kylie minogue asset models & who cares anyway martyn dorey consultant 2 december 2003 important...
Post on 18-Jan-2018
215 Views
Preview:
DESCRIPTION
TRANSCRIPT
Kylie Minogue Asset Models & Who cares anyway
Martyn DoreyConsultant
2 December 2003
Important Notice This document has been approved for issue in the UK by PSolve, a division of io investors Ltd., regulated by the FSA. Information contained in this document has been derived from sources that we consider to be reasonable and appropriate. While this information is believed to be reliable, no representations or warranties are made as to the accuracy of information presented, and no responsibility or liability can be accepted for any error, omission or inaccuracy in this document or related materials. This document may also include our views and expectations, which cannot be taken as fact. This information is supplied to you in confidence and you may not pass it on to any other party without PSolve’s prior written consent. Past performance is not necessarily a guide to future returns. The value of investments can go down as well as up as a result of market and currency fluctuations. Due to the above factors, an investor may get back less than was originally invested.
2
Objectives• Split presentation into three parts• Epistemology
– Influence of internal culture on modelling– Reflections on debate earlier
• Technical– Pay attention here comes the science bit– Behavioural aspects of optimisation– How do you put a price on the downside
• Do we care?– What are the big issues we need to be
thinking about over the year– Plan for next year
3
Step back in time
• Whats the Kylie link?• This is an accessible conference• Fancied doing something different
from neighbours & went into competitive pop business
• Early success was short lived• Culture changed• Found herself out of a job• What was wrong?
4
Wouldn’t change a thing -
• Kylie ultimate consultant:• Reinvent approach every decade
using latest technology• Responded to changing cultural
environment• Measurable feedback on approach• Did not specialise but got better at
everything• Anything goes• Above all took risk• Got involved in the creative process
5
Kylie Vs. actuarial risk modelling • Creative thinking?
– Is culture is stagnant• Press - do we take it too seriously?
– Competitive approach in press and talks
• Competitors in the top 40 – Breadth and depth of product
philosophies/styles– Similar models used– 4 advisors 65% of FTSE 100
• Change of direction interpreted– weakness not creative strength
• Bitchy? – Use competitors good ideas– Finish other peoples ideas
• Integrated vs. segregated– Get involved in creative process– Seek contemporary creativity
• Trying to be ‘hard’– You can still be normal
6
Getting ideas out.
• Express risk as – Potential funding level– Potential contribution rate rises
• Analysis examines different outcomes based on a simple bell curve
• Most people concerned with poor experience
• Also consider better than expected100% funded
Average in the middle
90% of time X funded or better
Poor experience
Gray area = 90%
Better than average experience
1/3 of time Y funded or better
Gray area =33%
7
Mini case study (1)
• Client likes bonds• With very little information from actuary
basis for discussion
8
Shocked
N:\2-Product Development\RiskBudgeting\[RiskBudgeting.xls]OutputSheet 0.1
Asset mix & est. one year downside "90% of the time funding levels will be above"
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
200.0%
100: 0 90: 10 80: 20 70: 30 60: 40 50: 50 40: 60 30: 70 20: 80 10: 90 0: 100
Asset mix Equities: Bonds
OngoingDiscontinuanceFRS17MFR
Asset mix & est. one year downside "10% chance that contribution rates will rise by"
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
100: 0 90: 10 80: 20 70: 30 60: 40 50: 50 40: 60 30: 70 20: 80 10: 90 0: 100
Asset mix Equities: Bonds
OngoingDiscontinuanceFRS17MFR
9
I should be so lucky
N:\2-Product Development\RiskBudgeting\[RiskBudgeting.xls]OutputSheet 0.66
Asset mix & est. one year downside "1/3 of the time funding levels will be above"
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
100: 0 90: 10 80: 20 70: 30 60: 40 50: 50 40: 60 30: 70 20: 80 10: 90 0: 100
Asset mix Equities: Bonds
OngoingDiscontinuanceFRS17MFR
Asset mix & est. one year downside "1/3 chance that contribution rates will rise by"
-1.8%
-1.6%
-1.4%
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%100: 0 90: 10 80: 20 70: 30 60: 40 50: 50 40: 60 30: 70 20: 80 10: 90 0: 100
Asset mix Equities: Bonds
OngoingDiscontinuanceFRS17MFR
10
Je Ne Sais Pourquoi?
