ON THE RIGHT PATH TO BETTER OUTCOMES
WE ARE WITH YOU
EVERY STEP OF THE WAY
RUSSELL’S 2014
PREMIER ADVISOR CONFERENCE
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
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Open and Welcoming
Remarks
Kris Ullman, Divisional Director, Eastern Canada
SEPTEMBER 2014
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Introduction
David Feather
President and CEO, Russell Investments Canada
David Feather is president and CEO of Russell Investments, Canada.
Based in Toronto, David oversees the strategic direction for Russell’s
institutional, consulting and retail business activities in Canada and is
involved with a number of key client relationships. David is also a
member of Russell’s global executive leadership forum. He joined
Russell in 2010.
Prior to joining Russell Canada, David was president of Mackenzie
Financial Services Inc. During his 19-year career at Mackenzie
Financial, he was responsible for leading the company’s distribution
efforts, sales, product management and sub-adviser investment
management relationships. David has also worked in the economic
strategy group at Ernst & Young and in corporate and government
banking at the Bank of Montreal.
David is a director and board member at various charitable
organizations, including the Mental Health Partnerships of Canada,
Canadian Psychiatric Research Foundation and the Child
Development Institute.
p.3
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Russell Canada
State of the Union
David Feather, President and Chief Executive Officer
SEPTEMBER 2014 New York
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Important Information
THIS PUBLICATION IS INTENDED FOR INVESTMENT ADVISORS ONLY AND IS NOT INTENDED FOR, NOR CAN IT BE PROVIDED TO,
INVESTORS OR POTENTIAL INVESTORS. IT DOES NOT CONSTITUTE A SALES COMMUNICATION AS DEFINED BY NATIONAL
INSTRUMENT 81-102, “MUTUAL FUNDS.”
Nothing in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any
investment, nor a solicitation of any type. This information is made available on an “as is” basis. Russell Investments Canada Limited does not
make any warranty or representation regarding the information.
© 2014 Morningstar. All Rights Reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary
information of Morningstar Research ("Morningstar"), its affiliates or their third party content providers, (2) may not be copied or redistributed, (3) do
not constitute investment advice offered by Morningstar, (4) are provided solely for informational purposes and (5) are not warranted to be correct,
complete or timely. Except to the extent otherwise specifically required by law, neither Morningstar nor its affiliates nor their third party content
providers shall be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or
opinions or their use. Past performance is no guarantee of future results.
Morningstar median values are calculated from observations of fund holdings data over a period of three years. Morningstar relies on the Canadian
Investment Funds Standards Committee (CIFSC) for fund categories. (Source: http://www.cifsc.org/en/fund_list.php)
Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell Investments
Canada Limited and its affiliates, including Frank Russell Company, are collectively known as “Russell Investments.”
Unless otherwise stated all index data is sourced from ©BNY Mellon Asset Servicing. All rights reserved.
This report contains Standard & Poor’s proprietary data and is provided for the recipient's internal use only.
Russell Investments, the Russell Sovereign Investment Program and the Russell Investments logo and Indices are either trademarks or registered
trademarks of Frank Russell Company used under license by Russell Investments Canada Limited.
Copyright © Russell Investments Canada Limited 2014. All rights reserved. This material is proprietary and may not be reproduced, transferred, or
distributed in any form without prior written permission from Russell Investments.
Date of first publication: September 2014
RETAIL-2014-09-05-0933 (EXP-09-2015)
p.5
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Major Themes
Russell Engagement
› 3 Concentrated Defensive Mandates
› Capitalizing on Private Client need for higher
equity exposure, but lacking desire for full
equity market risk, through adoption of
alternatives and defensive strategies in
asset mix.
Outcome
Oriented
Investing
Outcome Oriented Investing
› Fully discretionary Multi-Asset Solutions
› Growth and Income
› Growth
› Adoption of Alternatives
› Infrastructure, Real Estate, Commodities,
Inflation-Protected, Real Assets
› All with goal of optimizing Multi-Asset
Solution.
p.6
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Russell Focused US Equity Pool (Series F)
Performance Analysis
# of Weeks for
Focus US Pool
97
57
One Year
Two Years
Annualized Performance
Since Inception (9/16/11)
Russell Focused US Equity Pool F
26.3%
26.1%
24.3%
Russell 1000 Index
28.8%
28.2%
25.2%
Relative Return
-2.6%
-2.1%
-1.0%
Source: Russell Investments, BNY Mellon. Based on weekly data from 9/17/2011 – 8/29/2014. Based on F Class. The weekly return of the Russell 1000
Index was used to determine if the market was “Up” (greater than 0) or “Down” (less than 0). The respective average was taken to determine the Up and
Down Market Return for the benchmark as well as the Russell Focused US Equity Pool.
p.7
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Industry Trends
Industry trend #2
Russell Engagement
› Have maintained 1st and /or 2nd Quartile (of
lowness) in Fees on all recent introductions.
Cost Efficient,
Actively Managed,
Smart Portfolios
› Direct Implementation of Focus Funds,
launched at lower price.
› Smart Beta execution in Canadian Funds
and Global Fund.
› Fully Discretionary active (MAGI)
› Knowledge around passive has improved
active managers offering.
p.8
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F Class Quartile Rankings
1 Yr
3 Yr
5 Yr
Morningstar
Russell Fixed Income Pool
2
1
1
*****
Russell Canadian Equity Pool
3
4
3
***
Russell US Equity Pool
4
2
2
****
Russell Global Equity Pool
2
1
2
****
Russell Overseas Equity Pool
1
2
1
****
Russell Emerging Markets Equity Pool
1
1
2
****
Source: Morningstar as of August 31, 2014
p.9
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Active management and taxable distributions:
Russell Global Equity Pool vs. 50% Largest S&P 500 Index Fund/Largest MSCI EAFE Index Fund
Source: Russell Investments, as of August 31, 2014. Note: Taxes are based on Ontario’s second highest marginal tax rates and assumes no redemption at the end of the period.
p.10
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Russell adds Frontiers in April 2011 to Emerging Markets
Cumulative Index Returns
40.0%
34.6%
30.0%
17.9%
20.0%
10.0%
0.0%
-10.0%
4/1/2011
5/1/2011
6/1/2011
7/1/2011
8/1/2011
9/1/2011
10/1/2011
11/1/2011
12/1/2011
1/1/2012
2/1/2012
3/1/2012
4/1/2012
5/1/2012
6/1/2012
7/1/2012
8/1/2012
9/1/2012
10/1/2012
11/1/2012
12/1/2012
1/1/2013
2/1/2013
3/1/2013
4/1/2013
5/1/2013
6/1/2013
7/1/2013
8/1/2013
9/1/2013
10/1/2013
11/1/2013
12/1/2013
1/1/2014
2/1/2014
3/1/2014
4/1/2014
5/1/2014
6/1/2014
7/1/2014
8/1/2014
-20.0%
Russell Emerging Markets Index
Russell Frontier Markets Index
As of August 31, 2014. Past performance is not indicative of future results. Indexes are unmanaged and cannot be invested in directly
p.11
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Active management and taxable distributions:
Russell Emerging Markets Equity Pool vs. Largest MSCI Emerging Markets Index Fund
Source: Russell Investments, as of August 31, 2014. Note: Taxes are based on Ontario’s second highest marginal tax rates and assumes no redemption at the end of the period.
p.12
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Series F MER
Highest MER in Quartile
Category
Russell
1st
2nd
3rd
4th
Global Fixed Income Bal
Russell Income Essentials Portfolio
1.02
1.03
1.13
1.34
2.41
Global Neutral Balanced
Russell Diversified Monthly Income
1.08
1.09
1.22
1.38
5.00
Global Neutral Balanced
Russell Multi-Asset Growth & Income
1.09
1.10
1.22
1.38
5.00
Cdn Short Term Fixed Inc
Russell Short Term Income
0.61
0.76
0.80
1.01
1.61
Cdn Fixed Income
Russell Fixed Income
0.73
0.84
0.88
1.10
3.51
Global Fixed Income
Russell Global Unconstrained Bond
1.07
1.35
1.70
High Yield Fixed Income
Russell Global High Income Bond
1.14
1.33
1.89
Cdn Small/Mid Cap Eq
Russell Smaller Companies
1.32
2.08
5.13
US Equity
Russell Focused US Equity
1.14
1.19
1.33
1.47
3.58
Canadian Equity
Russell Canadian Equity
1.02
1.12
1.27
1.46
7.12
US Equity
Russell US Equity
1.14
1.23
1.33
1.47
3.58
Global Equity
Russell Global Equity
1.29
1.32
1.37
1.50
3.66
International Equity
Russell Overseas Equity
1.23
1.33
1.35
1.48
2.02
Emerging Markets Eq
Russell Emerging Markets Equity
1.45
1.56
1.66
1.90
3.76
0.94
0.97
1.05
1.27
1.09
1.27
Source: Morningstar as of end of August 2014.
p.13
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Industry Trends
Industry trend #3
Russell Engagement
› Enhanced and Tiered F Class and O Class.
› Significant amount of new transactions
without embedded commission.
› Closed back-end load option.
› Transparency a part of business model.
Increasing
Regulatory
Reform and
Oversight
› Model-based, and Multi Asset investing
lends itself well for cash based personal
rate of return.
› Investment and Research process
already acts as a Fiduciary.
 CRM
 Statutory Duty of Care
 Mutual Fund Fees
p.14
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Industry Trends
Industry trend #4
Russell Engagement
› Russell Disciplined Investment Program
(“RDIP”) and High Speed Strategic Planning
(“HSSP”) Expanded.
› Expanded RD Teams into Regions.
Solutions Led
Offering and
Approach
› Consulting Heritage Reinforces Solution
Orientation – Pension, Endowments,
Foundations.
