harvest volatility management preserving real purchasing power … 0900 harvestva-silva... · 2014....

Harvest Volatility Management

Preserving Real Purchasing Power in NDTs

J o s h S i l v a

E a r l K l e c k n e r

N u c l e a r D e c o m m i s s i o n i n g T r u s t F u n d

S t u d y G r o u p

2 0 1 4 A n n u a l C o n f e r e n c e

M a y 1 8 - 2 1 , 2 0 1 4

It's really hard to design products by focus groups. A lot of

times, people don't know what they want until you show it

to them."

— Steve Jobs

CONFIDENTIAL. NOT FOR DISTRIBUTION

Nuclear Decommissioning Trust Issues

One of the key issues for any NDT is the loss of the purchasing power

Many NDTs are underfunded

Purchase power protection will help protect the buying power of the trust from rising inflation

The NRC Escalation Index which adjusts the minimum financial assurance amount continues to be adjusted

upwards to try and keep pace with rising costs

PAGE │ 2


Labor Costs- Effects on Decommissioning

Labor is 65% of the Escalation Index

Labor force for decommissioning is specialized and if multiple utilities are forced to decommission

simultaneously, the cost could escalate dramatically

Utilizing assets that perform well as interest rates rise to help mitigate the rising costs of labor as interest rates

and labor costs trend closely together

PAGE │ 3


Energy Costs-Effects on Decommissioning

The Energy Component is 13% of the Escalation Index and is represented by light fuel oil and industrial power

Select a basket of energy assets that are highly correlated to light fuel oil

Utilize utility stocks to represent industrial power

PAGE │ 4


Burial Costs-Effects on Decommissioning

The Burial Component is 22% of the Escalation Index

This component is constantly under scrutiny as the U.S. government has yet to establish a permanent burial

facility

Present burial sites may not be available in the future

Disposal may therefore add a long tail to decommissioning

This is the hardest component to offset

Using construction costs as a close facsimile, we consider burial cost to be comprised of material cost plus

employment

PAGE │ 5


Concerns to Modern Investor

1. Gas and food have more than doubled over last 20 years with the last ten years seeing the majority

of the increase

Are we truly in a low inflation world?

2. Loss of purchasing power in low-yield environment

How does an investor hedge loss of purchasing power?

PAGE │ 6

FAO Food Price Index

1990 – 2013Source: Food and Agriculture Organization of the United Nations

Price Trends of Consumer Energy Products in Nominal

Dollars, 1990-2012

(Index 1990 = 1.0)

Sources: U.S. DOE/EIA, Annual Energy Review 2010 and Short – Term Energy

Outlook (January 2012)

FAO Food Price Index

1990 – 2013

Source: Food and Agriculture Organization of the United Nations


Passive Commodities – Welcome to Six Flags!

Passive investment in commodities has produced 3% returns at a 24% volatility since 2000

High volatility/low returns causes failure as investment options

Low correlation of commodity assets

PAGE │ 7

$1M Invested in GSCI from March 2000 - July 2013

Mar 2000 - Jul 2013 Precious Metals Energy Agriculture Industrial Metals

Precious Metals 1.0000

Energy 0.2755 1.0000

Agriculture 0.3429 0.2422 1.0000

Industrial Metals 0.3661 0.3911 0.3794 1.0000

$0.00

$500,000.00

$1,000,000.00

$1,500,000.00

$2,000,000.00

$2,500,000.00

$3,000,000.00

$3,500,000.00

$4,000,000.00

3/1

/2

00

0

9/1

/2

00

0

3/1

/2

00

1

9/1

/2

00

1

3/1

/2

00

2

9/1

/2

00

2

3/1

/2

00

3

9/1

/2

00

3

3/1

/2

00

4

9/1

/2

00

4

3/1

/2

00

5

9/1

/2

00

5

3/1

/2

00

6

9/1

/2

00

6

3/1

/2

00

7

9/1

/2

00

7

3/1

/2

00

8

9/1

/2

00

8

3/1

/2

00

9

9/1

/2

00

9

3/1

/2

01

0

9/1

/2

01

0

3/1

/2

01

1

9/1

/2

01

1

3/1

/2

01

2

9/1

/2

01

2

3/1

/2

01

3


TIPS – The Great Unknown

PAGE │ 8

Treasury Inflation Protected

Bonds (TIPS) provide

protection against CPI

With yields now above 2%,

can they provide protection

against rising rates

Lack of Liquidity in a TIPS

portfolio

TIPS mimic the return of

Barclays Aggregate (AGG)

with higher volatility and

much larger drawdowns

Barclays US Treasury Inflation Notes vs. Barclays Aggregate March 2000-December 2013

