UBS Institutional Consulting
Risk Management Strategies for Institutional Investors
Prepared by John S. Adams, CFP, CIMA Senior Vice President -Investments
Advisory & Brokerage Services
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UBS Institutional Consulting
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UBS Institutional Consulting is a specialized advisory consulting service
program of UBS Financial Services Inc.
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UBS Institutional Consulting is one of the largest investment consulting
providers in the country*, consulting to over 500 institutional clients with
approximately $45 billion in assets under advisement**
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UBS Institutional Consulting has delivered specialized, comprehensive
investment consulting services to institutional clients since 1984***
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Clients include corporations, private and public retirement plans,
Taft-Hartley plans, municipalities, foundations and endowments
Organizational Structure - The Arbor Group at
UBS
UBS Financial Services Inc.
• As a member of the UBS AG family, UBS Financial Services Inc. is one of the leading US wealth managers. UBS Financial Services Inc. is a full service brokerage firm with a network of over 8,000 Financial Advisors.
UBS Institutional Consulting
• A select group of approximately 95 Financial Advisors have been authorized by UBS to provide institutional consulting services. These Institutional Consultants possess the knowledge, capabilities, and resources necessary to provide investment advisory services to institutional clients.
Consultant- The Arbor Group
• The Arbor Group, lead by UBS Institutional Consultant, John S. Adams, CFP, CIMA, provides access to high quality institutional advice tailored to reflect the specific needs, philosophy, and mission of clients. We focus on serving the investment needs of endowments and foundations.
UBS
Global Asset Management Investment Bank
Wealth Management & Business Banking
UBS Institutional Consulting
Our Mission
Risk Management Strategies for
Institutional Investors
Risk Management Strategies*
1.
Strategic portfolio rebalancing
2.
Tactical asset allocation
3.
Use of low and negatively correlated asset classes
4.
Identification and defensive use of equity manager
capture ratios
5.
Tactical adjustment of index vs. active equity managers
6.
Mathematical “market breaker” risk reduction system
7.
Optimal Curve allocation adjustment
8.
Risk Budgeting
9.
Use of “Bear” Exchange Traded Funds (ETFs) for
hedging risk
Risk Management Strategies - Today's Discussion
1.
Strategic portfolio rebalancing
2.
Tactical asset allocation
3.
Identification and defensive use of equity
manager capture ratios
4.
Mathematical “market breaker” risk reduction
system
Importance of Asset Allocation
A 1991 landmark study of large pension funds*
concluded that if you compare two portfolios—one that
used an asset allocation strategy with one that did not—
91% of the variation in portfolio performance could be
attributed to asset allocation
Strategic Portfolio Rebalancing
♦ Rebalancing of portfolios can systematically reduce portfolio volatility and increase long-term returns.
♦ Modern Portfolio Theory assumes that market dynamics assure that a "risk
premium" is assigned to higher volatility asset classes. The risk premium accords greater long-term returns to higher risk assets.
♦ Rebalancing of accounts on a periodic basis will transfer gains from appreciating asset classes to assets classes with lower appreciation and lower risk. This should be scheduled with regularity.
— Annual — Quarterly — Monthly
♦ Many institutional investors intentionally maintain only a long-term strategic
allocation and allow individual asset managers to make all tactical adaptations. For these investors, periodic rebalancing moves the portfolio back to the long-term
Tactical Portfolio Rebalancing
Tactical Portfolio Rebalancing allows implementation of tactical asset
allocation advice, potentially taking advantage of market conditions.
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The purpose of tactical asset allocation can be to enhance capital
appreciation, to reduce risk or both.
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The movement of assets on a tactical basis should be based upon solid
research, and informed by a change in the asset allocation model – not
merely a "hunch" guided by a Consultant or Board member.
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Tactical decisions are made on the asset class level. Individual asset
managers or index funds are employed to manage the assets in the class.
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Strategic allocation is necessary to control risk. Tactical allocation is
Defensive use of Manager Capture Ratios
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Good defensive managers can reduce overall portfolio risk by controlling
losses in down markets and by exhibiting less portfolio volatility than their
respective benchmark index.