› Multi-Asset Products and Models Driving
Advisor Growth
› Funding Ratio introduction to PCS.
p.15
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Solutions Led Distribution
p.16
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Russell Multi-Asset Growth & Income
Strategic Allocation
Tactical Allocation
50% Fixed Income / 50% Equities Strategic Allocation
As of January 14, 2014
44% Fixed Income / 48% Equities/ 8% Cash
As of August 31, 2014
Source: Russell Investments as of August 2014
p.17
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Thank you
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
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Introduction
Stephen Wood
Chief Market Strategist, North America, Russell Investments
Stephen Wood is chief market strategist, North America for Russell
Investments. Based in New York, Dr. Wood conducts research on, and acts as
one of Russell’s external voices for the economy, capital markets, portfolio
strategies, and investor behavior. Dr. Wood works closely with Russell’s
institutional clients and retail partners to communicate Russell’s global market
perspectives, investment process and portfolio management. He joined Russell
in 2005.
Dr. Wood is a frequent contributor to the international media. He appears on
CNBC, BBC, Fox Business Network, Bloomberg TV, and PBS and is often
quoted in publications such as the Wall Street Journal, the Financial Times, the
International Herald Tribune, as well as other major international newspapers.
Prior to joining Russell, Steve worked with institutional investment clients at
Manning & Napier Advisors in Rochester, New York, as senior portfolio
strategist. He gained significant experience with high net worth clients as vice
president with Fisher Investments’ private client group in San Francisco.
p.19
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Russell Quarterly Economic
and Market Review
New market highs: cause for caution or celebration?
Stephen Wood, Chief Market Strategist, North America
SEPTEMBER 2014
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
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Important information
THIS PUBLICATION IS INTENDED FOR INVESTMENT ADVISORS ONLY AND IS NOT INTENDED FOR, NOR CAN IT BE
PROVIDED TO, INVESTORS OR POTENTIAL INVESTORS. IT DOES NOT CONSTITUTE A SALES COMMUNICATION AS
DEFINED BY NATIONAL INSTRUMENT 81-102, “MUTUAL FUNDS.”
› Nothing in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any
investment, nor a solicitation of any type. This information is made available on an “as is” basis. Russell Investments Canada Limited does not
make any warranty or representation regarding the information.
› Indices and benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, and are not a guarantee of future
performance and are not indicative of any specific investment. Index return information is provided by vendors and although deemed reliable, is not
guaranteed by Russell Investments or its affiliates. Due to timing of information, indices may be adjusted after the publication of this report.
› This publication may contain forward-looking statements. Forward-looking statements are statements that are predictive in nature, that depend
upon or refer to future events or conditions, or that include words such as "expects", "anticipates", "plans", "believes", "estimates" or negative
versions thereof and similar expressions. In addition, any statement that may be made concerning future performance, strategies or prospects, and
possible future Fund action, is also a forward-looking statement. Forward looking statements are based on current expectations and projections
about future events and are inherently subject to, among other things, risk, uncertainties and assumptions about economic factors.
› Forward-looking statements are not guarantees of future performance, and actual events and results could differ materially from those expressed or
implied in any forward-looking statements made in this publication. Any number of important factors could contribute to these digressions, including,
but not limited to, general economic, political and market factors, interest and foreign exchange rates, capital markets, business competition,
technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events.
› We stress the above-mentioned list is not exhaustive. We encourage you to consider these and other factors carefully before making any
investment decisions and we urge you to avoid placing undue reliance on forward-looking statements. Further, you should be aware of the fact that
Russell Investments has no specific intention of updating any forward looking statements whether as a result of new information, future events or
otherwise.Unless otherwise stated all index data is sourced from ©BNY Mellon Asset Servicing. All rights reserved.
› This report contains Standard & Poor’s proprietary data and is provided for the recipient's internal use only.
› FTSE TMX Canada previously known as DEX. Source: FTSE TMX Global Debt Capital Markets Inc. FTSE TMX Global Debt Capital Markets Inc
(“FTDCM”), FTSE International Limited(“FTSE”), the London Stock Exchange Group companies (the "Exchange") or TSX INC. (“TSX” and together
with FTDCM, FTSE and the Exchange, the “Licensor Parties”).
p.21
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Important information
› THE LICENSOR PARTIES MAKE NO WARRANTY OR REPRESENTATION WHATSOEVER, EXPRESSLY OR IMPLIEDLY, EITHER
AS TO THE RESULTS TO BE OBTAINED FROM THE USE OF THE FTSE TMX CANADA INDEXES REFERENCED ABOVE (“THE
INDEXES”) AND/OR THE FIGURES AT WHICH THE SAID INDEXES STAND AT ANY PARTICULAR TIME ON ANY PARTICULAR
DAY OR OTHERWISE. THE INDEXES ARE COMPILED AND CALCULATED BY FTSEDCM AND ALL COPYRIGHT IN THE INDEX
VALUES AND CONSTITUENT LISTS VESTS IN FTDCM. THE LICENSOR PARTIES SHALL NOT BE LIABLE (WHETHER IN
NEGLIGENCE OR OTHERWISE) TO ANY PERSON FOR ANY ERROR IN THE INDEXES AND THE LICENSOR PARTIES SHALL
NOT BE UNDER ANY OBLIGATION TO ADVISE ANY PERSON OF ANY ERROR THEREIN. “TMX” IS A TRADE MARK OF TSX INC.
AND IS USED UNDER LICENCE. “FTSE®” IS A TRADE MARK OF FTSE INTERNATIONAL LIMITED AND IS USED BY FTDCM
UNDER LICENCE.
› The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be
used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user
of this information assumes the entire risk of any use it may make or permit to be made of this information. Neither MSCI, any of its
affiliates or any other person involved in or related to compiling, computing or creating the MSCI information (collectively, the “MSCI
Parties”) makes any express or implied warranties or representations with respect to such information or the results to be obtained by
the use thereof, and the MSCI Parties hereby expressly disclaim all warranties (including, without limitation, all warranties of originality,
accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this
information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special,
incidental, punitive, consequential or any other damages (including, without limitation, lost profits) even if notified of, or if it might
otherwise have anticipated, the possibility of such damages.
› The Russell Investments Logo and Indices are a trademark or registered trademark of Frank Russell Company and are used under
license by Russell Investments Canada Limited.
› Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell
Investments Canada Limited and its affiliates, including Frank Russell Company, are collectively known as “Russell Investments.”
› Copyright © Russell Investments Canada Limited 2014. All rights reserved. This material is proprietary and may not be reproduced,
transferred, or distributed in any form without prior written permission from Russell Investments.
› Date of publication: September 2014
› RETAIL-2014-09-02-0930 (EXP-09-2015)
p.22
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Lost decade? We found it.
Longer term perspective on U.S. equity returns
U.S. equity 10-year returns (December 2004 – June 2014)
14%
10-Year U.S. Equity Return
(% Annualized)
12%
10-year return of U.S. equity
10%
July 2004-June 2014 = 8.2%
8%
6%
Lost decade
4%
10-year return for
U.S. equity = 0% or less
2%
0%
-2%
-4%
10-year return of U.S. equity
March 1999-February 2009 = -2.7%
10-year return of U.S. equity
October 2000-September 2010 = 0.1%
› As recent as September 2010, the 10-year performance for U.S. equities appeared “lost.”
› Don’t let short-term events dim long-term view and goals.
U.S. Equity: Russell 3000® Index
Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
p.23
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Economic indicators dashboard
Evolving economic environment
NEW METHODOLOGY
Typical range was 90%,
now +/- 1 std. deviation
NEW INDICATOR
All eyes on interest rates:
10-year U.S. Treasury
Yield added
NEW INDICATOR
Home prices improving:
S&P/Case-Shiller 20-City
Index added
INDICATOR CHANGES
Some More Familiar
Numbers
› Inflation now CPI Index
› Unemployment now
BLS official rate
› Consumer Sentiment
now University of
Michigan Survey
http://www.russell.com
Current state as of June 25, 2014.
See appendix for category definitions.
Russell’s Economic Indicators Dashboard charts several key indicators to help investors assess the current “health” of the economic and market trends.
p.24
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Asset Class Returns Summary
as of 2nd Quarter 2014
35.0
31.7
29.3
30.0
26.4 26.4
Rates of Return (%)
25.0
20.0
16.3
15.0
13.2
12.5
17.2
15.5
13.112.4
9.0
10.0
7.2
6.5
5.0
3.2
1.2 0.5
5.0 4.6
3.1
2.0
5.7
4.1
7.0
6.3
4.8
5.3
YTD 2014
1 Yr
0.0
2Q 2014
Russell Canada Index
Russell Dev. NNA Large Cap Index
FTSE TMX Canada Universe Bond Index
JP Morgan EMBI Global Diversified Index
FTSE EPRA/NAREIT Developed Index
Russell 3000 Index
Russell Emerging Markets Index
BofA Merrill Lynch Global High Yield Index
S&P Global Infrastructure Index
Source: BNY Mellon, Russell Investments. All returns in CAD.
p.25
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Russell 1000® Index % Change
Pullbacks are common
and should not distract the long-term investor
Calendar-year U.S. equity returns (%)
and intra-year declines
Pullback Illustration
25%
› Russell 1000® Index up 16% for 2012
20%
15%
10%
April 1 – June 30:
Down 10%
5%
0%
12/30/2011
3/30/2012
6/30/2012
9/30/2012
12/31/2012
Despite annual pullbacks, in 28 of
the last 34 years, U.S. equity
markets finished in positive territory
50
38
40
32
32
30
30
20 22
20
10
33
33
22
18
30
27
21
17
5
3
6
0
16
15
11
9 10
30
28
6
16
5
2
0
-10
-20
-4
-5
-7
-15
-18 -16
-12
-7 -9
-7 -7
-20
-30
-40
-50
-3
-6 -5 -8
-8 -10
-10
-33
-8
-12
-20
The average annual pullback
(peak-to-trough) from
January 1980-June 2014 was 13.9%
-12
-13
-18
-10
-16
-22
-30
-20
-27
-33
-60
Russell 1000 Index
-5 -5
-8 -7 -8 -10
-38
-49
Maximum Peak-to-Trough during the year
Source: Russell. Returns calculated with dividends included. Maximum peak-to-trough represents the return difference between the largest peak-to-trough of the calendar year.
Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.
p.26
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U.S. equity valuations in perspective
Price/Earnings (P/E) Ratio
20-year average = 21.3
› Many investors are
asking:
“Are valuations
stretched?”
› Current U.S.
valuations are
consistent with longterm average
› Russell does not
believe we are in
“bubble” territory
P/E Ratio =
Average stock price of an index
Overall corporate earnings of an index
p.27
U.S. Equity represented by Russell 3000® Index.
Source: Factset. P/E averages are calculated based
quarterly data beginning 12/31/1999.
Index returns represent past performance, are not a
guarantee of future performance, and are not indicative of
any specific investment. Indexes are unmanaged and
cannot be invested in directly.
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
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Validating last year’s equity rally
Key metrics show U.S. outlook remains positive
Labor market has recovered jobs lost in
the Global Financial Crisis
Number of homes sold,
in thousands
New U.S. home sales up 15.1% YTD
550
Nonfarm payroll employment changes
as of June 2014 (in thousands of jobs)
500
450
400
300
350
100
300
-100
8.3 million
jobs lost
-300
Source: National Association of Home Builders
-500
9.1 million jobs
gained
-700
U.S. GDP growth forecast remains
positive despite poor first quarter
Source: Bureau of Labor Statistics
2.6
2.3
2.2
2.1
The rally appears to be validated
1.1
1Q 2013
Forecast
-900
4.1
2.5
Actual
2Q 2013
3Q 2013
4Q 2013
1Q 2014
-2.9
2Q 2014
3Q 2014
Actual
4Q 2014
Forecast
Source: Historical GDP growth – Bureau of Economic Analysis, Forecast GDP growth – Blue Chip
Consensus Economics survey as of June 9, 2014.
›
1Q 2014 GDP growth disappointed,
but was counterbalanced by strong
home sales and job growth.
Each month since 1976, Blue Chip Economic Indicators has polled 50 of America’s top business economists, collecting their forecasts of U.S. economic growth, inflation, interest rates, and a
host of other critical indicators of future business activity. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a
projection of the stock market, or of any specific investment.
p.28
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Have investors become complacent?
Recent external events have not destabilized markets
Monthly VIX prices
January 2007 – May 2014
Lehman Brothers
collapses
Deepwater Horizon oil
rig explodes, causing
huge oil spills in the
Gulf of Mexico
70
Monthly values (%)
60
Colonel Gaddafi is
overthrown during
the Libyan Civil War
1. U.S. Government shutdown
2. Russia invades Ukraine
3. Sunni insurgence in Iraq
50
40
30
20
10
0
1/1/2007
1/1/2008
1/1/2009
1/1/2010
1/1/2011
1/1/2012
1/1/2013
1/1/2014
Source: The CBOE VIX (Chicago Board Options Exchange Volatility Index)
2008
2010
2011
YTD
% of days market +/- 1%
51%
29%
37%
12%
% of days market +/- 2%
27%
8%
13%
2%
% of days market +/- 3%
16%
3%
5%
0%
Source: Market represented by S&P 500® Index
p.29
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Yield: be careful what you reach for
Current yield and downside risk
› Low interest rates can tempt investors to “reach” for yield
› Higher yields carry additional risks
› Don’t mistake yield for safety
Cash: Citigroup 1-3 Month T-Bill Index; U.S. Treasuries: Barclays U.S. Treasury Index; Aggregate Bonds: Barclays U.S. Aggregate Bond Index; Credit: Barclays U.S. Credit Index; Long
Treasuries: Barclays Long U.S. Treasuries Index; Global Infrastructure: S&P Global Infrastructure Index; Global REITs: FTSE EPRA/NAREIT Index; EMD: Barclays Emerging Markets Debt Index;
U.S HY: Barclays U.S. High Yield Index; Global High Yield: Barclays Global High Yield Index; MLPs: Alerian MLP Index.
p.30
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Rising interest rates in perspective
Historical look at different asset classes
Annualized* Return (%)
Periods of rising 10-year U.S. Treasury yields
Aggregate Bonds
60
50
40
30
20
10
0
-10
-20
Commodities
Global High Yield
U.S. Real Estate
Global Stocks
10/93 - 09/94
[2.6% rise]
11/98 - 01/00
[2.2% rise]
06/03 - 06/07
[1.5% rise]
12/08 - 04/10
[1.4% rise]
05/13
- 09/13
5/13-9/13
[1.0%
rise]
[1.0% rise]
MORE
SENSITIVE
to rising
interest rates
LESS
SENSITIVE
to rising
interest rates
Commodities
Mixed results
Aggregate U.S. Bonds
Most sensitive to rising rates
Global High Yield
Less sensitive to
U.S. rate rises
U.S. Real Estate
Tends to have low
correlation to interest
rate rises
Global Stocks
Tend to do well
during periods of
economic growth
*Periods longer than one year are annualized.
Aggregate Bonds = Barclays U.S. Aggregate Bond Index; Commodities = Bloomberg Commodity Index; Global High Yield = Barclays Global High Yield Index; U.S. Real Estate = FTSE/NAREIT
Index; Global Stocks = MSCI World Index.
Other time periods will produce different results. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future
performance, and are not indicative of any specific investment.
Diversification does not assure a profit and does not protect against loss in declining markets.
p.31
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Different economies, different recoveries
Potential opportunities for global investors
UNITED STATES
EURO AREA
JAPAN
CHINA
Steady, 2.8%
Weak but
improving,1.2%
Improving, 1.4%
Steady, 7.5%
Unemployment
Improving, 6.1%
High but improving,
11.6%
Low, 3.5%
Steady, 4.1%
Interest rate policy
Low, no change
Rate cut
Low, no change
No change
Yes, tapering
Yes, more possible
in the future
Yes, expanding
No
+225%
+162%
+97%
+122%
As of June 2014
IMF forecasted 2014
real GDP (annual
percent change)
Stimulus
Recovery since
market bottom
(cumulative return
3/9/09-6/30/14)
Sources: IMF, U.S. Bureau of Labor Statistics, Eurostat, Japan Ministry of Internal Affairs and Communications, People’s Republic of China Ministry of Human Resources and Social Security.
Market returns: United States – Russell 3000® Index, Euro Area – Russell Eurozone Index, Japan – Russell Japan Index, China – Russell China Index.
Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific
investment.
p.32
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Canadian GDP growth expected to be in 2-2.3% range
Household debt and uneven employment trends remain key risks
Canada GDP
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
QoQ (AR%)
YoY (%)
Source: FactSet, Russell Investments. As of 2Q2014
p.33
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› Positive: Higher
commodity prices and
supportive monetary
policy
› Negative: Household
debt & employment
› Conclusion: expect GDP
growth of 2-2.3% as
improved trade and
business investment
offset subdued
contribution from
consumers and
residential investment
Euro area
Headline risks don’t equal market REALITIES
EUROPEAN CENTRAL
BANK TAKES ACTION
LOW INFLATION
STAGNANT GROWTH
› Euro area inflation at 0.5% in
May, well below 2% target
› Euro area GDP growth at 0.2% › To bring back inflation and
in 1Q 2014, up from 2013
boost lending
Year-to-date country returns (As of June 30, 2014)
16%
15%
14%
14%
13%
12%
10%
10%
8%
8%
8%
7%
7%
6%
6%
4%
4%
2%
3%
1%
1%
0%
Source: Eurostat, Russell Indexes: Russell Austria Index, Russell Belgium Index, Russell Finland Index, Russell France Index, Russell Germany Index, Russell Greece Index, Russell Ireland Index,
Russell Italy Index, Russell Luxembourg Index, Russell Netherlands Index, Russell Portugal Index, Russell Spain Index, Russell Czech Republic Index. Euro area includes: Belgium, Germany,
Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.
Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
p.34
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Historically, diversification can work for those who wait
Time horizon matters
Range of stock, bond and balanced index portfolio total returns (January 1976 through June 2014)
100%
99%
90%
U.S. Equities
Non-U.S. Equities
80%
BONDS EXAMPLE:
Looking at 1-year rolling periods (451 1-year periods),
the highest return = 35%. The lowest 1-year return = -9%.
As of June 30, 2014, the 1-year return = 4.4%.
70%
Annualized Range of Returns
60%
61%
Bonds
60/40 Balanced Index Portfolio
Periods ending June 30, 2014
50%
40%
43%
43%
35%
30%
30%
26%
20%
20%
26%
19%
10%
15%
0%
-7%
-9%
-7%
3%
16%
18%
1%
7%
5%
-1%
-3%
-1%
16%
11%
6%
15%
7%
2%
-10%
-20%
-29%
-30%
-40%
-43%
Annualized Rolling Returns:
Useful for understanding the behavior of returns over multiple time periods. For example, 5-year rolling time periods
calculated monthly over 10 years allows us to view 61 observations as opposed to looking at a single end date.
Demonstrates patterns or longer term trends in the return data.
The charts covers rolling periods including January 1976 through June 2014.
-50%
-50%
1-Year Rolling
5-Year Rolling
10-Year Rolling
20-Year Rolling
Diversification does not assure a profit and does not protect against loss in declining markets.
U.S. Equities: S&P 500 Index; Non-U.S. Equities: MSCI EAFE Index; Bonds: Barclays U.S. Aggregate Bond Index; 60/40 Balanced Index Portfolio: 40% S&P 500 Index, 20% MSCI EAFE Index,
40% Barclays U.S. Aggregate Bond Index.
Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
Indexes do not include a deduction for fees and expenses. Had they done so, returns would have been lower.
p.35
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Don’t “do something” just to do something
Remember – volatility comes with being in the market
Learn from research on soccer goalies and penalty kicks:
94% of goalies dove for the ball, but…
They caught 30% when they dove left
They caught 25% when they dove right
They caught 60% when they stayed in the center
When markets get rough…stay centered on your plan!
p.36
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Important information and disclosures
International/Global:
International/Global investing value may be significantly affected by political or economic conditions and regulatory requirements in a particular
country. Investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting
standards and foreign taxation. Such securities may be less liquid and more volatile. Investments in emerging or developing markets involve
exposure to economic structures that are generally less diverse and mature, and political systems with less stability than those in more developed
countries.
Bonds:
With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond
prices typically rise and conversely when interest rates rise, bond prices typically fall. When interest rates are at low levels there is risk that a
sustained rise in interest rates may cause losses to the price of bonds. Bond investors should carefully consider these risks such as interest rate,
credit, repurchase and reverse repurchase transaction risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment
and increased default risk, is inherent in portfolios that invest in high yield ("junk") bonds or mortgage backed securities, especially mortgage
backed securities with exposure to sub-prime mortgages. Investment in non-U.S. and emerging market securities is subject to the risk of currency
fluctuations and to economic and political risks associated with such foreign countries. When interest rates are at low levels there is risk that a
sustained rise in interest rates may cause losses to the price of bonds.
Growth:
Growth investments focus on stocks of companies whose earnings/profitability are accelerating in the short-term or have grown consistently over
the long-term. Such investments may provide minimal dividends which could otherwise cushion stock prices in a market decline. A stock’s value
may rise and fall significantly based, in part, on investors' perceptions of the company, rather than on fundamental analysis of the stocks. Investors
should carefully consider the additional risks involved in growth investments.
Value:
Value investments focus on stocks of income-producing companies whose price is low relative to one or more valuation factors, such as earnings
or book value. Such investments are subject to risks that the stocks’ intrinsic values may never be realized by the market, or, that the stocks may
turn out not to have been undervalued. Investors should carefully consider the additional risks involved in value investments.
p.37
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Index definitions
Alerian MLP Index: A market-cap weighted, float-adjusted
index created to provide a comprehensive benchmark for
investors to track the performance of the energy MLP sector.
Barclays 1-3 Year Treasury Bond Index: Index measures
the performance of the U.S. Treasury securities that have a
remaining maturity of at least one year and less than three
years.
Barclays U.S. Credit Index: Comprises the U.S. Corporate
Index and a non-corporate component that includes foreign
agencies, sovereigns, supranationals and local authorities.
The U.S. Credit Index is a subset of the U.S.
Government/Credit Index and the U.S. Aggregate Index.
Barclays Global High-Yield Index: Provides a broad-based
measure of the global high-yield fixed income markets. The
Global High-Yield Index represents the union of the U.S.
High-Yield, Pan-European High-Yield, U.S. Emerging
Markets High-Yield, and Pan-European Emerging Markets
High-Yield Indices.
Barclays Long U.S. Treasuries Index: Includes all publicly
issued, U.S. Treasury securities that have a remaining
maturity of 10 or more years, are rated investment grade,
and have $250 million or more of outstanding face value.
Barclays U.S. Aggregate Bond Index: An index, with
income reinvested, generally representative of intermediateterm government bonds, investment grade corporate debt
securities, and mortgage-backed securities. (specifically:
Barclays Government/Corporate Bond Index, the AssetBacked Securities Index, and the Mortgage-Backed
Securities Index).
Barclays U.S. Corporate High-Yield Index: Measures the
market of USD-denominated, non-investment grade, fixedrate, taxable corporate bonds.
Barclays U.S. Treasury Index: Includes public obligations
of the U.S. Treasury. Treasury bills are excluded by the
maturity constraint but are part of a separate Short Treasury
Index. In addition, certain special issues, such as state and
local government series bonds (SLGs), as well as U.S.
Treasury TIPS, are excluded.
Bloomberg Commodity Index Family: Represents the
major commodity sectors within the broad index: Energy
(including petroleum and natural gas), Petroleum (including
crude oil, heating oil and unleaded gasoline), Precious
Metals, Industrial Metals, Grains, Livestock, Softs, Agriculture
and ExEnergy. Also available are individual commodity subindexes on the 19 components currently included in the DJUBSCI℠, plus brent crude, cocoa, feeder cattle, gas oil, lead,
orange juice, platinum, soybean meal and tin.
p.38
Bloomberg Commodity Index Total Return: Composed of
futures contracts on physical commodities. Unlike equities,
which typically entitle the holder to a continuing stake in a
corporation, commodity futures contracts normally specify a
certain date for the delivery of the underlying physical
commodity. In order to avoid the delivery process and
maintain a long futures position, nearby contracts must be
sold and contracts that have not yet reached the delivery
period must be purchased. This process is known as "rolling"
a futures position.
Citigroup 1-3 Month T-Bill Index: Tracks the performance
of short-term U.S. government debt securities.
Dow Jones Industrial Average: A price weighted average
of 30 significant stocks traded on the New York Stock
Exchange and the Nasdaq. The DJIA was invested by
Charles Dow back in 1896.
FTSE NAREIT: An Index designed to present investors with
a comprehensive family of REIT performance indexes that
span the commercial real estate space across the U.S.
economy, offering exposure to all investment and property
sectors. In addition, the more narrowly focused property
sector and sub-sector indexes provide the facility to
concentrate commercial real estate exposure in more
selected markets.
FTSE EPRA/NAREIT Developed Index: A global market
capitalization weighted index composed of listed real estate
securities in the North American, European and Asian real
estate markets.
MSCI EAFE (Europe, Australia, Far East) Index: A free
float-adjusted market capitalization index that is designed to
measure the equity market performance of developed
markets, excluding the U.S. and Canada.
MSCI Pacific Index: Captures large and mid cap
representation across 5 Developed Markets (DM) countries
in the Pacific region. With 454 constituents, the index covers
approximately 85% of the free float-adjusted market
capitalization in each country.
MSCI World Index: Captures large and mid cap
representation across 23 Developed Markets (DM) countries.
With 1,6111 constituents, the index covers approximately
85% of the free float-adjusted market capitalization in each
country.
Russell 1000® Index: Measures the performance of the
large-cap segment of the U.S. equity universe. It is a subset
of the Russell 3000® Index and includes approximately 1000
of the largest securities based on a combination of their
market cap and current index membership. The Russell 1000
represents approximately 92% of the U.S. market.
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Index definitions (cont’d)
Russell 1000® Growth Index: Measures the performance of
the large-cap growth segment of the U.S. equity universe. It
includes those Russell 1000 companies with higher price-tobook ratios and higher forecasted growth values.
Russell 1000® Value Index: Measures the performance of
the large-cap value segment of the U.S. equity universe. It
includes those Russell 1000 companies with lower price-tobook ratios and lower expected growth values.
Russell 1000® Defensive Index: Subset of top 1000 U.S.
equities with companies that demonstrate less than average
exposure to certain risk. (lower stock price volatility, higher
quality balance sheets, stronger earnings profile).
Russell 1000® Dynamic Index: Subset of top 1000 U.S.
equities with companies that demonstrate than average
exposure to certain risks. (higher stock price volatility, lower
quality balance sheets, uneven earnings profile).
Russell 2000® Index: Measures the performance of the
small-cap segment of the U.S. equity universe. The Russell
2000 Index is a subset of the Russell 3000® Index
representing approximately 10% of the total market
capitalization of that index. It includes approximately 2000 of
the smallest securities based on a combination of their
market cap and current index membership.
Russell 2000® Growth Index: Measures the performance of
the large-cap growth segment of the U.S. equity universe. It
includes those Russell 2000 companies with higher price-tobook ratios and higher forecasted growth values.
Russell 2000® Value Index: Measures the performance of
the large-cap value segment of the U.S. equity universe. It
includes those Russell 2000 companies with lower price-tobook ratios and lower expected growth values.
Russell 3000® Index: Index measures the performance of
the largest 3000 U.S. companies representing approximately
98% of the investable U.S. equity market.
Russell Developed ex-U.S. Large Cap Index: Offers
investors access to the large-cap segment of the developed
equity universe, excluding securities classified in the U.S.,
representing approximately 40% of the global equity market.
This index includes the largest securities in the Russell
Developed ex-U.S. Index.
Russell Emerging Markets Index: Index measures the
performance of the largest investable securities in emerging
countries globally, based on market capitalization. The index
covers 21% of the investable global market.
Russell Global Index: Measures the performance of the
global equity market based on all investable equity securities.
All securities in the Russell Global Index are classified
p.39
according to size, region, country, and sector, as a result the
Index can be segmented into thousands of distinct
benchmarks
The S&P 500® Index is a free-float capitalization-weighted
index published since 1957 of the prices of 500 large-cap
common stocks actively traded in the United States. The
stocks included in the S&P 500® are those of large publicly
held companies that trade on either of the two largest
American stock market exchanges: the New York Stock
Exchange and the NASDAQ.
The S&P 500® Global Infrastructure Index: Provides liquid
and tradable exposure to 75 companies from around the
world that represent the listed infrastructure universe.
The S&P/Case-Shiller 20-City Composite Home Price
Index: Seeks to measure the value of residential real estate
in 20 major U.S. metropolitan areas: Atlanta, Boston,
Charlotte, Chicago, Cleveland, Dallas, Denver, Detroit, Las
Vegas, Los Angeles, Miami, Minneapolis, New York,
Phoenix, Portland, San Diego, San Francisco, Seattle,
Tampa and Washington, D.C.
VIX(CBOE Volatility Index): The VIX is calculated and
disseminated in real-time by the Chicago Board Options
Exchange. Theoretically it is a weighted blend of prices for a
range of options on the S&P 500® Index.
U.S. Material & Processing: Within the Russell 3000®,
those companies that extract or process raw materials, and
companies that manufacture chemicals, construction
materials, glass, paper, plastic, forest products and related
packaging products. Metals and minerals miners, metal alloy
producers, and metal fabricators are included.
