The globalization of financial market.

1. IFoA CANUK Joint Event 2016
金融市场全球化的
机遇与挑战
1

2. IFoA CANUK Joint Event 2016
The globalization of financial market
2
Due to current control on capital account, China’s contribution to global financial integration is significantly lagged behind its
contribution to world trade and GDP.
The gap is largely seen in portfolio investment and derivatives.
Source: IMF, Bank of England Quarterly Bulletin 2013 Q4

3. IFoA CANUK Joint Event 2016
The globalization of financial market
Japan as a case study
3
Source: IMF
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Japanese External Assets as % of GDP
Assets, Direct investment Assets, Portfolio investment Assets, Other investment Assets, Reserve assets
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Japanese External Liabilities as % of GDP
Liabilities, Direct investment Liabilities, Portfolio investment Liabilities, Other investment

4. IFoA CANUK Joint Event 2016
The changes brought in by financial market globalization
4
Challenges Opportunities
Potential source of economic
growth
Enhanced market depth and
breadth
Increased sources of finance
for domestic borrowers
Expanded opportunity set
More prone to external shocks
Lower profit margin from
traditional sources
Higher liability costs for
domestic FIs
Increased competition
Integration brings China closer to the world financial markets

5. IFoA CANUK Joint Event 2016
The static business model is not sustainable in the new business environment
5
Net Interest Income and Net Interest Margin - US Banking Sector
Source: Bloomberg
• Observable cycle in NIM
• Curve flattening pressed
down NIM
• Net interest income
growth slowed down
significantly in the last
decade
• Need to explore
alternative sources of
revenue to maintain
growth

6. IFoA CANUK Joint Event 2016
Facing the challenge
6
•Dynamically position market
exposures based on views of
the economic cycle
•Subject to capital charge and
risk budgeting
•Expand opportunity sets into
new territories
•Employ revolutionary
investment philosophies
•Seek true alpha and smart
beta – enhanced portfolio
efficiency
•i.e. ABS, MBS and other Credit
derivatives etc.
•Equity release mortgages
•Investment and advisory
business
•Expand traditional business
•Increased leverage on
traditional business
•Optimize capital structure to
reduce financing costs and
improve profit margin
Optimize
Traditional
Business
Innovative
Products
Dynamic
Market
Positioning
Alternative
Investments

7. IFoA CANUK Joint Event 2016
The Evolution of UK Insurance Industry
7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
UK Insurance Asset Balance Sheet
Fixed Income Equity Real Estate Other Investments
Source: Bloomberg on the four largest insurance groups in UK, AVIVA, Prudential, Legal & General and Standard Life
A typical case of change in insurance asset allocation in the UK market.
Moving away from the traditional bond and equity allocation towards more dynamic asset allocations

8. IFoA CANUK Joint Event 2016
Multi-Dimensional Challenge
Business
Decisions
Finance
Risk Investment
Product

9. IFoA CANUK Joint Event 2016
• Enables timely and effective strategic decision-making by providing “calls” to actions when the client diverges from its goals.
• Provides a clear framework for assessing investment opportunities against the client’s specific requirements.
• Ultimately allows the Client to exercise better control over the investment strategy.
The Value of a Investment Risk Management Framework
9
Providing Transparency, Clarity and Structure to the Decision-Making Process
Objective Measurement Performance Indicators Performance (June 12) RAG
Primary Funding
Objective
To reach 110% funded on a swaps flat
basis by 2029
Expected Returns (ER) > Required
Returns (RR)
RR: Libor + 308bps
ER: Libor + 189bps
Difference: -120bps
Secondary
Funding Objective
To reach 100% funded on a
Gilts+100bps by 2022
Expected Returns (ER) > Minimum
Required Returns (MRR)
RR: Libor + 277bps
ER: Libor + 189bps
Difference: -88bps
Investment
Strategy
Actual Returns should exceed
Expected Returns
Actual Returns (AR) > Expected Returns
(ER)
AR: Libor + xxxbps
ER: Libor + 189bps
Difference: xxbps
n/a
Risk Budget
The investment strategy should not risk
the deficit worsening by £600mm over
a 1 year period
VaR95 < £600mm VaR95: £656mm
Hedging Strategy
Nominal and inflation hedge ratio
should be maintained within +/- 5% of
the funding ratio
Funding Ratio (swaps flat) 67% n/a
Nominal Hedge Ratio (swaps flat) 46.0%
Inflation Hedge Ratio (swaps flat) 94.6%
Collateral
Maintain sufficient eligible for the
purposes of covering margin calls that
may arise from the Scheme’s current
derivative positions over a 1 year
period.
Total available eligible collateral £936mm
Remaining collateral after VaR95 event £610mm
RAG Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away
“The Investment Risk Management Framework has put us in
control of the investment risk in our scheme.”
Penny Green – Chief Executive & Managing Director, SAUL Trustee
Company