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Asset managers can be described by the percentage “capture” of the
performance of the relevant market index that is used as a performance
benchmark for the manager.
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Index funds should have a capture ratio of 100% - expressed as 1.0
Defensive use of Manager Capture Ratios
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Those asset managers that tend to outperform the market index in up
markets have an upside capture ratio of over 1.0. Managers that lose less
than the index in periods of market decline have a lower than 1.0
“downside capture ratio.”
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These values are quantified for every asset manager in the Investment
Consultant’s performance database.
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If the ratio of upside to downside performance is higher than 1.0, this
Defensive use of Manager Capture Ratios
This up/down capture ratio does not just tell the Investment Consultant if the
manager outperforms the benchmark index, but how much of that
out-performance is created by playing good defense compared to playing
good offence.
The use of historical information regarding manager capture ratios is not
completely reliable as a predictive tool due to three factors.
1.
The managers that created the discipline in past markets may have
experienced turnover in key positions.
2.
Assuming the same managers and analysts are employed, every down
market has different dynamics.
3.
There is a long-documented tendency of managers towards mean
Mathematical "Market breaker" System
♦ A "Market breaker" system is intended to protect portfolios from very large and unpredictable market declines.
♦ The tactical advice on allocation adjustments is triggered by a mathematical system involving limits, referred to as “breakers”. When a limit is exceeded, the Investment Consultant informs the client of the event and gives advice providing the client the option of implementing the defensive strategy.
♦ No specific time frames are imposed to the discipline, as it is informed by declines or gains in market indices only.
♦ Asset classes are sold at successive market lows and purchased at successive highs. This results in progressively lower exposure to asset classes in the event of very large market declines. It also results in progressively higher exposures during periods of market recovery.
Steps to Implement a "Market breaker" System
The steps taken in a breaker system are as follows:
1. An appropriate index benchmark is identified. For example, the U.S. market benchmark commonly used is the S&P 500. The trailing one-year market high point is used as the point from which breakers are measured.
2. Breakers are set at specified percentages of market index decline.
3. As each breaker (percentage of decline) is breached, the Investment Consultant advises about initiating the sale of an established percentage of the investments in the asset class. 4. As long as the market does not go above the prior market high, the recommended
percentage is maintained. As long as the market stays above the next downward breaker point, the recommended percentage is maintained. This range is called a “corridor” of asset exposure. Thus there is normally a wide “corridor” between these set levels, to assure that breakers are rarely implemented.
5. If the next breaker (down percentage break point) is reached, the Consultant advises that the next established percentage of the investment in the asset class be sold.
6. This results in advice to have progressively lower exposure to asset classes in the event of very large market declines.
7. Assuming that the market and its relative index begin to increase, the percentage of equities sold at each breaker is re-purchased as the market attains successive established
Steps to Implement a "Market breaker" System
♦ In using any risk management system that deviates from maintaining the long-term strategic allocation for an institution, the Consultant's role is to provide advice and council, but only the client may authorize a change in asset allocation.
♦ In the case of the "market breaker", the tactical advice on adjustments is triggered by a mathematical system involving limits, referred to as “breakers”. When a limit is exceeded, the Investment Consultant informs the client of the event and gives advice providing the client the option of implementing the defensive strategy
♦ Modeling of the use of mathematic breakers shows that it has limited but certain opportunity costs in advancing markets. This opportunity cost is the “insurance premium” for implementing the “market breaker” defensive strategy.
Inclusion of Principal Protected Notes
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Principal Protected Notes (PPNs) are a type of structured product offered
by many large investment banks.
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Banks normally do not participate in any of the risk in the underlying
options, but make their profits from fees for origination of structured notes.
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PPNs are not insured by Federal or State government programs in the
Inclusion of Principal Protected Notes
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There are several variations in structure. Returns can be equity linked
and provide a guarantee of principal protection if held until term.
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The simplest form of PPN is an equity-linked note with a specific maturity
(12, 18, 24, 36 or 48 months) and a structure providing a multiple of the
return of an underlying index.
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A second common type of PPN is the Barrier Note. The barrier note
typically provides a positive return linked to either or both the negative or
positive return of the underlying equity or index.