Mar 2000 -Dec 2013 TIPS AGG

Annual Return 6.67% 5.68%

Annual Vol 6.42% 3.56%

IR 1.04 1.60

$1,000,000.00

$1,200,000.00

$1,400,000.00

$1,600,000.00

$1,800,000.00

$2,000,000.00

$2,200,000.00

$2,400,000.00

$2,600,000.00

$2,800,000.00

Date

7/31/2000

1/31/2001

7/31/2001

1/31/2002

7/31/2002

1/31/2003

7/31/2003

1/31/2004

7/31/2004

1/31/2005

7/31/2005

1/31/2006

7/31/2006

1/31/2007

7/31/2007

1/31/2008

7/31/2008

1/31/2009

7/31/2009

1/31/2010

7/31/2010

1/31/2011

7/31/2011

1/31/2012

7/31/2012

1/31/2013

7/31/2013

TIPS

AGG


Federal Reserve

PAGE │ 9

In 1977, Congress amended The Federal Reserve Act to establish the current objective of

the Federal Reserve (“Fed”). This marked the beginning of the Fed’s “dual mandate” to

both keep inflation in line and to encourage economic growth at the same time.

The Board of Governors of the Federal Reserve System and the Federal

Open Market Committee shall maintain long run growth of the monetary

and credit aggregates commensurate with the economy’s long run

potential to increase production, so as to promote effectively the goals of

maximum employment, stable prices and moderate interest rates.”

(Federal Reserve Act, Section 2A)


Investment Cycle post WWII

Only country with a viable economy post WWII is the United States

This leads to a boom in US corporate Earnings as US rebuilds the world. Stock market rally of the 1950s

Eventually other countries recover and go from importing nations to exporting nations (Eg. Japan and Germany) 1960s

This puts pressure on commodities and demand for goods picks up, and corporate profits go lower (Late 1960s to early 1980s)

Eventually Bond yields go up to fight inflation putting more pressure on corporate profits (Late 1960s to early 1980s)

Once inflation is beaten, best time to invest in bonds (1980s)

Falling yields and falling inputs costs (commodities) lead to higher corporate profits (1990s)

These high corporate profits lead to global expansion and importing nations become exporting nations (BRIC) 2000s

