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Meaningful investment solutions should start with an understanding of clients’ goals. In retirement planning, the main problem faced by individuals is to finance a sufficient and stable stream of replacement income in retirement. EDHEC-Risk Institute is grateful to Merrill Lynch for having supported the research project that has provided the conceptual foundations for the design of the EDHEC-Princeton Retirement Goal-Based Investing Index Series. The Retirement Goal-Based Investing Indices, developed with the Operations Research and Financial Engineering Department at Princeton University in the context of our joint research programme on Investment Solutions for Institutions and Individuals, are an example of these concepts being implemented. They represent asset allocation benchmarks for innovative mass-customised target date solutions for individuals preparing for retirement.

EDHEC-Princeton Goal Price Indices
Retirement Income
June 2019 Values
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
15.03
19.27
US, 2028
13.12
18.54
US, 2033
11.32
17.64
US, 2038
9.74
16.75
US, 2043
8.39
15.95
US, 2048
7.27
15.28
US, 2053
6.35
14.74
US, 2058
5.55
14.22

EDHEC-Princeton Goal Price Indices
Retirement Wealth
June 2019 Values
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
0.94
1.01
US, 2028
0.84
1.00
US, 2033
0.74
0.97
US, 2038
0.64
0.93
US, 2043
0.55
0.88
US, 2048
0.47
0.82
US, 2053
0.41
0.79
US, 2058
0.35
0.76

HIGHLIGHTS APRIL 2019

  • After a decrease during the last quarter of 2018, US long-term rates were roughly stable in January and February 2019, and they started to decrease again in March. The 10-year Treasury rate, which reached a peak above 3.2% in October 2018, fell down to 2.5% at the beginning of April 2019. A rise in interest rates is, in principle, good news for investors who are preparing for retirement because it implies that, for a given time to retirement, it costs less to acquire $1 of replacement income. But reasoning with a fixed retirement date in mind, the shortening of the horizon can absorb the effects of higher interest rates. Indeed, the price of $1 of replacement income – in other words, the Goal Price Index – increases when the horizon shortens, other things being equal. All in all, the Goal Price Indices were almost at the same levels at the beginning of April 2019 as at their inception date, in January 2018;
  • Taking the example of an individual who plans to retire in 2038 and targets fixed replacement income for 20 years starting in 2038, it cost $8.85 in January 2018 to purchase $1 per year of income, and $8.84 – an almost identical price – for the same stream of income in April 2019. Put differently, this person could have purchased $11,299 per year of income with $100,000 at the index inception, and $11,312 per year in April;
  • That is not to say that during their first year of existence, the Goal Price Indices remained stable. In November 2018, they were at lower levels than in January. For the above investor, the price of $1 of income was $7.70 at that time, versus $7.98 in January of the same year. This was due to the increase in long-term rates that took place during the first 10 months of 2018;
  • Indices with a COLA have experienced a slight decrease when compared to their inception levels. Taking again the example of an individual retiring in 2038 but now targeting replacement income growing by 2% per year in order to hedge against the effects of rising consumer prices, the price to pay per dollar of replacement income was $15.64 in January 2018, and only $15.23 in April 2019.

Highlights History

 

EDHEC-Princeton Goal-Based Investing Indices
Retirement Income
May 2019 Returns (%)
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
-0.99
-0.88
US, 2028
-2.16
-2.09
US, 2033
-3.99
-3.95
US, 2038
-5.72
-5.72
US, 2043
-5.72
-5.72
US, 2048
-5.72
-5.72
US, 2053
-5.72
-5.72
US, 2058
-5.72
-5.72

EDHEC-Princeton Goal-Based Investing Indices
Retirement Wealth
May 2019 Returns (%)
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
-2.58
-2.58
US, 2028
-3.17
-3.17
US, 2033
-4.50
-4.50
US, 2038
-5.72
-5.72
US, 2043
-5.72
-5.72
US, 2048
-5.72
-5.72
US, 2053
-5.72
-5.72
US, 2058
-5.72
-5.72

HIGHLIGHTS APRIL 2019

  • Decreasing interest rates combined with shortening horizons imply positive returns for GHPs. This rule was confirmed in March 2019: for investors targeting replacement income, returns ranged from 3.57% for a retirement date in 2023, to 11.65% for the longest horizon, which corresponds to a retirement date in 2058. These differences are explained by the differences in the durations of the portfolios, with the longest horizons implying the greatest exposures to changes in interest rates;
  • On the equity side, the PSP posted positive performance in March 2019, thereby continuing a regular rising trend that started after Christmas 2018. After 8.27% in January and 3.89% in February, it earned 2.39% in March. With the S&P 500 index at about 2,860 at the beginning of April versus 2,920 at the high in October 2018, US equities have almost recovered from the losses recorded in the last three months of 2018;
  • With both their building blocks earning positive returns in March, the Goal-Based Investing Indices displayed positive returns too. But longer retirement horizons imply greater allocations to the PSP, as a result of the weighting policy that recommends that the equity allocation be an increasing function of the horizon. So, indices for retirement dates in 2038 and after, which are entirely or almost entirely invested in the PSP, captured just the PSP return, which, while being positive at 2.39%, was less than that of the GHP;
  • The probabilities of reaching aspirational goals of 130%, 150% and 200% are the probabilities for portfolios to outperform their reference Goal Price Index by 30%, 50% or 100% by the retirement date. Those of the Goal-Based Investing Indices are very close to those of target date funds with the same horizon, but with a traditional glide path from equities to bonds. The difference, however, is that the Indices have, by construction, a 100% (or close to 100%) probability of attaining at least 80% of the performance of the Goal Price Index every year, while target date funds can only achieve this level by chance. As a consequence, probabilities for target date funds can be much lower than 100%.

