FOR PROFESSIONAL INVESTORS
Nicosia , Conference
June 4th 2014
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Lessons from existing Life-Cycle offerings
3
Target-Date «Life-Cycle» Funds
Definition
Target date funds, which are also called lifecycle funds, are designed to offer a convenient way
to invest for a person expecting to retire around a particular date. A target date fund pursues a
long-term investment strategy, using a mix of asset classes (or asset allocation) that the fund
provider adjusts to become more conservative over time. Research shows that asset allocation
is one of the most important factors in long-term portfolio performance.
Features
• Diversification across asset classes
• Avoiding extreme asset allocations
• Automatic rebalancing
• Automatic adjustment for changing risk profile
Source: www.ici.org
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Target-Date «Life-Cycle» Funds
US MARKET
• The target-date fund industry continues to have some of the most consistent cash flows
among all open-end mutual funds
For the past five years, net flows into these funds have averaged about USD
48 billion per year
• In 2013 target-date funds took in
nearly USD 51 billion in net new
assets, bringing the industry’s
total net assets up to USD 621
billion
• Target date strategies is expected to capture 63.4% of 401(k) contributions in 2018
Source: Ibbotson; Global analytics firm Cerulli Associates
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Target-Date «Life-Cycle» Funds
…and in Europe?
• European Life-Cycle funds are structurally different to US funds and take a far more
aggressive approach.
• Some experiences:
Austria: first introduced lifecycle investing in 2004 as a “target risk fund”. Now almost all schemes to secure
retirement for employees (Pensionskasse) offer a lifecycle option
Netherland: lifecycle funds have grown to such an extent that in 2007, the Pension Act required all defined
contribution schemed to have a lifecycle default.
Sweden: in 1998, the government passed pension reforms increasing the use of lifecycle funds. Although
lifecycle represent only a small segment of the market, their role has endured for over a decade
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With previous offers, risk of sacrificing protection or performance
Target date offers de-risking over time (“glide-path”) but
no formal protection
 Risk of protection being insufficient for some investors
Proportion in %
100%
Target date offers with 100% max NAV formal protection
 Risk of sacrificing upside potential in low interest rate
environments
 Opportunity cost for investment occurring in high rate context
Euros
Asset allocation at retirement date
65
90%
60
80%
70%
55
60%
50
50%
45
40%
30%
20%
10%
0%
Nov-20
40
Cash
Bonds
Equity
Years
NAV
Nov-30
Nov-40
Nov-50
Nov-60
Nov-70
Guaranteed value at maturity
Years
Need to develop a new type of offering, combining protection and upside potential
Source: BNPP IP, for illustrative purposes only
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Need for a solution adaptative to various interest rate regime
Swap rates
Interest rates: currently low… and unpredictable over a long term savings horizon
7,00%
6,00%
5Y IR
?
5Y IR
5,00%
8Y IR
8Y IR
10Y IR
13Y IR
4,00%
10Y IR
13Y IR
3,00%
15Y IR
15Y IR
20Y IR
25Y IR
2,00%
20Y IR
25Y IR
1,00%
30Y IR
30Y IR
0,00%
Our starting point to develop BNP Paribas Plan Easy Future
Source: BNPP IP
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Easy Future: our answer, based on two innovations
Aiming to
reconciliate
Innovation 1
Protection mechanism
- Protection and upside potential reconciled
- Adaptation to market changes
- An offer built to remain relevant in the future
- Potential good news to come
- Value formally protected at maturity
- Protection adaptative to:
- Interest rate
- Time remaining to maturity
Innovation 2
- Reasonable sized cushion
Management of the - High diversification
risky assets
- Risk-controlled leverage
A breakthrough approach documented in a white paper
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Easy Future for the investor in a nutshell
Range of 8 open-ended target dated sub-funds ranging from 2018 to 2043, allowing to invest at
one’s own pace and respect one’s own horizon, well-adapted to progressive savings
Aiming to offer a good balance between:
capital growth potential:
a well-calibrated portion of funds
invested in performance engines
&
an adaptative Formal Protection:
a formally protected value at maturity
for each fund which can only
increase over time
A Cushion Portfolio Insurance range of funds with relevant value proposal whatever time left to
maturity & interest rates, hence well-adapted to progressive savings
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An adaptative protection mechanism
● A formally protected Value at maturity, which can only increase over time
– Common to all the investors of a given sub-fund
– Formal protection given by the BNP Paribas Group
● A daily calculation to determine the protection
– Daily calculation of new potential value at maturity:
Protected Value at maturity = Current NAV x Current Protection Ratio
The best of 2
1. Linked to time remaining to
maturity
2. Linked to interest rate
conditions
– New value at maturity only taken into account if above previous one
Introducing a new approach: PIWAP = Portfolio Insurance With Adaptative Protection
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2nd protection: highlighting the limits of traditional approaches
Traditional guaranteed funds = pre-determined protection ratios
Here 100% of investor’s capital guaranteed in 25 years
1
Put aside assets
ensuring protection
2
Deduct size of cushion
investable in risky assets
Case 1: low interest rates (1.5%)
Cushion investable in
risky assets
11 €*
Assets ensuring
protection
89 €
NAV=100€
?
