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A closer look at today’s target date fund landscape

DC Investment Forum Toronto, Ontario September 26, 2014

Chhad Aul, CFA Portfolio Manager Sun Life Global Investments

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Today’s agenda

• A closer look at current market conditions

• Impact of current markets on plan members

• Why Target Date Funds make sense • Evaluating the merits of different Target

Date Funds

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A closer look at

current market conditions

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-60%

-40%

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0%

20%

40%

60%

80%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

S&P/TSX Composite TR (CAD)

S&P 500 TR USD

Tech Bubble

US Financial Meltdown

European Crisis

Japanese bubble

Mexican Economic Crisis Russian

Financial Crisis

Six major crises in 25 years Impact remains fresh in plan members’ minds

Rolling one year returns. Source: Morningstar as of June 30, 2014.

What’s next?

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-80%

-60%

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0%

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40%

60%

80%

100%

Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14

S&P/TSX Composite TR ScaledS&P 500 TR ScaledMSCI EAFE TR ScaledMSCI EM TR Scaled

Strength of equity markets continues

Source: Bloomberg. Scaled returns from July 1, 2008 to June 30, 2014.

European Crisis

US Financial Meltdown

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30

40

50

60

70

80

90

100

110

Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014

Inde

x Le

vel

Lower implied correlation

Reduced correlations create opportunity

European Crisis

US Financial Meltdown

Higher implied correlation

CBOE S&P 500 Implied Correlation Index. Source: Bloomberg as of June 30, 2014.

Now is the time for active management

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0

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18Cdn 10-year gov't bond yield

U.S. 10-year Treasury Yield

Bond yields still at historical lows

Source: Bank of Canada, Bloomberg as of June 30, 2014.

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Interest rates

Bond prices

Interest rates What’s going to happen when they eventually rise?

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MORE THAN

of DC consultants surveyed are concerned about • rising rates • a low return environment, and • high volatility over the next three to five years

DC consultants weigh in

Source: PIMCO, April 2014.

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The impact of current markets

on plan members

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Are today’s investors too conservative?

Source: Wells Fargo/Gallup Investor and Retirement Optimism Survey, 2014.

Investors still scarred by financial crisis

of investors favour no-risk / low return risk /

high return over

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Average asset allocation is extremely conservative

Millennials feel it too!

are invested in cash vs. 23% cash for other investors

Source: UBS Wealth Management Americas.

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Are they making informed decisions?

Source: Sun Life Benchmark Report of Capital Accumulation Plans in Canada.

FUNDS

Regardless of plan size or the number of options offered,

most plan members limit their investments to

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Are they making informed decisions?

Source: Franklin Templeton Investments

view fixed income

as a safe haven

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Canadian consumers among developed world’s most indebted OECD household debt-to-income ratio (2011, % of GDI)

Source: Capital Economics.

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60% 31%

2/3 of Canadians aged 55-64 currently hold debt

cannot

of investors estimate that their current

debt level

Impact of consumer debt on savings

Source: advisor.ca as at April 28, 2014

MORE THAN

save does not allow them to save

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Resetting plan member behaviour

• Members need to be proactive to achieve their retirement goals – Look beyond North America – Stock pickers market – need to do more

than just index – Diversify sources of yield – Tactically adjust to market conditions

• ………or delegate!!

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WHY Target Date Funds make sense

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Why target date funds make sense

Professional management

Automatic rebalancing

Glidepath mirrors lower risk tolerance as target date approaches

Seamless implementation

Simplifies investment decision

Removes member’s irrational investment behaviour

Strong diversification benefits

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Growth of target date funds

$1000

$3.9 $5.0 $5.7

$6.9

$9.1

$10.9

$12.8

Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

Source: Sun Life Group Retirement Services. Figures are in $ billions.

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of DC plans

Source: Sun Life Financial. Data since 2011.

Growth of target date funds as default option

who've joined Sun Life Financial have added TDFs to their lineup and are

using them as the default option.

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45

50

56

58

62

65

67

63

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44

42

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0 20 40 60 80 100

65 +

60-64

55-59

50-54

40-49

30-39

20-29

Under 20

EquityFixed Income

Not enough or too much equity? Equity exposure (%) by age for plan members who choose their own portfolio

Source: Sun Life Benchmark Report of Capital Accumulation Plans in Canada.

