks and government securities) have been used in the analysis.  A total of 142 data points (Monthly returns: Jan’01-Oct’12) have been considered for calculation of various statistics used in the analysis.  Culmination of the aforementioned statistics is the overall asset allocation based on the work of Dr. Harry M. Markowitz on Modern Portfolio Theory. ©2013 UBL Fund Managers. All rights reserved.

21. Source of statistics for 12 year return analysis 21  Stocks 1 : KSE-100 Index is used as a proxy returns.  Long term government securities 1 : The PIB that has a maturity closest to ten years at the beginning of each calendar year.  Medium term government securities 1 : The PIB that has a maturity closest to five years at the beginning of each calendar year.  Short term government securities 1 : The proxy for cash is 1 year Pakistan Revaluation Rate (PKRV).  Inflation 1 : Rate of appreciation in the CPI basket in each calendar year. 1 Returns, standard deviation and correlation for various asset classes have been taken from the research titled “Institutional Investments – Long term returns, Strategic asset allocation and Comparison with other emerging markets” by Magnus Investment Advisors ©2013 UBL Fund Managers. All rights reserved.

22. What is the ideal asset allocation? 22©2013 UBL Fund Managers. All rights reserved.

23. How much should be placed where? 23©2013 UBL Fund Managers. All rights reserved.

24. Maximisation of risk adjusted returns 24©2013 UBL Fund Managers. All rights reserved.

25. Common fears of investing in equity 25©2013 UBL Fund Managers. All rights reserved. The market might crash! I can’t keep track of market ups and downs Which scrips should I invest in I will lose my Capital Fear of Market Lock down Is there a Solution? We don’t invest in Equity because… EQUITIES Political instability / Elections

26. Is there a painless and low risk way of Equity investing? ©2013 UBL Fund Managers. All rights reserved.

27. Investing in equity 27©2013 UBL Fund Managers. All rights reserved.  It is not about timing the market, its actually about time in the market  Those who have burnt their fingers are due to poor timing or poor scrip selection  No one can time the market perfectly, all the time

28. One time equity investing can be risky ©2013 UBL Fund Managers. All rights reserved.

29. If Equity is the best long term investment then how to go about it … ©2013 UBL Fund Managers. All rights reserved.

30. Painless Equity Investing Regular or Periodic investing ©2013 UBL Fund Managers. All rights reserved.30  Employ the Regular Systematic Investing methodology to build the equity portfolio over time, smoothing out market fluctuations.  Advantage of Rupee/Cost averaging  The plan is designed to gradually build an equity portfolio

31. ©2012 UBL Fund Managers. All rights reserved.31 Systematic Investing Building portfolio step by step

32. Time Value of Money SCENARIO Starting amount10,000,000 Starting date1-May-08 Closing date10-May-13 Periodic transfer 55,777 FrequencyWeekly RESULTS Investment Type Value at the end of the PeriodReturns in Percentage (%) Lump Sum14,869,89549% Systematic Transfer Plan22,494,914125%

33. Time Value of Money GRAPHICAL DEPICTION

34. Conclusion 34  Overcome Investor Psychology barriers through expert advice  Returns on Banking deposits and short term government securities are not enough to protect investors against inflation  Retirement savings are long term investments, some exposure to equities is necessary to beat the inflation  An asset allocation having around 20% exposure in equities and 80% in medium term corporate and government securities could potentially generate the greatest value for the investor  One time equity investing should be avoided  Invest in equity regularly over a long period of time and build exposure gradually over the time period ©2013 UBL Fund Managers. All rights reserved.

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