100 €
Protected NAV at maturity=100€
 Protection excessively ambitious,
upside potential sacrificed
Case 2: high interest rates (5%)
?
Cushion investable in
risky assets
Assets ensuring
protection
62 €*
100 €
38 €
NAV=100€
Protected NAV at maturity = 100€
 Protection sacrificed, excessive risk taking
Risk taking (protection/return couple) depends on rates and residual maturity
Source: BNPP IP; for illustrative purpose only ; Management fees assumption: 1% - * Level of the cushion if a new protection is given
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2nd protection: paradigm change by linking it to interest rates
Our proposition = adapt protection to interest rate conditions
1
Invest a reasonably-sized
cushion in risky assets
2
Deduct the relevant protection
given interest rates
Case 1: low interest rates (1.5%)
Case 2: high interest rates (5%)
?
Cushion investable in
risky assets
Assets ensuring
protection
?
25
75
NAV=100€
85
Protected NAV at maturity=85€
Cushion investable in
risky assets
Assets ensuring
protection
200
25
75
NAV=100€
Protected NAV at maturity = 200€
Protection and upside potential combined ; value proposition aiming at being relevant whatever
interest rates
Source: BNPP IP; for illustrative purpose only ; Management fees assumption: 1% - * Level of the cushion if a new protection is given
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Historical illustration of the protection ratios
Swap rates
7,00%
6,00%
Illustration of the backtested protection ratio for 25 year
target date fund in various interest rate regimes
Protection ratio of 25 y
@ 256%
Yield curves
Protection ratio of 25 y
@ 189%
5Y IR
5,00%
8Y IR
Protection ratio of 25 y
@ 110%
4,00%
10Y IR
13Y IR
3,00%
15Y IR
2,00%
20Y IR
25Y IR
1,00%
30Y IR
0,00%
Protection ratios significantly above 100% for longer-dated funds in high interest rate contexts
Source: BNPP IP & Bloomberg, au 01/10/13
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Protection at maturity ensured by low risk fixed income assets
●
A synthetic fixed income portfolio specific to each BNP Paribas Easy Future
fund with a maturity matching the fund’s maturity
●
A zero coupon behavior
●
A synthetic exposure replication to a BNP Paribas collateralized bond
Cushion invested
in risky asset
Low risk Fixed
income
– BNP Paribas ratings (4 April 2014): A+ (S&P), A1 (Moody’s), A+ (Fitch)
– Maturity of the synthetic BNP Paribas bond matching the fund’s maturity
– Funding level reflecting BNP Paribas rating and BNP Paribas UCI funding vehicles
●
An active duration management to optimize rebalancing between the Low risk
fixed income portfolio and the cushion invested in risky asset
Fixed income assets following strict guidelines
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Risky asset portfolio specifically designed for CPPI structure
Cushion invested
in Risky asset
●
Designed and managed to be used in CPPI structures with a controlled downside risk to
minimize monetization:
– Global diversification aiming at reducing downside risk
– Leverage to boost returns but a flexible leverage aiming at reducing drawdown risk
Low risk Fixed
income
●
A model portfolio based on risk budgeting approach to ensure diversification over time
– 80 % of the risk budget allocated to directional exposure on traditional asset classes
– 20% of the risk budget allocated to a largely diversified portfolio of absolute return strategies
●
An active management that can deviate from the model portfolio to benefit from market
opportunities or protect from market threats
– risk budget allocated to directional exposure can vary from 50% and 100%
– risk budget allocated to absolute return leeway can vary from 0% and 50%
Combination aiming at being well-prepared to face different market conditions
Source: BNPP IP; for illustrative purpose only
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Backtested benefit of the directional risky asset construction
1
Diversification benefit: sharpe
ratio improved: similar long term
returns with lower volatility
3
2
Flexible leverage benefit: increasing the
sharpe ratio and minimizing drawdowns
Leverage benefit: increasing risk
and, hence, return potential
Significant value brought by each of the three layers
Source: THEAM as of 30/09/13
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Fund behavior: risky assets flat ; interest rates up
Example
●
Example on BNPP Plan Easy Future 2038 : risky assets flat ; interest rates up
Source: BNPP IP as of 16/09/13 for illustrative purpose only
Starting point:
24.6€
24.6% in line with 20% to 25% objective
75.4€
75.4%
Protected Value at maturity
= Current Protection Ratio x current NAV
= 110.4% x 100.0€
= 110.4€
Protected Value = 110.4€
Current NAV = 100.0€
Risky assets flat, interest rates up +1%*:
29.6% > 20% to 25% objective
20.8€
24.6€
58.5€
70.4% needed for
protection
Rebalancing**
62.4€
25.0% back in line with 20% to 25%
objective
Rebalancing into low risk Fixed
income with higher rates
75.0%
Current NAV = 83.2€
Protected Value = 117.7€
 Current NAV down
* From 2.67% to 3.67%
Protected Value at maturity
