fAlternative investments for pension fundspension funds

QiaoYang, XuMinminBeijing Technology and Business Universityg gy y

China International Conference on Insurance and Risk ManagementQinghai,China

July 20, 2010

Background Global pension systems have accumulated huge value of Global pension systems have accumulated huge value of

assets

P i f d b th t i t t i tit ti l Pension funds become the most important institutional investors in the global financial market.

Asset allocation plays an important role in pension management.

Pension funds’ allocations to alternative assets have continued to rise.

Outline An introduction to alternative investments An introduction to alternative investments

Why should pension funds invest in alternative assets

Risks in alternative investments

Alternative investments for pension funds around the world

China’s pension funds investment regulation and practicep g p

An introduction to alternative investments

What are alternative investments? In simple terms an alternative investment is any investment In simple terms, an alternative investment is any investment

that does not fit into the traditional buckets that are familiar to most investors.to ost vesto s.

H d f dAlternative investmentsBonds/debt

Hedge fundsPrivate equityR l t t

Cash (Cash Stocks

Real estateCommoditiesN t l relevants)/Equity Natural resourcesGold and precious metals…

Alt ti t i tAlternative assets investors

Chart1: Global Alternative Investments by Type of investors (2007)

High net-worth

Pension funds37%other

individuals15%

institutions23%

Insurance companies

Mutual funds13%

Foundations and

endoements10%3%

Alternative asset classes

Hedge funds/fund of hedge fund

Private equity Private equity

Real estate

d d f l f Commodities and financial futures

Why should pension funds invest in alternative assets

1.The demand of searching for higher yield

Researches show that alternative assets were able to deliver overall higher and more consistent returns than the traditional gassets classes during the last one or two decades

Cash Bonds Equity Real Estate CommoditiesHedge Funds

Private Equity

Table1: Annualised statistics of asset classes (Jan-1994 to Jun-2007)

Funds

Return 5.07% 6.08% 11.06% 6.07% 9.29% 12.43% 16.29%

Volatility 0.60% 5.50% 15.50% 13.70% 19.40% 7.80% 9.90%

Sharpe ti

0 0.07 0.35 0.08 0.18 0.86 1.07ratio

Source: Groot and Swinkles (2007)

2.portfolio diversification benefits

The basis of Markowitz’s portfolio theory is diversification

In a global economy, traditional asset classes such as stock and bonds are increasingly linked, but alternative assets are less correlated with an overall market.

World Stock Inde World Bond Inde

Table2: Correlation between Traditional Assets and Alternative Assets (2000-2005)

World Stock Index World Bond Index

Hedge Fund Index 0.46 0.13

Real Estate Index 0.62 0.08

Commodity Index 0 02 0 01Commodity Index 0.02 0.01

Source: Credit Suisse/ Tremont, FTSE EPRA/NAREIT, Goldman Sachs, Bloomberg.

3. Optimizing the match of pension assets and liabilitiesliabilities

To meet their future pension liabilities pension funds need to To meet their future pension liabilities, pension funds need to gain higher return of their assets

Alternative investments can optimize the duration matching of Alternative investments can optimize the duration matching of the pension assets and liabilities

Risks in alternative investmentl d k liquidity risk

operational risk

limited transparency

valuation weaknessesvaluation weaknesses

reputation risk

i k i i f t i risks arising from outsourcing

Alternative investment for pension funds around the world

An overview of global pension funds Pension funds assets keep increasing Pension funds assets keep increasing

Table3: Global pension funds assets

Total OECD (30Private pension

fundsPublic pension funds Total

Table3:  Global pension funds assets

Total OECD (30 countries,2007)

funds

78.9% of GDP 14.5% of GDP 93.4%

1999 2009Towars Waston 13 pension markets US$16318bn,76% of

GDPUS$23290bn,70% of GDP

World largest 300 pension funds

2003 2008

US$6593 billions US$10429 billions

Graph 2: Pension assets in 13 markets (USD Billion)p ( )

Table3: Global pension funds assetsTable3:  Global pension funds assets

Alt ti i t t f l b l i f dAlternative investments for global pension funds

Global pension funds’ allocations to alternative assets Global pension funds allocations to alternative assets have continued to rise.

17% of l

7% of total

total assets

assets

1999 2009

pension assets allocation during the period 1999~2009 l Exposure to alternative investments continues to grow

Alt ti i t t f l b l i f dAlternative investments for global pension funds

Pension funds’ increasing exposure to alternative Pension funds increasing exposure to alternative investments are most likely to continue.

A di t (b G i h A i t ) According to a new survey (by Greenwich Associates), Approximately 25% of the 234 funds surveyed plan to

i ll ti t i t it b f 2012 20% ill raise allocations to private equity before 2012, 20% will increase international equities, and 18% will get into h d f d th ll ti ill tl f hedge funds. the allocations will come mostly from domestic equities and Fixed Income.

An example: CalPERS ’ alternative investments

The California Public Employees’ Retirement The California Public Employees Retirement system(CalPERS )

One of the world largest pension funds. Ranked 4 at the end of g p2008; total assets US$214 billion.

The CalPERS started Investing in alternative assets in the early 1990s.

As of the end of March 2006, the CalPERS invested 5.1% of its l ( 211 1 b ll ) l d h 5 0% total asset ($211.1 billion) into real estate and other 5.0% into

hedge funds and private equity. And as of June 21 2010, the allocation to real estate increased to 7% ($14 8 billion) and allocation to real estate increased to 7% ($14.8 billion), and asset allocated to alternative investment market amount to 13%.

An example: CalPERS ’ alternative

CalPERS’s asset allocation 2006 and 2010

investments CalPERS s asset allocation 2006 and 2010

Source: CalPERS. website:http://www.calpers.ca.gov/

China’s pension funds investments regulation and practice

China’s pension funds

Table4: China’s pension fund (RMB billion)

plan type financing value of t

Table4: China s pension fund (RMB billion)

p yp g assets

1st pillarbasic pension mandatory DB PAYG 1300

Individual d t DC fully 43 959Individual accounts mandatory DC fully

funding 43.959

2nd pillar Enterprise Pension voluntary DC fully

funding 200 g

National Social Security fund Sovereign pension fund 776.6

China’s pension funds investments regulation

The basic pension of 1st pillar is financed on a PAYG basis The basic pension of 1 pillar is financed on a PAYG basis, and the assets are allowed to invest only in bank deposits and government bonds.gove e t o s.

No specific regulation so far. In practice same as NSS

The Enterprise Pension: The Enterprise Pension:

Asset classes limitationCash relevants ＞=20%Fixed Income ＜=50%

G t b d ＞ 20%Government bonds:＞=20%Equity ＜=30%

stocks:＜=20%s oc s: %

Alternative investment practice National Social Security Fund’s aassetallocation National Social Security Fund s aassetallocation

Alternative investment practice So far National Social Security Fund’s has So far National Social Security Fund s has

invested in 6 PE funds, and is deemed the main and largest institutional LP in PE marketand largest institutional LP in PE market.

These 6 PE funds are:中比基金 渤海产业基金 鼎晖基金 弘毅基中比基金、渤海产业基金、鼎晖基金、弘毅基金、绵阳产业基金

Totaled 8 bn (6 bn invested already);account for 1% of the total asset of NSS fund.

Thank you!