U.S. Small Cap: Within the Russell 2000®, small
capitalization investments involve stocks of companies with
smaller levels of market capitalization (generally less than $2
billion) than larger company stocks (large cap).
U.S. Small Cap Financials: Sector within the Russell 2000®
Index that consists of companies that provide financial
services including banking, finance, life insurance, and
securities brokerage, and services companies.
U.S. Technology: Within the Russell 3000, those companies
that serve the information technology, telecommunications
technology and electronics industries.
U.S. Utilities: Within the Russell 3000, those companies in
industries heavily affected by government regulation, such as
electric, gas and water utilities. Also includes companies
providing telephone services, as well as companies that
operate as independent producers or distributors of power.
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Economic recovery dashboard definitions
Market Indicators
MARKET VOLATILITY(VIX) – CBOE VIX (Chicago Board Options Exchange Volatility Index) measures annualized implied volatility as
conveyed by S&P 500 stock index option prices and is quoted in percentage points per annum. For instance, a VIX value of 15 represents
an annualized implied volatility of 15% over the next 30 day period. The VIX measures implied volatility, which is a barometer of investor
sentiment and market risk.
10 YR. U.S. TREASURY YIELD – The yield on the 10 year U.S. Treasury note issued by the U.S. Government. It is important because it
is seen as a benchmark for interest rate movements and borrowing costs in the economy.
YIELD SPREAD – The spread between 3 month Treasury bill yields and 10 year Treasury note yields measures the market outlook for
future interest rates. A normal or upward-sloping yield curve, can imply that investors expect the economy to grow and inflation to eat into
asset returns. They thus demand a higher yield for long-term Treasuries. An inverted yield curve has often been an indicator of coming
recessions, but not always. For example, reduced inflation expectations could cause the yield curve to flatten.
HOME PRICES – The S&P/Case-Shiller Home Price Index is a measurement of U.S. residential real estate prices, tracking changes in top
20 metropolitan regions. This indicator value represents the trailing year over year % change in the home prices index as of last monthend. Residential real estate represents a large portion of the US economy and the Home Price index helps us monitor the value of real
estate.
Economic Indicators
INFLATION – The Consumer Price Index (CPI) NSA (non-seasonally adjusted) measures changes in the price level of a market basket of
consumer goods and services purchased by households. This indicator value represents the trailing year over year % change in the CPI
index as of last month-end.
UNEMPLOYMENT – The Bureau of Labor Statistics measures employment and unemployment of all persons over the age of 15 using
two different labor force surveys conducted by the United States Census Bureau (within the United States Department of Commerce) and
the Bureau of Labor Statistics (within the United States Department of Labor) that gather employment statistics monthly. The data reported
here is seasonally adjusted (SA) to account for seasonal gains in employment leading up to Christmas.
ECONOMIC EXPANSION (GDP) – GDP (Gross Domestic Product) measures the total market value of a nation’s output of goods and
services during a specific time period. It is usually measured on a quarterly basis. Current GDP is based on the current prices of the
period being measured. Nominal GDP growth refers to GDP growth in nominal prices (unadjusted for price changes). Real GDP growth
refers to GDP growth adjusted for price changes. Calculating Real GDP growth allows economists to determine if production increased or
decreased, regardless of changes in the purchasing power of the currency.
CONSUMER SENTIMENT – The University of Michigan Survey of Consumer Sentiment Index is an economic indicator which measures
the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation.
p.40
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Thank you
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Coffee Break
(15 minutes)
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Introduction
Jeff T. Hussey, CFA
Global Chief Investment Officer, Russell Investments
Jeff Hussey is Russell’s global chief investment officer (CIO) with responsibility for
Russell’s investment management, implementation and research activities worldwide.
He has served in this role since August 2013 and is a member of Russell’s Executive
Committee.
Prior to his current role, Hussey was Russell’s chief investment officer of fixed income
where he was accountable for the performance of fixed-income funds, the quality of the
investment content, and investment manager recommendations within this asset class
globally. In this role he served as a member of the firm’s investment strategy committee
and provided oversight for Russell’s cash management activities.
He was appointed to oversee U.S. fixed-income efforts in 2003 and took on additional
oversight of fixed assets in London and Canada in 2008. With assets under
management of more than $60 billion, the fixed income team runs a variety of
assignments across the risk spectrum in domestic and global mandates. Hussey also
retains direct portfolio management responsibility for various U.S. core-plus funds
managed within Russell.
From 2001 to 2003, Hussey was a portfolio manager with lead responsibilities for over
$12 billion in Russell’s U.S. fixed-income mandates, including core, core-plus, short,
municipal, and stable-value mandates. In this capacity, he was responsible for the
selection of managers and strategies across a variety of commingled and separate
accounts.
p.43
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Introduction
Gregory W. Nott, CFA
Chief Investment Officer, Russell Investments Canada
Greg Nott is the chief investment officer (CIO) for Russell Investments
Canada and is responsible for all aspects of investment management,
including leading the fixed income and equity Investment Teams.
Greg has 18 years of industry experience and has been with Russell
Investments since 1998. He joined initially as a research analyst, and
became portfolio manager in 2005 and CIO in 2011. Greg has
overseen strong investment performance by the fixed income team
and is a crucial player in steering the investment team through recent
challenges and opportunities in the markets.
Prior to joining Russell, Greg was a research analyst with TD
Evergreen, a full service retail brokerage firm owned by the Toronto
Dominion Bank. In this role, Greg was responsible for mutual fund
evaluation and analysis, and the quarterly publication of TD
Evergreen’s FundBook and formation of a “recommend list” of mutual
funds.
p.44
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Introduction
Adam Goff
Managing Director, Russell Investments
Adam Goff is managing director, investments, for Russell
Investments, leading the investment process and risk team. Adam
is responsible for oversight and improvement of Russell’s multi–
asset multi-strategy investment process with direct responsibility for
investment practice, quant analytics, capital markets research, and
operational due diligence teams. The investment process and risk
team’s mission is to support Russell’s investment teams in
delivering investment outcomes through differentiated capital
market insight, a robust analytical infrastructure, and the continuous
improvement of our investment approach. Adam became managing
director of manager research in 2007 and his role was expanded to
cover overall process oversight from 2009.
Prior to taking on his current role in 2013, Adam was responsible for
oversight and improvement of Russell’s multi–asset multi-strategy
investment process as head of the Investment Process and Risk
Team. He had direct responsibility for investment practice, quant
analytics, capital markets research, and operational due diligence
teams as well as the broad objective of driving the continuous
improvement of our investment approach.
p.45
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CIO Round Table
Multi-Asset Investment
Process
Jeff Hussey, Global Chief Investment Officer, Russell Investments
Greg Nott, Chief Investment Officer, Russell Investments Canada
Adam Goff, Managing Director, Russell Investments
SEPTEMBER 2014
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TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Introduction
Darren Spencer
Director, Client Portfolio Manager Alternative Investments
Russell Investments
Darren Spencer is a client portfolio manager, alternative investments
for Russell Investments. Based in New York, Darren is responsible for
working with Russell’s asset management clients in North America to
develop and implement alternative investment solutions.
Darren joined Russell in January 2011, and until January 2014, was
responsible for directing the development and implementation of
alternative investment strategies for Russell’s consulting clients in
North America.
Prior to joining Russell, Darren worked as a director for Dorchester
Capital Advisors since September 2008.
From March 2003 through September 2008, Darren was global head
of alternative investments at Aon Investment Consulting in Chicago.
In that role he was responsible for the development of Aon’s
alternative investment research and consulting platform. He was the
primary architect of Aon’s alternative investment research process
and primary consultant on alternative investing for Aon’s North
American consulting clients.
Prior to relocating to Chicago, Darren was based in Sydney, Australia
where he was a co-founder of Aon’s investment consulting practice in
Australia.
p.47
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Bridging the gap
Russell Multi-Strategy Absolute Return Pool*
Darren Spencer, Director, Client Portfolio Manager Alternative Investments
SEPTEMBER 2014
*This fund is currently available for US investors only
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Important information
THIS PUBLICATION IS INTENDED FOR INVESTMENT ADVISORS ONLY AND IS NOT INTENDED FOR, NOR CAN IT BE
PROVIDED TO, INVESTORS OR POTENTIAL INVESTORS. IT DOES NOT CONSTITUTE A SALES COMMUNICATION AS
DEFINED BY NATIONAL INSTRUMENT 81-102, “MUTUAL FUNDS.”
Nothing in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any
investment, nor a solicitation of any type. This information is made available on an “as is” basis. Russell Investments Canada Limited does not
make any warranty or representation regarding the information.
Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell Investments
Canada Limited and its affiliates, including Frank Russell Company, are collectively known as “Russell Investments.”
Russell Investments and the Russell Investments logo and Indices are either trademarks or registered trademarks of Frank Russell Company used
under license by Russell Investments Canada Limited.
Copyright © Russell Investments Canada Limited 2014. All rights reserved. This material is proprietary and may not be reproduced, transferred, or
distributed in any form without prior written permission from Russell Investments.
Date of first publication: August 2014
RETAIL-2014-08-18-0918 (EXP-08-2015)
p.49
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Bridging the gap
We’re going to discuss:
p.50
1.
Why absolute return strategies matter in
today’s market
2.
Russell’s credentials and approach
3.
Absolute return strategies in the total portfolio
context
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
The capital markets today
More returns sources are needed in a low return environment
Survey of professional forecasters
10%
9%
8.7%
Expected Returns
8%
7%
5.6%
6%
5.0%
5%
4%
3%
3.3%
3.7%
2%
2.3%
1%
10 Yr Inflation
60/40 Inflation-Adjusted
60/40 Nominal
Source: Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters & Russell. Data as of January, 2014.
Expected returns on this chart are the expectations that the Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters as well as Russell Investments had during the
time period noted on the chart above. These are 2 year forward looking forecasts.