Causing demand for commodities again as in the 1960s

PAGE │ 10

•Falling CPI

•Stock Market Rally

1945-1965

•Rising CPI

•Rising Commodity Prices

•Rising Bond Yields

•Flat Stock Prices

1965-1982•Falling CPI

•Falling Commodity Prices

•Falling Bond Yields

•Rising Stock Prices

1982-2000

•Rising CPI

•Rising Commodity Prices

•Falling Bond Yields

•Flat Stock Prices

2000-2012•Falling CPI

•Falling Commodity Prices

•Rising Bond Yields

•Rising Stocks

2013-Present


PAGE │ 11

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

0

10

20

30

40

50

60

70

80

90

100

06

/2

9/4

5

12

/3

1/4

5

06

/2

8/4

6

12

/3

1/4

6

06

/3

0/4

7

12

/3

1/4

7

06

/3

0/4

8

12

/3

1/4

8

06

/3

0/4

9

12

/3

0/4

9

06

/3

0/5

0

12

/2

9/5

0

06

/2

9/5

1

12

/3

1/5

1

06

/3

0/5

2

12

/3

1/5

2

06

/3

0/5

3

12

/3

1/5

3

06

/3

0/5

4

12

/3

1/5

4

06

/3

0/5

5

12

/3

0/5

5

06

/2

9/5

6

12

/3

1/5

6

06

/2

8/5

7

12

/3

1/5

7

06

/3

0/5

8

12

/3

1/5

8

06

/3

0/5

9

12

/3

1/5

9

06

/3

0/6

0

12

/3

0/6

0

06

/3

0/6

1

12

/2

9/6

1

06

/2

9/6

2

12

/3

1/6

2

06

/2

8/6

3

12

/3

1/6

3

06

/3

0/6

4

12

/3

1/6

4

SPX

CPI

SP

X in

$

CP

I in %

S&P 500 versus CPI

Asset Class Comparison from 1945 - 1965



PAGE │ 12

0

2

4

6

8

10

12

14

16

0

20

40

60

80

100

120

140

160

180

200

SPX

CPI

SP

X in

$

CP

I in

S&P 500 versus CPI

0

2

4

6

8

10

12

14

16

18

0

100

200

300

400

500

600

700

800

Gold

10 Year Yield

Gold versus 10 Year Note Yield

Go

ld in

$1

0 Y

ea

r No

te Y

ield

in %



PAGE │ 13

0

1

2

3

4

5

6

7

0

200

400

600

800

1000

1200

1400

16000

6/2

8/8

5

12

/3

1/8

5

06

/3

0/8

6

12

/3

1/8

6

06

/3

0/8

7

12

/3

1/8

7

06

/3

0/8

8

12

/3

0/8

8

06

/3

0/8

9

12

/2

9/8

9

06

/2

9/9

0

12

/3

1/9

0

06

/2

8/9

1

12

/3

1/9

1

06

/3

0/9

2

12

/3

1/9

2

06

/3

0/9

3

12

/3

1/9

3

06

/3

0/9

4

12

/3

0/9

4

06

/3

0/9

5

12

/2

9/9

5

06

/2

8/9

6

12

/3

1/9

6

06

/3

0/9

7

12

/3

1/9

7

06

/3

0/9

8

12

/3

1/9

8

06

/3

0/9

9

12

/3

1/9

9

SPX

CPI

SP

X in

$

S&P 500 versus CPI

CP

I in %

0

2

4

6

8

10

12

0

100

200

300

400

500

600

06

/2

8/8

5

12

/3

1/8

5

06

/3

0/8

6

12

/3

1/8

6

06

/3

0/8

7

12

/3

1/8

7

06

/3

0/8

8

12

/3

0/8

8

06

/3

0/8

9

12

/2

9/8

9

06

/2

9/9

0

12

/3

1/9

0

06

/2

8/9

1

12

/3

1/9

1

06

/3

0/9

2

12

/3

1/9

2

06

/3

0/9

3

12

/3

1/9

3

06

/3

0/9

4

12

/3

0/9

4

06

/3

0/9

5

12

/2

9/9

5

06

/2

8/9

6

12

/3

1/9

6

06

/3

0/9

7

12

/3

1/9

7

06

/3

0/9

8

12

/3

1/9

8

06

/3

0/9

9

12

/3

1/9

9

Gold

10 Year Yield


Go

ld in

$1

0 Y

ea

r No

te Y

ield

in %


Asset Class Comparison from 2000 - Present

PAGE │ 14

-2

-1

0

1

2

3

4

5

6

0

200

400

600

800

1000

1200

1400

1600

1800

2000

SPX

CPI

SP

X in

$C

PI in

%

S&P 500 versus CPI

0

1

2

3

4

5

6

7

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Gold

10 Year YieldGo

ld in

$1

0 Y

ea

r No

te Y

ield

in %



Preserving Purchase Power Philosophy

A multi-asset tactical approach is the best solution to protect a portfolio against falling purchasing power

Investing in the correct beta at the right time is the best way to generate alpha

Sector and sub-sector betas should be achieved efficiently, and be low cost

During an investment cycle outperforming during down moves is more important than outperforming up moves

A portfolio should have a positive cost of carry

An investment strategy should be low cost, liquid, and transparent

PAGE │ 15


Biography

Joshua Silva

Managing Director,

Chief Portfolio Strategist

18+ years of risk management and

execution experience in the US and

European markets trading derivatives

Senior Portfolio Strategist and Portfolio Manager at Attalus Capital, in charge of creating new investment

approaches and providing customized beta and alpha solutions for the firm’s clients

Managing Director of Equity Derivatives Trading at Credit Suisse in New York.

Responsible for overseeing the US single stock option flow derivatives trading team and managing its risk

Options trader at CME for Société Générale

B.S in Chemical

Engineering from the

University of Wisconsin

in Madison

M.S. in Financial

Mathematics from the

University of Chicago

Earl Kleckner

Managing Director,

Business Development

31 years of experience in sales,

business development and client service

Managing Director of Sales at Attalus Capital, a boutique asset management firm, overseeing the firm’s

business development and client services

Managing Director of Client Services and Reporting at Mellon Capital Management

Vice President of Utility Trust Products for Mellon Trust

B.S. in Business

Administration from

California University

MBA also from

California University

PAGE │ 16

harvest volatility management preserving real purchasing power … 0900 harvestva-silva... · 2014....

Documents