Asset mix & impact on benchmark risk
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
100: 0 90: 10 80: 20 70: 30 60: 40 50: 50 40: 60 30: 70 20: 80 10: 90 0: 100
Asset mix Equities: Bonds
OngoingDiscontinuanceFRS17MFR
• 100% Equities– MFR low risk– FRS17 high risk
• 100% Bonds – MFR high risk– FRS17 low risk
• 50:50 lowest risk against all benchmarks
11
Obsession: Behavioural finance• Myopic risk aversion• Hope for out-performance • Need risk to outperform in long term• Too much risk under-perform in short
term
Probability of achieving objective
0
0.1
0.2
0.3
0.4
0.5
0.6
0.00
0.01
0.02
0.02
0.03
0.04
0.05
0.06
0.06
0.07
0.08
Risk against benchmark
Prob
whe
re IR
= 0
.36
12
Obsession: Behavioural finance• Myopic risk aversion• Hope for out-performance • Need risk to outperform in long term• Too much risk under-perform in short
term
0
5
10
15
05
1015
20250
0.2
0.4
0.6
0.8
SkillIncreasing skill
Probability of achieving objectives
Active riskIncreasing risk
13
Obsession: Behavioural finance• Myopic risk aversion• Hope for out-performance • Need risk to outperform in long term• Too much risk under-perform in short
term
0
5
10
15
05
1015
20250
0.2
0.4
0.6
0.8
SkillIncreasing skill
Probability of achieving objectives
Optimum risk
14
Obsession: Behavioural finance
Probability of achieving objectives
manager information ratio
activ
e ris
k
15
Word is out: Cost to risk• It’s not ‘hard’• Behavioural method?• If things go wrong how much do you have
to pay?• Looks only at downside• Works with any distribution you like –
here we will use stochastic• Could be thought of as an option• You will exercise option if your assets
don’t deliver the goods
16
Cost to risk: What do I have to do?• Calculate the option:• PV(Min(x-obj),0)• Determine a benchmark• Determine an objective• Calculate distribution around this• Work out the mass function• Then calculate the expected value of
downside
17
Global Equity Return 8.7% 32.9% 47.1% 48.5% 14.8% 51.2% 68.5% 68.1%Global Fixed Income Return 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Global Index Linked Return 85.0% 57.9% 32.9% 27.9% 75.7% 33.6% 1.5% 0.0%Global Property Return 6.3% 9.2% 20.0% 23.6% 9.5% 15.2% 30.0% 31.9%Global ARF Return 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Global Corp Return 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Exp Return relative year : 5 -12.7% -4.9% 0.1% 0.8% -22.2% -10.7% -4.8% -4.8%Exp Return relative year : 10 -25.4% -3.6% 10.7% 12.6% -47.9% -15.4% 1.5% 1.5%Exp Return relative year : 15 -37.2% 10.1% 42.1% 46.3% -76.4% -4.4% 34.3% 34.3%Exp Return relative year : 20 -46.7% 43.1% 106.8% 115.4% -107.6% 33.5% 114.0% 114.0%Exp Return relative year : 25 -52.7% 104.1% 220.5% 236.3% -141.2% 112.6% 265.3% 265.1%Exp Return relative year : 30 -51.6% 212.4% 417.9% 446.4% -174.0% 266.9% 548.3% 547.9%
Prob failing objective year : 5 99.5% 62.9% 51.1% 50.1% 99.5% 67.5% 58.0% 57.7%Prob failing objective year : 10 99.8% 57.7% 42.7% 41.6% 99.8% 67.0% 53.2% 53.3%Prob failing objective year : 15 99.1% 47.3% 32.7% 31.8% 99.5% 58.4% 46.1% 46.1%Prob failing objective year : 20 96.2% 37.1% 24.4% 23.4% 98.3% 50.5% 38.6% 38.6%Prob failing objective year : 25 91.4% 27.5% 16.9% 16.3% 95.9% 43.5% 31.1% 31.2%Prob failing objective year : 30 84.1% 19.2% 10.7% 10.2% 93.0% 36.2% 25.2% 25.1%
Exped Loss year : 5 -12.7% -9.4% -10.0% -10.2% -22.2% -17.0% -17.8% -17.9%Exped Loss year : 10 -25.5% -13.6% -13.0% -13.2% -47.9% -28.6% -27.5% -27.6%Exped Loss year : 15 -37.2% -15.0% -13.1% -13.2% -76.5% -37.1% -33.7% -33.8%Exped Loss year : 20 -47.4% -14.7% -12.0% -11.9% -108.1% -43.9% -38.2% -38.1%Exped Loss year : 25 -55.7% -13.3% -10.3% -10.2% -143.8% -49.1% -41.0% -40.9%Exped Loss year : 30 -61.1% -11.0% -8.0% -7.9% -182.3% -51.7% -40.9% -40.8%
Beat ILG by 3%, reduce downside Beat ILG by 5%, reduce downsideAsset Allocation Asset Allocation
Output (1)
18
Output (2)Beat ILG by 3%, reduce downside
0%10%20%30%40%50%60%70%80%90%
100%
Years1:1
Years2:2
Years3:3
Years4:4
Years5:5
Years6:6
Years7:7
Years8:8
Years9:9
Years10:20
Years20:30
Global Corp Return
Global ARF Return
Global Property Return
Global Index Linked Return
Global Fixed Income Return
Global Equity Return
19
Who cares:• What is the biggest issue for the younger
members• Generate
• something you would like to hear someone talk about
• Something that you would like to talk about• Opportunity to practice• Try out some ideas
top related