10. IFoA CANUK Joint Event 2016
60%
65%
70%
75%
80%
85%
90%
95%
100%
105%
GHG Funding Level Comparison, 01/10/2010 - 31/12/2015
Original Strategy (Annual Vol. 15.82% since inception) (1 YR
Vol. 17.22%)
Dynamic De-Risking Strategy (Annual Vol. 12.31% since
inception) (1 YR Vol. 7.86%)
Dynamic Asset Allocation
Case Study
De-risking
10
Dynamic Risk Management Strategy
driven by a Framework
Limited Governance Resources Efficient Implementation
“Redington helped us to establish a robust pension risk management framework as well as devising and implementing a new investment strategy which enabled us to
be nimble and cost effective in making changes to our asset allocation to reduce risk as opportunities arose. The strategy has delivered outstanding results allowing
us to reduce the Scheme’s overall risk while taking us closer to our objective of full funding.”
Rita Powell – Independent Chairman of Trustees
Outperformed original strategy by
c.15% at significantly lower risk
Buy and Maintain

11. IFoA CANUK Joint Event 2016
DGF – 动态成长基金
11
Sub Category
Popular Example
Product
Asset Allocation
Approach
Long-Only or
Long/Short
Equity Weighting
Correlation to Equity
Markets
Expected Maximum
Drawdowns
1. Strategic
Allocation
Traditional
Balanced Funds
Relatively Static Long-Only High (>50%) Very High Large
2. Dynamic
Allocation
Ruffer Total Return Highly Dynamic
Mostly Long-Only
(can hold some
relative value
strategies)
High Variability (10-
60%) Through the
Cycle
Varying Over Time Small-Medium
3. Absolute Return
Relative Value
Standard Life GARS
Risk-Based
Allocation, Not Asset
Allocation
Long/Short
N/A (risk-based
approach)
Low Small

12. IFoA CANUK Joint Event 2016
DGF – 动态成长基金
12
Sample Dynamic Allocation DGF Manager Asset Allocation since 2001
(2)
(3)
(4)
(1) Other

13. IFoA CANUK Joint Event 2016 13
Style Premia – 风格溢价
Alpha
Style Premia
Market Risk Premia
Returns due to manager skill; a
feature of (successful!) active
management
Returns that provide
compensation for taking on
market exposure (e.g. risk
parity, synthetic equities)
Often disguised as “alpha”,
returns that are associated
with style factors
Value Momentum
Carry Defensive
Style Premia

14. IFoA CANUK Joint Event 2016
Style Premia – 风格溢价
14
0
50
100
150
200
250
300
350
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Regressed Invesco High Income Fund FTSE All Share
Market Value Momentum Defensive
Portfolio Weights 75% 13% 19% 52%
Source: Deutsche Bank, Invesco, Bloomberg; Calculations: Redington
Neil Woodford’s annualised
outperformance over the FTSE All
Share: 3.4% p.a.
Replicating
Portfolio

15. IFoA CANUK Joint Event 2016 15
Style Premia – 风格溢价
Cumulative excess return of the style premia factors vs. MSCI World
-50%
0%
50%
100%
150%
200%
Dec-89 Dec-92 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13
CumulativeReturn
Value Momentum Carry Defensive MSCI World