Data is historical and is not indicative of future results. 60/40 = 60% equity, 40% bond portfolio. Equity returns were calculated using the S&P 500 Index, bonds were calculated using the
U.S. Treasury 10 year bond. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the
stock market, or of any specific investment.
p.51
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
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Why absolute return strategies matter today
Equity Market Returns March 9, 2013 - July 31, 2014
S&P/TSX
Russell Global Index
S&P 500
Nasdaq
Canada 10 Year Bond Yield June 1982 – April 2013
16.39%
102.6%
89.5% decline
in bond yields
155.0%
185.4%
1.72%
244.4%
1
2
Significant increase in equity prices & decline in bond yields
Source: Russell Investments. Bank of Canada, Data and Statistics Office August 2014.
p.52
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
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Endowments allocations to hedge funds
Representative Endowment Portfolio
Cash
Fixed Income
Hedge Funds
Domestic Equities
International Equities
Other Alternatives
Source: 2013 NACUBO-Commonfund Study of Endowments. Based on survey of 261 Endowments with assets between $US100 to $500 million.
p.53
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US Liquid Alternative Growth in Context
Growth of Hedge Fund Industry Assets 1990-1998 vs.
40 Act Alternative Mutual Funds 2006-Q1 2014
400000
Hedge Fund
Industry
1990-1998
350000
Growth of Hedge Fund Industry Assets
1990-2003
900,000
$374 B
Q4 2014
$368 B
$820 B
800,000
700,000
+119%
300000
600,000
250000
500,000
200000
400,000
150000
300,000
40 Act Alternative
Mutual Funds
2006-Q1 2014
100000
50000
200,000
100,000
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
0
1990 /1991 /1992 /1993 /1994 /1995 /1996 /1997 /1998 /
2006 2007 2008 2009 2010 2011 2012 2013 Q1
2014
›
$374 B
Asset growth in 40 Act alternative mutual funds
matches almost dollar for dollar growth in the hedge
fund industry itself between 1990 and 1998
›
›
To put this in context, we show on this chart how
hedge fund AUM more than doubled in the next 5
years to $820 billion in 2003
By summer 2008, AUM reached $1.8 trillion
Source: Citi Investor Services, June 2014.
p.54
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Russell investments
The required credentials in alternative investments
As of March 31, 2014
p.55
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Russell manager research
Russell is uniquely qualified
ACCESS
BREADTH
PERSPECTIVE
INSIGHT
Transparency
into the key
decision makers
and portfolios
Broad coverage
of the available
managers
Understanding the
skill sets necessary
to beat the market
The ability to
analyze and select
the managers
Russell believes
are the best of the
best
p.56
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
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Russell operational due diligence
1.0 FIRM / BUSINESS RISKS
Initial Review
›
›
›
Russell conducts on-site reviews of
all sub-advisers prior to
implementation in Russell funds.
Sub-advisers rated ‘Deficient’ are
not hired.
Russell works with sub-advisers not
rated ‘Satisfactory’ or 'Monitor' to
improve.
Ongoing Reviews
›
›
p.57
Russell conducts ongoing reviews
of all Russell fund managers.
Review schedule is based on
perceived risk to Russell and
clients; however, all Russell fund
sub-advisers are reviewed at least
every two years (on-site or
remotely).
›
■■■■ Firm history / Ownership
›
■■■■ Organizational structure
›
■■■■ Business activities
›
■■■■ Governance
›
■■■■ IT and BCP
2.0 COMPLIANCE RISKS
›
■■■■ Firm-wide monitoring
›
■■■■ Compliance culture
›
■■■■ Regulatory / Audits / Legal
›
■■■■ Privacy / Personal info security
3.0 TRADING / OPERATIONAL RISKS
›
■■■■ Trade process
›
■■■■ Settlement / Reconciliation
›
■■■■ Pricing policy and procedures
›
■■■■ Trade / Operational errors
›
■■■■ Best exec / Counterparty
›
■■■■ Soft dollars
■
■
SATISFACTORY
MONITOR
■
■
WEAK
DEFICIENT
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Russell Multi-Strategy Absolute Return Pool (MSARP)
A dynamically managed multi strategy, multi manager fund
Multi-Strategy
• Event Driven, Tactical
Trading, Relative
Value, Equity Hedge
• Strategy analysis and
portfolio fit
• Diversification in a
single fund
Multi-Manager
• 9 sub-advisers
• Separately managed
accounts for Russell
• Best of breed subadvisers from around
the globe
Dynamically Managed
• Understand current
portfolio exposures
• Respond to changing
market conditions and
circumstances
• Incorporate forward
looking market views
Open architecture. Daily liquidity. No performance fees.
Shown for illustrative purposes only. The information may not be complete and accurate and not indicative of future results.
p.58
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
MSARP investor outcomes
Outperform bonds
GOAL 1
GOAL 2
› Seek to achieve a return that will outperform bonds on a
net of fee basis with similar levels of volatility
Outperform equities in negative markets
› Seek to generate superior performance to equities in negative
equity market environments
Superior total portfolio diversification
GOAL 3
›
Lower correlation and beta to other portfolio assets
›
Mitigate portfolio drawdown’s to offset the impact of
negative compounding
Winning over time by not loosing
›
p.59
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
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How MSARP fits into a portfolio
Fixed
Income
Replacement
› Muted outlook for fixed income returns
› MSARP expected to provide superior return to fixed
income with similar levels of risk
›
Portfolio
Diversifier
p.60
›
In traditional 60/40 portfolios approximately 95%
total portfolio risk is driven by equities
Maximize diversification benefits relative to equities
and fixed income and diversify total portfolio risk
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Positioning by investor personae
Innovators
Total
Portfolio
Outcome
Conservative
Following the
Leaders
p.61
• Not backward looking,
what will work moving
forward
• Focus on total
portfolio context
• Investors vulnerable to
increasing interest rates
• Looking to reduce
overall portfolio volatility
• Knowing they are
participating in
strategies used by
institutions
• Don’t want to be “leftbehind”
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Russell Multi-Strategy Alternative Fund Performance
From August 2012 inception through June 2014
MONTHLY RETURNS
Jan
Feb
Mar
Apr
May
Jun
Jul
2012
2013
0.59%
-0.20%
0.69%
1.36%
-1.44%
-0.88%
2014
-1.55%
0.10%
-0.78%
-0.20%
0.20%
0.40%
0.10%
Aug
Sep
Oct
Nov
Dec
Total
0.10%
-0.30%
-0.30%
0.30%
1.70%
1.50%
-0.10%
-0.10%
0.20%
1.47%
1.30%
3.00%
-1.84%
HISTORICAL CUMULATIVE RETURN
40%
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
Aug-12
Jan-13
Jul-13
RMSAF
HFRI Fund Weighted Index
Russell Global Index
S&P/TSX Composite Index
Barclays Global Aggregate Bond Index
FTSE TMX Canada Bond Index
Past performance is not indicative of future results.
Performance results are net of management fees (3.00%)
p.62
Jan-14
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Risk & Return Analysis
From August 2012 inception through June 2014
RMSAF
HFRI Fund
Weighted
Russell Global
Index
S&P/TSX
Composite
BarCap
Global Agg
FTSE TMX
Canada Bond
Annualized Return
1.36%
8.35%
18.24%
18.17%
1.99%
2.30%
Cumulative Return
2.62%
16.61%
37.87%
37.72%
3.85%
4.46%
Annual Standard Deviation
2.92%
3.29%
8.54%
6.94%
3.98%
3.31%
Sharpe Ratio
0.45
2.52
2.13
2.61
0.49
0.68
Correlation (TSX)
0.01
0.56
0.50
1.00
0.28
0.15
Correlation (TMX)
0.01
0.13
0.10
0.15
0.66
1.00
Max Monthly Drawdown
-1.55%
-1.47%
-3.77%
-3.76%
-2.97%
-2.03%
Max Drawdown
-2.42%
-1.47%
-3.77%
-4.27%
-5.28%
-3.85%
% Positive Returns
56.52%
73.91%
73.91%
78.26%
47.83%
56.52%
% Negative Returns
43.48%
26.09%
26.09%
21.74%
52.17%
43.48%
Skew
0.01
(0.37)
(0.41)
(0.76)
(0.75)
0.00
Kurtosis
0.04
(0.09)
(0.19)
0.90
0.94
1.56
Beta (TSX)
0.00
0.27
0.61
1.00
0.16
0.07
Past performance is not indicative of future results. Risk Free Rate is average 3 Month Treasury over analysis period (0.05%)
p.63
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Average Monthly Returns in Down Markets – RMSAF vs. Benchmarks
From August 2012 inception through June 2014
5.0%
4.0%
3.0%
2.0%
1.0%
0.33%
0.17%
0.32%
0.0%
-0.58%
-1.0%
-1.39%
-2.0%
-3.0%
-4.0%
-5.0%
-3.77%
Average Performance During Down Equity Markets
RMSAF
Average Performance During Down Fixed Income Markets
HFRI Fund Weighted Index
Past performance is not indicative of future results.
p.64
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Benchmark
Summary
Relevance
› Bridging critical portfolio gaps
› Participation in key industry trend
Credentials
› Russell’s industry leading position in alternatives
› Resources and scale required for success
Approach
› Open architecture, multi-strategy, multi-manager
› Dynamically managed
Fees
› Reasonable fees
› No performance fees
Access
Index
investing
in commodities
p.65
65
› Availability of a practical solution
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
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Thank you
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Lunch
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Introduction
Christopher Blake
Managing Director, Portfolio Manager and Analyst, Lazard Asset
Management
Christopher Blake is a Managing Director and Portfolio Manager/Analyst on the US
Strategic Equity, US Equity Concentrated and US Mid Cap Equity Concentrated
portfolio teams. He began working in the investment field in 1995 upon joining Lazard.