Highlights History

 

The EDHEC IEIF Monthly Commercial Property Index (France) was developed by IEIF (Institut de l’Epargne Immobilière et Foncière) and EDHEC-Risk Institute, in collaboration with the global competitiveness centre Finance Innovation, under the patronage and with the support of La Française Group. Published since 2009, this index measures the monthly performance of an aggregate portfolio of unlisted funds, without financial leverage, representative of the performance of French commercial property.

Highlights: The EDHEC IEIF Monthly Commercial Property Index (France) price index increased by 0.2% in April after a decrease by 1.3% in March. The index is up by 0.8% year-to-date and 2.4% on twelve month rolling average. The total return index is up by 1.8% year-to-date and 7.0% on twelve month rolling average.

Click on Total Return Index for detailed information

EDHEC IEIF Monthly Commercial Property 30-April-2019 YTD Annual Average Return since 2008 Annual Std. Dev Sharpe Ratio since 2008
Total Return Index (France) 0.20% 1.85%
6.07%
4.39%
1.19

Investors need benchmarks to evaluate the performance of hedge fund strategies, but existing hedge fund indices only give them a partial view of each investment style. Since 2003, EDHEC-Risk Institute has been publishing the EDHEC-Risk Alternative Indices, which aggregate and synthesise information from different index providers, so as to provide investors with representative benchmarks. These indices are computed for thirteen investment styles that represent typical hedge fund strategies.

 

Click on a Hedge Fund Strategy to find more information

Hedge Fund Strategies May 2019 YTD Annual Average Return since January 2001 Annual Std Dev since January 2001 Sharpe Ratio
Convertible Arbitrage
-0.36%
5.14%
5.57%
5.96%
0.26
CTA Global
-0.81%
3.54%
4.19%
7.90%
0.02
Distressed Securities
-0.53%
3.21%
8.26%
5.67%
0.75
Emerging Markets
-2.20%
5.95%
7.89%
9.27%
0.42
Equity Market Neutral
0.07%
0.69%
3.75%
2.65%
-0.09
Event Driven
-1.38%
5.27%
6.65%
5.51%
0.48
Fixed Income Arbitrage
0.01%
2.13%
5.28%
3.60%
0.35
Global Macro
-0.26%
3.16%
5.09%
4.01%
0.27
Long/Short Equity
-2.10%
4.90%
5.28%
6.46%
0.20
Merger Arbitrage
-0.47%
2.60%
4.76%
2.88%
0.26
Relative Value
-0.13%
3.20%
5.87%
4.01%
0.47
Short Selling
0.72%
-5.67%
-4.59%
12.88%
-0.67
Funds of Funds
-0.83%
4.05%
3.32%
4.49%
-0.15

As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up ERI Scientific Beta. ERI Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.

 

 

 

EDHEC-Risk Efficient Equity Indices

The FTSE EDHEC-Risk Efficient Index Series aims to capture equity market returns with an improved risk/reward efficiency compared to cap-weighted indices. The weighting of the portfolio of constituents achieves the highest possible return-to-risk efficiency by maximising the Sharpe ratio.

Further information is available at:

http://www.ftse.com/products/indices/EDHEC-Risk

 

FTSE EDHEC-Risk ERAFP SRI Index

The FTSE EDHEC-Risk Efficient Eurobloc ERAFP SRI Large Cap Custom Index aims to efficiently capture the performance available within an SRI screened universe of large and mid cap stocks in the Eurobloc. While the SRI screen allows addressing non-financial objectives, the efficient weighting scheme seeks to improve return-to-risk efficiency by improving portfolio diversification. While the screen relies on qualitative information on companies' SRI compliance, the weighting method uses robust estimates of a stock’s risk and return as inputs.

For further information, please contact FTSE.

ABOUT EDHECinfra

EDHECinfra was created to address the profound knowledge gap faced by infrastructure investors by collecting and standardising private investment and cash flow data and running state-of-the-art asset pricing and risk models to create the performance benchmarks that are needed for asset allocation, prudential regulation and the design of infrastructure investment solutions.

 

WHAT WE DO

Collecting and analysing data

We collect, clean and analyse the private infrastructure investment data of the project’s data contributors as well as from other sources, and input it into EDHECinfra’s unique database of infrastructure equity and debt investments and cash flows.We also develop data collection and reporting standards that can be used to make data collection more efficient and reporting more transparent. This database already covers 15 years of data and hundreds of investments and, as such, is already the largest dedicated database of infrastructure investment information available.

Designing cash flow and discount rate models

Using this extensive and growing database, we implement and continue to develop the technology developed at EDHEC-Risk Institute to model the cash flow and discount rate dynamics of private infrastructure equity and debt investments and derive a series of risk and performance measures that can actually help answer the questions that matter for investors.

Building reference portfolios of infrastructure investments

Using the performance results from our asset pricing and risk models, we can report the portfolio-level performance of groups of infrastructure equity or debt investments using categorisations (e.g. greenfield vs brownfield) that are most relevant for investors’ investment decisions.

 

 

 

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