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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
November 2019 Values
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
15.77
20.09
US, 2028
14.00
19.66
US, 2033
12.30
19.06
US, 2038
10.79
18.47
US, 2043
9.51
17.98
US, 2048
8.42
17.60
US, 2053
7.50
17.30
US, 2058
6.68
17.01

EDHEC-Princeton Goal Price Indices
Retirement Wealth
November 2019 Values
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
0.95
1.01
US, 2028
0.87
1.03
US, 2033
0.78
1.02
US, 2038
0.69
0.98
US, 2043
0.60
0.95
US, 2048
0.52
0.91
US, 2053
0.46
0.89
US, 2058
0.41
0.88

HIGHLIGHTS OCTOBER 2019

  • After a general downwards move that began in November 2018 and lasted until end of August 2019, rates on US Treasury bonds have recently featured alternating periods of downs and ups, resulting from competing forces at work. Markets are uncertain over the outcome of the trade war between US and China and are concerned with the resurgence of diplomatic tension with Iran, but the Federal Reserve is continuing its quantitative easing policy, putting long-term rates under downwards pressure. As a result, US rates of maturities ranging from 1 to 5 year(s) are now lower than the rates on 1-month and 3-month Treasury bills. One interpretation of this yield curve inversion is that the market anticipates that interest rates will further decrease in response to a recession yet to come;
  • The recent erratic moves in interest rates are reflected symmetrically in bond prices in general, and retirement bonds in particular. All Goal Price Indices displayed an increasing trend during the first six months of 2019, in response to the decrease in Treasury yields, but October values are lower than September values, owing to higher interest rates. The pattern of rates in the next few months will tell us whether this is just a temporary break in the decreasing trend or the beginning of a new trend;
  • Lower Goal Price Index values mean that replacement income is less costly to acquire for investors. For instance, an individual planning to retire in 2038 and wanting to secure income for the period from 2038 to 2057 would have to pay $18.9 per dollar of income in October, while the price for the same guarantee was $19.7 in September, a decrease by about 4%;
  • As usual, indices with a shorter horizon are less impacted by interest rate movements than their long-term counterparts. For the individual planning to retire in 2023, the price to pay for $1 of replacement income was $20.7 in September and $20.3 in October, so the decrease was a more modest 1.9%.

Highlights History

 

EDHEC-Princeton Goal-Based Investing Indices
Retirement Income
October 2019 Returns (%)
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
1.60
1.52
US, 2028
1.46
1.37
US, 2033
1.06
0.98
US, 2038
0.50
0.41
US, 2043
-0.11
-0.21
US, 2048
-0.92
-1.04
US, 2053
-2.00
-2.12
US, 2058
-2.62
-2.66

EDHEC-Princeton Goal-Based Investing Indices
Retirement Wealth
October 2019 Returns (%)
Zone, Retirement year
Not adjusted
Cost-of-Living-adjusted
US, 2023
2.48
2.48
US, 2028
2.64
2.64
US, 2033
2.38
2.38
US, 2038
1.83
1.83
US, 2043
1.13
1.13
US, 2048
0.49
0.49
US, 2053
-0.26
-0.26
US, 2058
-1.54
-1.54

HIGHLIGHTS OCTOBER 2019

  • Goal-Based Investing Indices are impacted both by changes in interest rates, through their goal-hedging building block, but also by equity market movements, since their performance-seeking portfolio is designed to replicate the performance of a cap-weighted index of the 500 largest US stocks. After a rally from January to April 2019, a downturn in May and a vigorous recovery in June, US equities featured a more quiet period during the summer, with slightly negative returns in July and August (–0.22% and –0.70%), and a small positive return in September (+ 0.44 %);
  • The big event that affected the 2058 indices for the income goal was the breach of their floor in August. Two indicators reveal this breach: the probabilities of reaching the essential goal have fallen down to 0% – which happened already in September – and the two indices are now fully invested in their GHP, a situation sometimes referred to as “monetization” in traditional portfolio insurance;
  • What happened in August that led to this situation? Recall that the essential goal that the insurance strategy is supposed to secure – and does secure most of the time, except in this case – is to achieve at least 80% of the performance of the GHP over every calendar year. At the beginning of August, the equity allocation of the 2058 index without a COLA was 49.7%, and the PSP return in this month was a small –0.70%. But the GHP return was huge, at 27.86%, because the GHP duration is large (greater than 40 years), and borrowing conditions substantially improved in August, with the 10-year Treasury constant maturity rate going down from 1.90% to 1.50%. Like for any portfolio insurance strategy, strong underperformance of the “risky” asset (here, the PSP) with respect to the “risk-free” one (here, the GHP) can result in a violation of the floor. As a matter of fact, the year-to-date gross return of the GHP as of September 2 is 1.665, and that of the index is 1.318, hence less than 80% of the GHP return, a threshold equal to 1.332. Overall, this event is live evidence that gap risk is not just a theoretical risk;
  • This situation will not last forever. The ground rules of Goal-Based Investing Indices stipulate that their floor is reset at the start of each civil year, to 80% of the current fund value. This revision regenerates a positive risk budget which can be consumed again during the year if the PSP again severely underperforms the GHP in a month. After the floor reset, the probability of reaching the essential goal will be back close to 100%;
  • The same thing happened to both 2058 indices for the income goal (with and without the COLA), but not to other indices, because these have GHPs with shorter durations. For these indices, equities still represent a positive fraction of the mix, and the probability of reaching the essential goal is still virtually 100%, while a deterministic target date fund can reach this goal only by chance.

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 decreased by 2.0% in September after an increase by 0.7% in August. The index is up by 1.8% year-to-date. The total return index is down by 0.9% last September, up by 5.1% year-to-date and 6.3% on twelve month rolling average.

Click on Total Return Index for detailed information

EDHEC IEIF Monthly Commercial Property 30-September-2019 YTD Annual Average Return since 2008 Annual Std. Dev Sharpe Ratio since 2008
Total Return Index (France) -0.93% 5.10%
6.13%
4.36%
1.22

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 October 2019 YTD Annual Average Return since January 2001 Annual Std Dev since January 2001 Sharpe Ratio
Convertible Arbitrage
0.32%
7.21%
5.55%
5.89%
0.26
CTA Global
-2.04%
6.20%
4.24%
7.91%
0.03
Distressed Securities
-0.33%
2.17%
8.01%
5.63%
0.71
Emerging Markets
2.04%
8.93%
7.87%
9.24%
0.42
Equity Market Neutral
-0.14%
1.04%
3.69%
2.62%
-0.12
Event Driven
0.27%
6.11%
6.54%
5.48%
0.46
Fixed Income Arbitrage
0.34%
2.84%
5.20%
3.57%
0.34
Global Macro
-0.56%
6.17%
5.14%
4.00%
0.28
Long/Short Equity
1.04%
7.37%
5.29%
6.41%
0.20
Merger Arbitrage
0.52%
4.52%
4.75%
2.85%
0.26
Relative Value
0.12%
4.74%
5.82%
3.97%
0.46
Short Selling
-0.28%
-7.22%
-4.57%
12.74%
-0.67
Funds of Funds
0.35%
5.21%
3.31%
4.46%
-0.16

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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