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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
October 2019 Values
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
15.92
20.33
US, 2028
14.21
20.01
US, 2033
12.54
19.46
US, 2038
11.02
18.90
US, 2043
9.71
18.40
US, 2048
8.60
18.01
US, 2053
7.68
17.75
US, 2058
6.85
17.50

EDHEC-Princeton Goal Price Indices
Retirement Wealth
October 2019 Values
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
0.95
1.01
US, 2028
0.88
1.03
US, 2033
0.79
1.03
US, 2038
0.70
1.01
US, 2043
0.61
0.97
US, 2048
0.53
0.93
US, 2053
0.47
0.91
US, 2058
0.42
0.90

HIGHLIGHTS JULY 2019

  • After a small increase in April, US long-term rates resumed their decline in May and June, and on 1 July, the 10-year Treasury constant maturity rate was at 2.03%, an unprecedented level since November 2016. As usual, declining interest rates push up the values of Goal Price Indices, because future replacement income cash flows are discounted at lower rates. In other words, it costs more to acquire every annual dollar of replacement income for a given time to retirement when rates are lower. In addition, index values tend to increase as time goes by because the remaining time to cash flows gets shorter;
  • As a consequence of these two effects, index values were higher in July than in April. Taking the example of an individual who plans to retire in 2038, the price to pay to acquire $1 per year of non-indexed replacement income in April was $8.84, and the price of $1 per year of cost-of-living-adjusted income was by definition higher, at $15.23. In July, these prices had grown to $9.68 and $16.62 respectively;
  • These figures can also be expressed by giving the purchasing power in terms of income of a fixed amount of savings, say $100,000. In April, the $100,000 could finance $11,312 per year of non-adjusted income, or $6,566 of adjusted income, expressed in dollars of April 2019. In July, the same $100,000 could finance only $10,331 or $6,017 per year;
  • For this particular individual, the returns on the non-adjusted index and its adjusted counterpart from April to July were respectively 9.50% and 9.13%. It is interesting to note that over the same period, an investment in a 3-month Treasury bill would have produced a return of approximately 0.6%, given an annual 3-month Treasury bill rate of about 2.4%. So, these bills would have severely underperformed the indices. These numbers highlight that short-term bills are not suitable to reliably hedge against the impact of declining interest rates on Goal Price Indices, and that a dedicated goal-hedging portfolio is needed for that purpose.

Highlights History

 

EDHEC-Princeton Goal-Based Investing Indices
Retirement Income
September 2019 Returns (%)
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
-0.69
-0.76
US, 2028
-1.06
-1.14
US, 2033
-1.63
-1.73
US, 2038
-2.42
-2.55
US, 2043
-3.42
-3.57
US, 2048
-4.68
-4.83
US, 2053
-6.03
-6.18
US, 2058
-7.01
-7.10

EDHEC-Princeton Goal-Based Investing Indices
Retirement Wealth
September 2019 Returns (%)
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
0.15
0.15
US, 2028
-0.15
-0.15
US, 2033
-0.52
-0.52
US, 2038
-0.96
-0.96
US, 2043
-1.58
-1.58
US, 2048
-2.61
-2.61
US, 2053
-3.89
-3.89
US, 2058
-5.30
-5.30

HIGHLIGHTS JULY 2019

  • The first four months of 2019 were a bull period for equities, with a return of 16.2% for the S&P 500 index from 1 January to 1 May. During the same period, the GHPs of the various indices posted lower returns. For instance, the GHP for an individual targeting 20 years of non-adjusted replacement income and planning to retire in 2038 had a return of 3.73%;
  • The outperformance of the equity building block with respect to the GHP caused the allocation to the former building block to increase, as prescribed by the systematic rebalancing rule of the indices. But for the latest retirement dates, in 2038 and beyond, the equity allocation at the beginning of the year was already large, above 75%. As a result, these indices had an even larger equity allocation at the beginning of May, and some of them were even fully invested in equities: this was the case for the GHPs of investors retiring in 2058;
  • The market landscape in May was very different, with a downturn in equities and a decline in interest rates. The S&P 500 index had a return of – 6.13%, and the PSP used in Goal-Based Investing Indices a return of – 5.72%. In the same month, GHPs had positive returns, but the indices that had a large equity allocation, sometimes equal to 100%, at the beginning of May, did not benefit from the positive return of their GHP and were impacted by the negative equity returns;
  • As a consequence of the underperformance of equities with respect to the GHP in May, the equity allocation decreased in all indices, and the change was sometimes severe. For the individual targeting 20 years of non-adjusted replacement income as of 2038, the equity allocation dropped from 100% to 57.1% in May;
  • In June, equities recovered, with a return of 8.01% for the S&P 500 index, and all indices captured a fraction of this good performance, in proportion to their equity allocation;
  • As usual, the Goal-Based Investing Indices have by construction close to 100% chances of reaching the essential goal, which is to avoid January-to-January losses relative to the corresponding Goal Price Indices greater than 20%. In contrast, traditional forms of target date funds with a deterministic stock-bond allocation can only reach this objective by chance, so they have lower success probabilities. The risk of failure for deterministic funds is especially large at the longest retirement horizons.

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 0.7% in August after an increase by 1.7% in July. The index is up by 3.8% year-to-date and 2.9% on twelve month rolling average. The total return index is 6.1% year-to-date and 7.5% on twelve month rolling average.

Click on Total Return Index for detailed information

EDHEC IEIF Monthly Commercial Property 31-August-2019 YTD Annual Average Return since 2008 Annual Std. Dev Sharpe Ratio since 2008
Total Return Index (France) 0.71% 6.08%
6.72%
4.36%
1.25

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 August 2019 YTD Annual Average Return since January 2001 Annual Std Dev since January 2001 Sharpe Ratio
Convertible Arbitrage
0.19%
6.62%
5.57%
5.92%
0.27
CTA Global
3.00%
11.45%
4.55%
7.90%
0.07
Distressed Securities
-0.89%
2.74%
8.11%
5.65%
0.73
Emerging Markets
-3.48%
5.95%
7.78%
9.28%
0.41
Equity Market Neutral
0.09%
1.45%
3.74%
2.63%
-0.10
Event Driven
-1.39%
5.75%
6.58%
5.50%
0.47
Fixed Income Arbitrage
-0.33%
2.20%
5.21%
3.58%
0.34
Global Macro
1.26%
7.46%
5.25%
4.01%
0.31
Long/Short Equity
-1.00%
6.34%
5.29%
6.44%
0.20
Merger Arbitrage
-0.03%
3.59%
4.75%
2.86%
0.26
Relative Value
-0.31%
4.06%
5.84%
3.99%
0.46
Short Selling
0.04%
-6.63%
-4.58%
12.80%
-0.67
Funds of Funds
-0.63%
5.20%
3.34%
4.48%
-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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