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PPNs can be substituted for index holdings. When this is done, as long
Inclusion of Principal Protected Notes
Implementation Challenges:
1. The Investment Policy Statement of the client may not have language that includes or excludes structured products, of which Principal Protected Notes are a sub-class.
2. Principal Protected Notes are a financial product that lies outside of the fee-based investment management normally used by Investment Consultants. The products are sold by banks and are registered as private placement new issues.
3. Because PPNs are not insured by Federal or State government programs in the United States, the principal guarantee resides with the issuing bank. This in turn puts the Investment Consultant in the unusual position of having to perform due diligence related to the solvency of the bank during the period of the guarantee.
Risk Management Strategies
*This presentation is provided for educational purposes only and does not represent a comprehensive list of questions or considerations necessary for making effective investment decisions. Consult with your investment and legal advisors for a more through discussion of your unique needs, risks, expenses and other investment-related matters.
This presentation is not intended to be a recommendation to you regarding any particular investment strategy or investment approach and is not intended to be a recommendation or solicitation for the purchase or sale of any securities or index.
The Arbor Group at UBS – Business Associates
John S. Adams, CFP CIMA
Senior Vice President - Investments
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Professional Associates
Carlos Obando
The Arbor Group at UBS
Allison Nathe
Senior Registered Client Service Associate
Yuta Taketani Strategy & Service Operations & Analysis Dina Carkonen
The Management Team at UBS
Brandt Westover
Executive Director Branch Manager
Janet Leahy Whitney Shelton
Senior Branch Management
Branch Administration
Robert Meston
The UBS Institutional Investment
Consulting Process
UBS Institutional Consulting Process
Asset Allocation Modeling Ongoing Consulting and Performance Investment Policy Planning Assistance ♦Asset Allocation Analysis ♦Overall Portfolio Design ♦Investment Manager Search, Evaluation and Recommendation ♦Strategy Integration ♦Cost Analysis ♦Portfolio and Manager Reviews ♦Portfolio Rebalancing ♦Develop Further Action Plans ♦Trustee Education ♦Assess Current Situation ♦Risk/Reward Profile ♦Assistance with Development and Review Institutions Clients ManagerOur Consulting Services
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Assistance in developing Investment Policy statements
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Asset allocation analysis
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Spending Policy assistance
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Investment manager research/evaluation and search capabilities
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Investment manager performance evaluation
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Foundation and Endowment services:
— Board education and communication
— Investment Policy performance monitoring
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Ongoing communication
Investment Policy
Investment Policy Statement Components
Risk Tolerance and Risk Management Appropriate Time Horizon
Performance Review Standards
Rebalancing Strategies
Acceptable Investment Vehicles Investment Goals & Objectives
Responsibilities of Interested Parties
Other Considerations Spending Policy
Securities Guidelines
Asset Allocation Development*
Asset Allocation Methodology
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Assessment of your investment objectives and tolerance for risk
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Sophisticated proprietary methodologies utilizing our capital market
assumptions
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An estimated covariance matrix for a set of primary factors that
estimates expected relative reactions during all market conditions
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Identification of underlying economic and fundamental influences of
each asset class to be considered for inclusion
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Our research on the future risk and return potential of each asset
category under consideration
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Equity and fixed income allocations that are further segmented into
subclasses and investment styles
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Final correlations among asset classes as well as market-related
risks
Investment Manager Research and
Recommendation
Our Manager Research Model
Process is both quantitative and qualitative* For managers included in searches, we currently provide IS Researched and IS Eligible categories of investment manager analysis by the Investment Solutions Manager Research Group. We cannot assure you that we will continue to provide ongoing analysis for any of these
Verify and Build Conviction Ongoing Due Diligence
Discussion and Decision by
Committee
Manager Research Process
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Manager research and due diligence is a collaborative effort between UBS
research professionals and your Institutional Consultant
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UBS proprietary database generated by the Manager Research Group of
Investment Solutions
– Managers must satisfy certain due diligence requirements – Ongoing due diligence review
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Your Institutional Consultant has access to independent manager