= Current Protection Ratio x current NAV
= 141.5% x 83.2€
= 117.7€ > 110.4€
 Protected Value at maturity increased
** From risky assets to fixed income instruments
FOR PROFESSIONAL INVESTORS
An extensive Marketing kit
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All the material gathered on a dedicated website
http://easyfuture.bnpparibas-ip.lu/
Video
Retail flyer, Q&A and
protected values
Simulator
Redirection towards
subfund pages
Source: BNPP IP - For illustrative purpose only
FOR PROFESSIONAL INVESTORS
Conclusion
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BNPP Plan Easy Future: main features & benefits
Benefits for end client
Benefits for distributor
8 target date funds, dated
2018 to 2043
Simple choice of relevant fund
Comprehensive range, completed over
time to remain consistent
Upside potential thanks to
well-calibrated risky asset
exposure
Room for capital to grow, even
when interest rates are low
Cash lock risk minimized, sustainable fees
Capital formally protected
at maturity
Adaptative to market
environment
Visibility at all times regarding
minimum capital at maturity, which
can only increase over time
Adaptation to progressive investment;
Higher protection ratios for
investments occuring with higher rates
Differentiation vs. « glidepath » offerings
A paradigm change vs. existing protected
target date ones
Contact opportunities with client: on NAV
and/or protected value
A win-win value proposition, designed for the long term
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Disclaimer
This material is issued and has been prepared by BNP Paribas Asset Management S.A.S. (BNPP AM)* a member of BNP Paribas Investment Partners (BNPP IP)**.
This material is produced for information purposes only and does not constitute:
an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or any investment advice .
This material makes reference to certain financial instruments (the “Financial Instrument(s)”) authorised and regulated in its/their jurisdiction(s) of incorporation.
No action has been taken which would permit the public offering of the Financial Instrument(s) in any other jurisdiction, except as indicated in the most recent prospectus, offering document or any other information material,
as applicable, of the relevant Financial Instrument(s) where such action would be required, in particular, in the United States, to US persons (as such term is defined in Regulation S of the United States Securities Act of
1933). Prior to any subscription in a country in which such Financial Instrument(s) is/are registered, investors should verify any legal constraints or restrictions there may be in connection with the subscription, purchase,
possession or sale of the Financial Instrument(s).
Investors considering subscribing for the Financial Instrument(s) should read carefully the most recent prospectus, offering document or other information material and consult the Financial Instrument(s)’ most recent
financial reports. The prospectus, offering document or other information of the Financial Instrument(s) are available from your local BNPP IP correspondents, if any, or from the entities marketing the Financial Instrument(s).
Opinions included in this material constitute the judgment of BNPP AM at the time specified and may be subject to change without notice. BNPP AM is not obliged to update or alter the information or opinions contained
within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the Financial Instrument(s) in order to make an independent
determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no
assurance that any specific investment may either be suitable, appropriate or profitable for a client or prospective client’s investment portfolio.
Given the economic and market risks, there can be no assurance that the Financial Instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or
objectives of the Financial Instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the Financial Instruments may
have a significant effect on the results portrayed in this material. Past performance is not a guide to future performance and the value of the investments in Financial Instrument(s) may go down as well as up. Investors may
not get back the amount they originally invested.
The performance data, as applicable, reflected in this material, do not take into account the commissions, costs incurred on the issue and redemption and taxes.
*BNPP AM is an investment manager registered with the “Autorité des marchés financiers” in France under number 96-02, a simplified joint stock company with a capital of 64,931,168 euros with its registered office at 1,
boulevard Haussmann 75009 Paris, France, RCS Paris 319 378 832. www.bnpparibas-am.com.]
** “BNP Paribas Investment Partners” is the global brand name of the BNP Paribas group’s asset management services. The individual asset management entities within BNP Paribas Investment Partners if specified
herein, are specified for information only and do not necessarily carry on business in your jurisdiction. For further information, please contact your locally licensed Investment Partner.