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Source: Voya Investment Management and ING Retirement Research Institute, February 2014.

Target date funds increase investor confidence

of TDF investors

are confident they will reach their RETIREMENT GOALS

vs. 41% non-TDF investors

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Source: Voya Investment Management and ING Retirement Research Institute, February 2014.

Higher confidence leads to higher contribution levels

over 10% of their income report contributing

vs. 23% non-TDF investors

of TDF investors

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Investment strategy for SLF plan members

1 year (%)

2 year (%)

3 year (%)

5 year (%)

Target date funds only 12.76 10.75 6.83 8.86

No target date funds 12.33 9.53 5.31 7.38

Excess return 0.43 1.22 1.52 1.48

Higher returns with target date funds

*Includes all Target Date Funds offered on the Sun Life Group Retirement Services investment platform. Data provided by Group Retirement Services, as at December 31, 2013. National Account client segment returns.

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Evaluating the merits of different

Target Date Funds

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Target Date Funds with a static

glidepath The plain vanilla option

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Strategic asset allocation Glidepath becomes more conservative as it approaches retirement

Time Remaining

0%

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100%

40 38 36 34 32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2

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Life Stage Early Saver Midlife Saver Pre Retiree Retiree

Risk is systematically and gradually reduced as participants

get closer to retirement

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Target Date Funds with a tactical

glidepath TAKING ADVANTAGE

of current market conditions

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Tactical allocation Assessing current market environment for tactical opportunities

Tactical asset allocation

Economic indicators

Market confidence

Volatility

Asset class correlations

Foreign exchange rate

movements

Valuations

Current yield

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100%

40 38 36 34 32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2

Time Remaining

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Life Stage Early Saver Midlife Saver Pre Retiree Retiree

Target date funds with a tactical glidepath

Key features: • Manager has the ability to move within a

predetermined range (+ or – 10%) to take advantage of market movements

• Asset class weights can change within defined tolerance bands

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-9

115 44 14 11

92

32 68

-30

91

17 40

-100

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0

50

100

150

200

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300

350

Q2 2013 2012 Since inception

Tactical Asset Class

Tactical Asset Mix

Manager selection

-28

298

93 122

Basi

s po

ints

Annualized

Return over benchmark*

due to:

Annualized (Jan. 17, 2012) (Jan. 17 to Dec. 31 , 2012)

Analysis done June 30, 2014. Returns of Sun Life Granite Balanced Fund are shown gross of fees. *Benchmark = 10% FTSE TMX Canada 91-day T-bill; 10% FTSE TMX Canada Short Term; 40% FTSE TMX Canada U.; 10% JPM Global Gov’t C$; 12% S&P/TSX Capped Comp.; 9% S&P 500 C$; 9% MSCI EAFE C$. The value add does not include other effects such as those resulting from cash flows which impacts the total value added. Asset allocations are subject to change without notice.

Evaluating the contribution of tactical asset allocation & active management Skilled investment managers must demonstrate value added

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Target Date Funds Active vs Passive

The best of both worlds

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And the winner is…..

Active Passive

Known as ‘father of efficient

market hypothesis’

Eugene Fama

His work shows limitations of

efficient market theory

Robert J. Shiller

The Sverges Riksbank Prize in Economic Sciences In Memory of Alfred Noble is the actual name of the award.

2013 Nobel Prize in Economic Sciences awarded to ‘contradictory’ theories

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Active managers are added to:

Help manage portfolio risk Enhance potential returns through alpha Access diversifiers where affordable Reduce volatility (vs. index profile) and

seek to reduce downside capture Help navigate through turbulent market

environments Overcome the fact that some standard

passive indices are inefficiently constructed (e.g. Infrastructure)

Passive funds are used to:

Help gain efficient market exposure (e.g. where potential value add from active management expected to be lower or to provide low-cost exposure)

Provide the ability to increase or decrease the portfolios active/passive exposure up or down depending on outlook for performance of active managers

Control manager style risk

Complementary approaches to portfolio construction

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Active vs passive by asset class

1.2%

1.1%

0.4%

1.0%

1.9%

1.1%

5.1%

1.3%

0.8%

1.0%

0.5%

0.0% 2.0% 4.0% 6.0%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

YTD 2014

Outperformance

Canadian Equity

Based on monthly Mercer MPA Pooled Canadian Equity, U.S. Equity and Global Fixed Income (PFS) gross returns from January 1, 2004 to June 30, 2014. Canadian equity passive index is the S&P TSX Capped Composite; U.S. equity passive index is the S&P 500; Global Fixed Income passive index is the Citygroup World Broad Investment Grade Index (Citi WBIG).