He has a BSBA in Finance from the University of Denver.
p.68
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Introduction
John Levin
Chief Executive Officer and Senior Portfolio Manager, Levin
Capital Strategies
John Levin is the senior portfolio manager for Levin Capital Strategies
(“LCS”), including all alternative and long-only investment strategies
managed by LCS. Mr. Levin founded Levin Capital Strategies in
January 2006. Prior to founding John A. Levin & Co. (“JAL”) in 1982,
Mr. Levin was a partner at Steinhardt Partners (1976-1982) and a
partner and director of research at Loeb, Rhoades & Co. (1963-1976).
He earned a BS and an LLB from Yale University.
p.69
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Introduction
Stephen Wood
Chief Market Strategist, North America, Russell Investments
Stephen Wood is chief market strategist, North America for Russell
Investments. Based in New York, Dr. Wood conducts research on, and acts as
one of Russell’s external voices for the economy, capital markets, portfolio
strategies, and investor behavior. Dr. Wood works closely with Russell’s
institutional clients and retail partners to communicate Russell’s global market
perspectives, investment process and portfolio management. He joined Russell
in 2005.
Dr. Wood is a frequent contributor to the international media. He appears on
CNBC, BBC, Fox Business Network, Bloomberg TV, and PBS and is often
quoted in publications such as the Wall Street Journal, the Financial Times, the
International Herald Tribune, as well as other major international newspapers.
Prior to joining Russell, Steve worked with institutional investment clients at
Manning & Napier Advisors in Rochester, New York, as senior portfolio
strategist. He gained significant experience with high net worth clients as vice
president with Fisher Investments’ private client group in San Francisco.
p.70
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Portfolio Manager Panel
Christopher Blake, Managing Director, Portfolio Manager and
Analyst, Lazard Asset Management
John Levin, Chief Executive Officer and Senior Portfolio Manager,
Levin Capital Strategies
Stephen Wood, Chief Market Strategist, North America, Russell
Investments
SEPTEMBER 2014
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
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Introduction
Heather Myers
Managing Director, Non-Profits US Institutional, Russell
Investments
Heather Myers is managing director, non-profits for Russell Investments,
assuming the role in 2010. Based in New York, Heather is responsible for
Russell’s business growth in the non-profit market segment and for
providing leadership on strategy development and advice to clients and
prospects. Additionally, Heather serves as a senior consultant for several
key non-profit clients, providing strategic advice on all aspects of clients’
investment programs, including governance, investment policy, asset
allocation, manager selection and risk management. As one of Russell’s
leading voices in the non-profit community, Heather regularly participates in
industry conferences and is actively involved in Russell’s research aimed at
the interests of this community.
Heather joined Russell in 1989 to support Russell’s international consulting
clients and the company’s Japanese-related business. By the end of 1989,
she was a member of Russell’s fixed income manager research team, and
through 2000, Heather researched the global fixed income and currency
markets. She moved to London in 1997 as the head of multi-currency fixed
income research for Russell, and in this role she oversaw the team
researching U.K., European and global fixed income strategies. Returning to
the U.S. in 2000, Heather was named Russell’s senior practice analyst for
fixed income and currency based in New York. The following year, she
joined Russell’s U.S. Consulting team, becoming a senior consultant in
2003. From 2003 to 2009, as a senior consultant, Heather was also a
member of Russell’s external hedge fund of fund research practice for
advisory clients, and in 2010, she assumed the role of director of
endowment and foundation strategy.
p.72
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Russell’s Institutional Heritage
A Non-Profit Perspective
Heather Myers, Managing Director, Non-Profits
SEPTEMBER 2014
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Important information
THIS PUBLICATION IS INTENDED FOR INVESTMENT ADVISORS ONLY AND IS NOT INTENDED FOR, NOR CAN IT BE
PROVIDED TO, INVESTORS OR POTENTIAL INVESTORS. IT DOES NOT CONSTITUTE A SALES COMMUNICATION AS
DEFINED BY NATIONAL INSTRUMENT 81-102, “MUTUAL FUNDS.”
Nothing in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any
investment, nor a solicitation of any type. This information is made available on an “as is” basis. Russell Investments Canada Limited does not
make any warranty or representation regarding the information.
Indices and benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, and are not a guarantee of future
performance and are not indicative of any specific investment. Index return information is provided by vendors and although deemed reliable, is not
guaranteed by Russell Investments or its affiliates. Due to timing of information, indices may be adjusted after the publication of this report.
Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell Investments
Canada Limited and its affiliates, including Frank Russell Company, are collectively known as “Russell Investments.”
Russell Investments and the Russell Investments logo and Indices are either trademarks or registered trademarks of Frank Russell Company used
under license by Russell Investments Canada Limited.
Copyright © Russell Investments Canada Limited 2014. All rights reserved. This material is proprietary and may not be reproduced, transferred, or
distributed in any form without prior written permission from Russell Investments.
Date of first publication: August 2014
RETAIL-2014-08-27-0928 (EXP-08-2015)
p.74
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Topics for today’s discussion
1. Why Russell
2. How we work with clients
3. The world has changed
4. Investment management
5. Key issues for non-profit organizations today
p.75
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Why work with Russell?
Russell’s dedicated non-profit investment practice


Over 25 years of non-profit investment management
experience – first non-profit client: 1987
46 non-profit clients in the United States
 42 Institutional Investment clients with more than $8B AUM*
 4 Consulting clients with more than $105B AUA*


The average tenure of our non-profit clients is over 9 years
Serving the non-profit middle market**
 Median client size: $122M AUM*
Russell Core Competencies
 Average client size: $199M AUM*
 Higher-education, private schools, hospitals,
museums & private foundations

Dedicated resources: 35+ professionals
Portfolio
construction
Portfolio
Implementation
Capital
markets
insights
Indexes
Manager
Research
* Data as of March 31, 2014
** Non-profit middle market represents 34 institutional investment clients with $25 million to $1 billion in AUM.
p.76
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Representative non-profit client list
Serving non-profits for over three decades
A sampling of our current non profit clients includes:
 Bala Presbyterian Home Foundation
 Brite Divinity School
 College of Saint Elizabeth
 Express Scripts Foundation
 Oregon School Boards Association
 San Angelo Area Foundation
 San Angelo Health Foundation
 The Greater Clark Foundation
 The Mariners’ Museum
 Woods Charitable Fund, Inc.
Please note that the logos shown above may be registered trademarks of the organizations represented. The client representative list includes consulting clients, clients who are
invested in Russell funds globally, and clients that may be using other services from Russell Investments. Client names current as of December 2013. Client names are used with
permission, but such use does not constitute an endorsement or recommendation of Russell’s products or services.
p.77
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TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
Benefits of a comprehensive investment solution
Strategic Advice
Asset Management
On-going Monitoring
Consulting / advice
Recommendations for
investment platform
Performance
measurement / analysis
Comprehensive client
service
Portfolio design,
construct and manage
Risk, liquidity and
spending analysis /
reporting
Review meetings
Benchmarking (custom,
universe and peer)
Detailed account,
performance and fund
reporting
Strategic review / planning
Asset allocation modeling
Risk modeling
Financial modeling
Policy development and
review
Fiduciary structure
Manager due diligence
and selection
Manager monitoring and
replacement
Risk management
Rebalancing
Fee analysis
78
Custody
Audit assistance
ClientLINK website
Capital markets research
Regulatory updates
Manager research
Research
New investment strategies
Educational events /
customized educational
workshops
“Best Practice” analysis
p.78
Administrative Support
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
How we bring practical advice to clients
Strategic advice
1
Our information advantage
= Broader opportunity set
and manager access
› Strategic advice
› Strategic asset allocation
and spending review
› Portfolio strategy
› Risk modeling
› Liquidity analysis
› Governance, policy,
best practice review
Manager research 2
Portfolio management
Practical experience
= Tilts the odds of
success in your favor
› Long only
strategies
› Hedge funds
› Commodities
› Infrastructure
› Global REITs
› Real estate
› Real assets
› Private capital
› OCIO’s are
practitioners
› Portfolio construction
with view of full
financial picture
› Manager selection
› Dynamic asset
allocation
› Ongoing
management
› Active risk
management
Implementation
3
Flexible platform
= Responsive to your
governance model
› Commingled funds, direct
managers, active and passive,
Smart beta, legacy investments
› Risk tools / implementation strategies:
Overlays / Thematic / Smart Beta
Transition management
Completion portfolio
Currency management
Rebalancing
OCIO is Outsourced Chief Investment Officer.
Implementation Services are offered through Russell Implementation Services Inc. a SEC registered investment adviser and broker-dealer member FINRA / SIPC.
p.79
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Educational Resources and Opportunities for our clients
Education covers full spectrum of topics core to prudent management
› Governance
› Asset allocation
› Investment Management
› Risk Management
Meetings customized for clients
› Attendance at quarterly IC meetings and
conference calls
› Ability to have focused workshops
› Access to all Russell experts for education
Events for clients
› Webcasts on timely topics (recent discussion on fixed income)
› Regional conferences and roundtables (non-profit specific May/June
across country)
› Annual Institutional Client conference
Other research
› “Viewpoints” and Market research white papers
› Russell’s research library / weekly market outlook video clips
p.80
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Sample “Roadmap” for committee meetings
Orientation Workshop*
(Full Day in person
meeting)
First committee
meeting with Russell
(extended meeting)
• Review transition of
relationship to Russell
• Asset allocation study
and recommendations
• Risk and volatility
analysis
• 1st policy discussion
•
•
•
•
1st quarter
Year 2
•
•
•
•
p.81
Market review / outlook
Portfolio review
Liquidity analysis
Educational topic
•
•
•
•
2nd quarter
Year 1
3rd quarter
Year 1
Market review / outlook
Portfolio review
2nd policy discussion
IPS review /
recommendations
• Market review / outlook
• Portfolio review
• Finalize / approve any
policy updates
• Regulatory update
• Educational topic
2nd quarter
Year 2
3rd quarter
Year 2
Market review / outlook
Portfolio review
Educational topic
Potential on-site
meeting at Russell
Seattle headquarters
•
•
•
•
Market review / outlook
Portfolio review
Reaffirm Strategic AA
Deep dive into risk and
volatility analysis
• Educational topic
FOR ADVISOR USE ONLY. DISTRIBUTION OR DISCLOSURE
TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.