databases for information on thousands of investment products
– Plan Sponsor Network (PSN) separate account database
– Covers more than 2,000 investment managers representing more than
10,000 domestic, global and international investment programs
– Basic firm-level information to detailed product specific information and
Evaluating Investment Managers
♦ Organization
— Financially and structurally sound — Incentive arrangements and retention — Proper resources
— Disaster recovery plan
♦ Quality of Personnel
— Experienced and skilled investment professionals
that work well as a team
♦ Philosophy
— Clearly defined investment philosophy
♦ Process
— Methods and procedures must be sound and
consistent
— Effectiveness of decision-making — Buy and sell disciplines
— Performed well in the past and structured to
perform well in the future
♦ Quality of Research
— Proper resources to track full universe — Knowledgeable and skilled research team — Objectivity and creativity
♦ Risk Management
— Appropriate system of risk controls
— Managed in accordance to their philosophy and
process
♦ Style Consistency and Implementation
— Adherence to style
— Appropriate trading capabilities — System of checks and balances
♦ Performance
— Competitive past absolute and risk-adjusted
performance results
— Consistent with investment philosophy — Track record by current team
Researched and Institutional reviewed strategies* are evaluated on the following criteria:
Portfolio Review &
Communication
Portfolio Reviews
Basic Performance Report Components
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Summary of assets at the beginning and end of the period (including
additions and withdrawals)
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Industry standard time-weighted rates of return
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Graphic and tabular representations of performance
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Comparisons to a universe of similar managers
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Market cycle comparisons
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Performance attribution
Portfolio Reviews
Our objective is to provide a comprehensive format to help you
determine the extent to which your goals are being met
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Performance monitoring reports are provided quarterly for each manager and
the total fund composite versus objectives, indexes and peer groups
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Benchmarks and comparative universes are customized based upon your
objectives and the manager’s investment approach
Performance Evaluation In-depth
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The Investment Policy Statement provides standards and the frequency for
portfolio review
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Quarterly evaluation of performance, execution of style of each manager
relative to selection criteria and any material changes within the manager's
organization are reviewed
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Formal annual review of the investment plan and each individual investment
manager
The Results of the UBS Institutional Consulting Process
♦ Clearly articulated goals and objectives and a methodology to pursue them
♦ Attention is focused on implementation of the Investment Policy
♦ A formal and customized asset allocation
♦ Appropriate investment managers to fulfill the foundation's asset allocation
♦ A method to objectively evaluate investment performance
♦ Customized fee structures
♦ Comfort of knowing that you are addressing your obligations
♦ Senior Consultants personally meet with the Board
The Arbor Group – A Commitment to Conservation Funds
♦ Proven experience and dedicated business structure from The Arbor Group at UBS –The UBS Institutional Consulting group specializing in service for Conservation Trust Funds
♦ The Arbor Group are members and consistent donors to International environmental conservation. This includes The World Wildlife Fund, Conservation International, The Wildlife Conservation Society, The Ocean Conservancy, Methow Conservancy, Sierra Club and World Wildlife Fund
♦ Global Investment Research of UBS, including the largest social and environmental investment research department in the major banks
♦ Speakers at conferences and workshops about best practices for investment management and risk control for foundations and endowments
Disclaimer
It is important that you understand the ways in which we conduct business and the applicable laws and regulations that govern us. As a firm providing wealth management services to clients, we are registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser and a broker-dealer, offering both investment advisory and brokerage services. Though there are
similarities among these services, the investment advisory programs and brokerage accounts we offer are separate and distinct, differ in material ways and are governed by different laws and separate contracts.
It is important that you carefully read the agreements and disclosures that we provide to you about the products or services we offer. While we strive to ensure the nature of our services is clear in the materials we publish, if at any time you seek clarification the nature of your accounts or the services you receive, please speak with your Financial Advisor.
For more information, please visit our website at www.ubs.com/workingwithus
UBS Institutional Consulting Services are advisory services and clients should read the ADV Disclosure Document applicable to UBS Institutional Consulting carefully before entering into a Consulting Services Agreement with UBS Institutional Consulting.
This presentation is provided for educational purposes only and does not represent a