16. IFoA CANUK Joint Event 2016
Multi-Class Credit – 多种信用投资
16
Long Only Managers Long/Short Credit Hedge Funds
Benchmark Credit Absolute Return
Credit
Multi-Class Credit Credit Relative Value
Universe Long-only managers Long-only managers
Long-only managers &
alternative managers
Alternative managers
Credit
Beta
Long only
Managed over the cycle
to avoid drawdowns
Long-biased
Long and short over the
cycle
Return
Target
Benchmark + % Cash + 200-400bps Cash + 400-800bps Absolute return target
Interest
Rate Risk
+/- Benchmark Typically neutral Typically long-biased
Varies widely on an
active basis
Credit
Profile
As per benchmark
Mainly investment
grade
Mainly high yield Varies

17. IFoA CANUK Joint Event 2016
Multi-Class Credit – 多种信用投资
17
Wide Range of Assets
Dynamic Asset Allocation
Benchmark Agnostic Approach
Strategic Efficiency
Access to Specialist Manager Skills

18. IFoA CANUK Joint Event 2016 18
Multi-Class Credit – 多种信用投资
2007 2008 2009 2010 2011 2012 2013 2014 2015
2.08%
US LEV
LOANS
-9.44%
EUR IG
70.44%
EUR HIGH
YIELD
10.33%
EUR HIGH
YIELD
1.51%
US LEV
LOANS
22.07%
EUR HIGH
YIELD
9.95%
EUR HIGH
YIELD
4.47%
EUR LEV
LOANS
5.50%
EUR LEV
LOANS
-0.57%
EUR LEV
LOANS
-21.20%
EM CORP
57.77%
US HIGH
YIELD
10.13%
US LEV
LOANS
0.72%
EUR LEV
LOANS
18.07%
EM SOV
9.19%
US HIGH
YIELD
2.12%
EUR IG
4.91%
EM CORP
-1.44%
EUR IG
-24.69%
US IG
51.62%
US LEV
LOANS
9.85%
EUR LEV
LOANS
-1.67%
EM CORP
14.54%
EM CORP
8.59%
EUR LEV
LOANS
1.83%
EUR HIGH
YIELD
3.17%
EM SOV
-3.29%
EM SOV
-29.10%
US LEV
LOANS
43.43%
EUR LEV
LOANS
9.32%
US HIGH
YIELD
-2.65%
US HIGH
YIELD
12.64%
US HIGH
YIELD
5.29%
US LEV
LOANS
1.60%
US LEV
LOANS
0.07%
EUR HIGH
YIELD
-4.07%
EM CORP
-30.01%
EUR LEV
LOANS
39.04%
EM SOV
7.93%
EM SOV
-2.66%
EUR IG
9.74%
EUR LEV
LOANS
3.58%
EM SOV
0.04%
US IG
-0.69%
US LEV
LOANS
-4.76%
US IG
-33.78%
EM SOV
25.17%
EM CORP
2.68%
EM CORP
-3.45%
US IG
9.67%
US LEV
LOANS
2.86%
US IG
-1.19%
US HIGH
YIELD
-1.07%
EUR IG
-5.23%
EUR HIGH
YIELD
-39.99%
US HIGH
YIELD
22.93%
US IG
2.31%
US IG
-7.25%
EM SOV
7.41%
US IG
2.14%
EM CORP
-1.35%
EM CORP
-3.18%
US IG
-6.97%
US HIGH
YIELD
-44.12%
EUR HIGH
YIELD
9.43%
EUR IG
0.46%
EUR IG
-8.27%
EUR HIGH
YIELD
5.34%
EUR IG
2.13%
EUR IG
-3.73%
EM SOV
-6.70%
US HIGH
YIELD
161%
45%
-49%

19. IFoA CANUK Joint Event 2016
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For professional investors only. Not suitable for private
customers.
The information herein was obtained from various sources.
We do not guarantee every aspect of its accuracy. The
information is for your private information and is for
discussion purposes only. A variety of market factors and
assumptions may affect this analysis, and this analysis does
not reflect all possible loss scenarios. There is no certainty
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20. IFoA CANUK Joint Event 2016 20