4th quarter
Year 1
•
•
•
•
Market review / outlook
Portfolio review
Spending analysis
Educational topic
*Educational Topics
may include:
•
•
•
•
•
Asset classes
Specific strategies
Specific managers
Risk management
Current events--such
as, market trends,
geopolitical activity, etc.
Key issues for non-profits today
1. Continual search for innovation
2. Liquidity is important
3. Governance and prudent management
4. Enhanced risk management process
5. Spending rate and spending policy
p.82
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THE NEW WORLD OF
INVESTMENT MANAGEMENT
FOR NON-PROFITS
› Assess current market
environment
› Understand investment
objectives
› Determine optimal
portfolio positioning
and strategy to achieve
objectives
The world has changed
Your investment model can have a significant impact on your mission
Status Quo Investing
OLD WORLD
›
›
›
›
U.S. Stock Picking
Equity & Fixed Income Focus
Stay the Course
The Uniform Management of
Institutional Funds Act (UMIFA)
Dynamic / Flexible Model
NEW WORLD
› Global Portfolios & Wide Array of
Strategies and Classes
› Dynamic Investing
› Sensitivity to Volatility and Tail Risk
› Renewed Spending Focus
INFLECTION POINT
› Regulatory Complexity
› The Uniform Prudent Management of Institutional Funds Act (UPMIFA)
& Dodd-Frank Wall Street Reform and Consumer Protection Act
› Due Diligence Requirements
› IRS Scrutiny & Updated Form 990
› Financial Accounting Standards Board (FASB) Mark-to-Market
› Recent Economic Downturn
p.83
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What worked in the past must change for the future
The Investment World Today
 Low return assumptions
 More volatility and complexity in markets
 Changing regulatory environment
 Increasing fee constraints
Investment success requires
 Need to be nimble – speed to implementation
 Need for expanded opportunity set
 Need to manage multiple layers of risk
 Need for smart active-passive choices
Survey of professional forecasters
10%
Expected Returns
9%
8.7%
8%
7%
5.6%
6%
5.0%
5%
4%
3%
3.3%
3.7%
2%
2.3%
1%
10 Yr Inflation
60/40 Inflation-Adjusted
60/40 Nominal
Source: Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters & Russell. Data as of January, 2014.
Expected returns on this chart are the expectations that the Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters as well as Russell Investments had during the
time period noted on the chart above. These are 2 year forward looking forecasts.
Data is historical and is not indicative of future results. 60/40 = 60% equity, 40% bond portfolio. Equity returns were calculated using the S&P 500 Index, bonds were calculated using the
U.S. Treasury 10 year bond.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific
investment.
p.84
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A more holistic approach for achieving better outcomes
Today’s more effective investment management delegation
Pre-Crisis
Post-Crisis
Objective Setting
Asset Allocation
Asset Class Strategy
Portfolio Structure
Portfolio
Management
(Construct)
Provider
Manager Selection / Monitoring
Review &
Control
(Manage)
p.85
Execution
Risk Management
Investments
Russell
Provider
Client
Strategy
(Design)
Client
Client
Governance
 Set the delegation of
investment discretion
at your level of
comfort. This should
also reflect the
committee’s level of
expertise and meeting
frequency.
 Committee should
focus on what it does
best and delegate the
rest.
Performance Measurement
& Evaluation
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How does your portfolio match your mission?
STABLE & GROWING
› Strong cash flow/capital
campaign mode
› Lack of constraints
› Flexibility in investment
implementation
› Balance intergenerational equity
with spending and inflation
› Steady contributions
› Reviewing new investment
strategies
CONSTRAINED
› Operations/grants heavily
dependent on portfolio
› Investment constraints
› Some underwater
portfolios
SPENDING POLICY & METHODOLOGY
p.86
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LIQUIDITY MANAGEMENT
VOLATILITY & RISK MANAGEMENT
AGGRESSIVE GROWTH
Guiding principles for portfolio construction
What clients can count on during the process
p.87
1
Outcome-oriented: Tailor solutions to client investment
objectives
2
Open architecture: Unbiased, well-constructed multi-manager
solutions are superior to single strategies
3
Investment discipline: Seek returns where opportunity is
greatest and counter behavioral biases
4
Risk management: Know exposures and mitigate unexpected
outcomes
5
Dynamic portfolio management: Careful timing and
implementation matter
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How we do it
How do we manage the portfolio to holistically mitigate
risk and enhance returns?
RISK HEDGING
› Hedge unwanted exposures
Tactical
Overlays
› Manage risk exposures at
the total portfolio level
› Tilt portfolio to hedge
specific risk exposures
Smart
Beta
Manager
changes
Dynamic
Fund
Management
› Tactical investment of cash
flows
› Informed rebalancing
p.88
RETURN ENHANCEMENT
› Opportunities to generate
alpha: structural, cyclical and
manager-specific
› Leverage active & passive
Currency
Hedges
New Asset
Classes
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› Most cost-effective execution
› Mis-pricing detection
› Tilt portfolio for behavioral
biases
Multiple dimensions of portfolio construction
Environment
Constraints
›
›
›
›
Fee budget
Liquidity Requirements
Use of Derivatives
Stocks/Industries to
Exclude
› Legacy Investments
›
›
›
›
›
Inflation (high/low)
Interest rates (high/low)
Currency (weak/strong)
Political uncertainty
Volatility (high/low)
Themes
› Global deleveraging
› Distressed
› Energy & resources
alternatives
› Volatility regimes
Strategies
Objectives
› Support non-profit mission
› Support operating budget
› Manage liquidity and cash
flows
› Meet spending requirements
› Preserve capital
› Respond to inflation
› Manage volatility
p.89
Portfolio
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›
›
›
›
›
›
›
Debt versus equity
Active versus passive
Alpha versus beta
Physicals versus derivatives
Marketable versus private
Absolute return strategies
Real Assets
Effective governance
Collaborative culture through collaboration and rigorous self-assessment
BOARD GOVERNANCE
› Focus on what matters
› Mission Alignment
› Policy and Strategy
› Risk Management
› Unambiguous Accountability
A COMMON
VISION
INVESTMENT COMMITTEE
› Define Policy and Strategy
› Investment Policy Statement
› Portfolio Oversight
› Delegation to Professionals
› Investment Education
RUSSELL & INTERNAL LEADERSHIP TEAM
› Daily Portfolio Management
› Strategic/tactical asset allocation
› Risk management
› Manager due diligence
› Training / Development
Source: Based on the "Proposed Board Effectiveness Model" of Richard Leblanc, PhD, 2007.
p.90
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Key issues in working with non-profits
USE THEIR
LANGUAGE
Safest to use the generic term “portfolio” when referring to their investments. They can be very
sensitive to the word “plan”.
The portfolio may or may not be an “endowment”. Endowment can refer to a “true endowment”
(restricted assets) or “quasi-endowment” (board designated or unrestricted assets). This makes a
difference in terms of the audit, accounting, and sometimes investment strategy.
BEST
PRACTICES
Ability to engage in a dialogue comparing and contrasting traditional and emerging best practices can
open a lot of doors and create “next steps” in prospecting. These can be found on the following page.
I am available and happy to clarify.
SPENDING
POLICY
Spending policy is the % the institution is required to spend. The methodology is how it is calculated.
Most popular is 5% of 3 or 5 year moving average. Many institutions have lowered their volatility of
spend by adopting a “hybrid” calculation that ties a % to inflation (the “Yale” or “Stanford” model).
RISK AND
LIQUIDITY
Continue to be big issues. Key is to tie asset allocation, spending, risk and liquidity back to the
mission…ie. alignment between their mission and the day to day management of the portfolio.
MOST
COMMON
QUESTIONS
FROM
REGIONAL
ADVISORS
p.91
1. What can I say to get the meeting? 2. What can I give them?
Answer #1: Almost all institutions know the Russell Indexes. Are they aware Russell has a dedicated
non-profit practice? Set up a brief introductory meeting to discuss emerging best practices and
provide a brief introduction. Non-profits often take meetings to “learn more” or to build files for
future RFP process.
Answer #2: Standard non-profit brochure and potentially a recent whitepaper.
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What topics do non-profits wish to discuss?
›
Spending policy, growing in perpetuity while meeting spend
›
Governance
›
Philanthropy
›
Risk management
›
Asset allocation
›
Active AND Passive management
›
Alternatives
›
Peer groups
›
SRI/ESG
p.92
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What do you need from us?
›
Russell works with non-profit organizations globally,
›
We have a dedicated team of talented individuals focused on nonprofits
›
Being able to talk the talk, and understand the unique issues facing
non-profits is critical in building a relationship
›
With current capital market expectations, meeting return targets is
more challenging; expertise in investment management is required,
as is active management
›
p.93
What would help you be successful?
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Thank you
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Introduction
Keith Pangretitsch, CFA
Director, National Sales-Private Clients Service
Russell Investments Canada
Keith Pangretitsch is director of national sales for Russell
Investments, leading the private client business in Canada. Keith is
a member of the executive team and the Canadian operating team,
which is responsible for managing Russell’s Canadian business.
Prior to assuming this role, Keith was a regional manager for
Russell, for Western Canada. Keith joined Russell in 1998, and
worked in the Toronto office for five years prior to setting up the
Vancouver office in 2003. In his role of regional director, Keith was
responsible for providing oversight for Russell’s high net worth
investment management business.
Keith has been in the financial services sector since 1993. He
started his career in the brokerage industry and subsequently
moved to the mutual fund industry in 1996 working with Templeton
Management Limited and Goodman and Company.
p.95
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Close
Keith Pangretitsch, Director, National Sales, Private Clients Service
SEPTEMBER 2014
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TO INVESTORS OR POTENTIAL INVESTORS IS PROHIBITED.