1.0%

2.0%

1.5%

0.2%

1.4%

0.9%

0.2%

1.2%

0.8%

2.1%

0.5%

0.0% 1.0% 2.0% 3.0%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

YTD 2014

Outperformance

US Equity

1.2%

1.3%

2.5%

9.7%

6.5%

7.6%

0.2%

0.7%

8.3%

0.1%

0.4%

0.0% 5.0% 10.0% 15.0%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

YTD 2014

Outperformance

Global Fixed Income

Calendar year excess returns

Active median manager Passive index

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Target Date Funds with a risk overlay

Providing members with choice based on risk profile

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0%

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100%

40 35 30 25 20 15 10 5

Equi

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Time Remaining

Aggressive glidepath

Conservative glidepath Moderate glidepath

Target date funds with a risk overlay Customized approach considers plan members’ risk tolerance

For illustrative purposes only.

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Target Date Funds with a guarantee

For risk-averse plan members seeking capital protection

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*Source: 2014 Sun Life Canadian Unretirement™ Index +Source: Voya Investment Management and ING Retirement Research Institute,. February 2014.

Wealth preservation is priority

are taking LESS RISK with their portfolio now, compared to before the 2008 crash*

OF INVESTORS

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Majority favour security over high growth

Source: Wells Fargo/Gallup Investor and Retirement Optimism Survey, 2014..

of investors favour no-risk / low return risk /

high return over

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$9.50$10.00$10.50$11.00$11.50$12.00$12.50$13.00$13.50$14.00$14.50$15.00$15.50$16.00$16.50$17.00$17.50$18.00$18.50

Investment opportunity for members who are saving long term and whose objectives have not changed.

2040 Fund returns Guaranteed Maturity Value

Target date funds with a guaranteed maturity value

For illustration purposes only. Data for the Sun Life Milestone 2040 Fund as of June 30, 2014. The returns provided are stated before investment management fees and include the reinvestment of all distributions. They do not take into account any administrative charges or taxes payable that would have reduced returns. Past performance may not be repeated. Group Retirement services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies.

• No matter what the path of the market, fund locks in the highest net asset value at month end • This provides a safety net, the plan member’s risk is reduced as they meet their target obligation (retirement, college

expenses, etc.)

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Summary • Capital markets impact members’ ability to prepare for retirement

• Target date funds can help alleviate emotional & investment stress

• Not all target date funds are created equal: evaluate product features & benefits

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This presentation contains information in summary form, for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this summary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. Information is subject to change. The views and/or opinions expressed may be those of the author or sub-advisors and are not necessarily the views and/or opinions of Sun Life Global Investments (Canada) Inc. Please note, any future or forward looking statements contained in this summary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this summary. Mutual and segregated fund values change frequently and past performance may not be repeated. Mutual funds are not generally guaranteed, although the Sun Life Milestone Financial Funds benefit from the guarantee described below. We have structured each Sun Life Financial Milestone Fund so that it will have sufficient assets to pay the Guaranteed Value per unit on its respective maturity date. Each Fund participates in a Sun Life Assurance Company of Canada guarantee, effective at the respective maturity date, assuring payment to the unitholders of the highest month end unit value achieved during the life of the Fund, or its ending unit value, or $10.00, whichever is the highest. Additional terms and conditions which govern the guarantee are outlined in the Description of Fund Operations attached to the group annuity policy issued to the plan sponsor. Sun Life Assurance Company of Canada and its affiliated companies respectively own or properly license all the trade-marks used on or in connection with the goods and services which they provide. The trade-marks are protected by Canadian and foreign trade-mark laws. All rights reserved. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies. Group Retirement Services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies. © Sun Life Global Investments (Canada) Inc., 2014.