FOR PROFESSIONAL INVESTORS ONLY NOT TO BE DISTRIBUTED TO RETAIL CLIENTS THIS DOCUMENT SHOULD NOT BE REPRODUCED IN ANY FORM WITHOUT PRIOR WRITTEN APPROVAL IAPF ANNUAL INVESTMENT CONFERENCE 2014 ABC of LDI 26 March 2014 Serkan Bektas Insight Investment IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie Liability driven investing (“LDI”) • Managing your portfolio towards the explicit objective of increasing your ability to pay liabilities as they fall due – Buy cashflows, or – Hedge cashflows • Helps stabilise the funding position and provides flexibility to pursue risk controlled returns IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie Understanding your liability risks Liability risks €14m €12m €10m €8m Inflation €6m Interest rates Longevity €4m €2m €0m 2014 2019 2024 2029 2034 2039 2044 2049 Liabilities 2054 2059 2064 2069 2074 2079 For illustrative purposes only. IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie Managing your liability risks Hedging instruments Hedgeable sources of risk Government bonds, corporate bonds, interest rate swaps Interest rates Liability Liability Matched hedging Portfolio portfolio Inflation Inflation-linked bonds, inflation swaps For illustrative purposes only. IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie Avoiding the traditional trade-off Equities and ‘Bonds’ Equities or ‘Bonds’ New feasible solutions 0% 100% Bonds/liability hedge Bonds/liability hedge 100% Growth assets 100% 0% Growth assets 100% For illustrative purposes only. IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie Minimise unintended, unrewarded risk Risk to funding position Manager skill Cash Property Credit Equity • Same return, lower risk? Asset risk • Higher return, same risk? Diversify Inflation Manager skill Liability risk Interest rates Cash Property Hedge Credit Equity Inflation Interest rates For illustrative purposes only. IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie Liability risks can have a significant impact on funding levels UK example: PPF 7800 index 1,400 1,300 Liabilities 1,200 £bn 1,100 1,000 Assets 900 800 700 600 500 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Pension Protection Fund IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie How large is the liability hedging market in the UK? • LDI is a key component of investment strategies • UK LDI market AUM grew 11% in 2012 to £446bn • 686 LDI mandates as at end 2012 • Many pension schemes implement a partial liability hedge – 35% of LDI mandates use triggers • Inflation hedging has been a key area of growth Source: 2013 KPMG LDI Survey. IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie Liability hedging decision making within your “flight plan” 115 110 Funding level % 105 100 95 90 85 80 75 70 Initial level For illustrative purposes only. IAPF Annual Investment Conference Deficit recovery contributions IAPF Annual Investment Conference Asset growth (beta) Asset growth (alpha) Outperformance from underhedging Hedge 'alpha' Target level www.iapf.ie Is now the right time to implement a liability hedge? History of 20 year Euro interest rate swap rates 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% Feb-06 Dec-06 Nov-07 Oct-08 Aug-09 Jul-10 Jun-11 May-12 Mar-13 Feb-14 Source: Bloomberg. Data as at 11 March 2014. IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie Expectations of interest rate rises are reflected in the yield curve Euro interest rate swap yield curve 4% Rate 3% 2% 1% 0% 0 5 10 15 20 Nominal swap rate (zero coupon) 25 Tenor (yrs) 30 35 40 45 Forward rate (nominal swap zero coupon) Source: Bloomberg. Data as at 11 March 2014. IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie 50 Euro government bond conditions: yield spreads to Euribor European government bonds yields versus Euribor swaps 250 200 Italy 150 Ireland 100 France Belgium 50 Netherlands 0 -50 Germany 0 Source: Bloomberg. Data as at 20 March 2014. IAPF Annual Investment Conference IAPF Annual Investment Conference 5 10 15 Duration (years) 20 25 www.iapf.ie How about inflation? 8 Ireland CPI All Items YoY 6 4 UK RPI YoY NSA 2 % ECB Euro Area Harmonized CPI All items ex Tobacco 0 -2 -4 US Consumer Price Index (YoY % -6 -8 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Bloomberg. As date December 2013. IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie Risks/challenges • Governance design of the right LDI solution for you • Trustee education and consensus building on the direction of travel • Counterparty risk management, documentation/legal set up and operational controls • Managing the long-term journey IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie Conclusion LDI is NOT about … LDI is about … • Eliminating all financial risks • Better and proactive risk management • Removing/reducing investment • Deciding on timing of liability hedge outperformance potential of the asset portfolio • Locking-in existing funding levels, raising long-term funding cost • Investing purely in bonds implementation in a manner consistent with the overall “flight plan”, reducing risk when market levels and/or solvency level reaches pre-determined levels • Removing ‘unrewarded’ risk; retaining exposure to remaining risks where appropriate • Diversifying sources of return IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie Notes Unless otherwise stated, the source of information is Insight Investment. Any forecasts or opinions are Insight Investment’s own at the date of this document and may change. They should not be regarded as a guarantee of future performance. The value of investments and any income from them will fluctuate and is not guaranteed (this may partly be due to exchange rate fluctuations). Investors may not get back the amount invested. Past performance is not a guide to future performance. This document is intended for professional clients only and should not be relied upon by retail clients. This document should not be amended or forwarded to a third party without consent from Insight Investment. Telephone calls may be recorded. For clients and prospects of Insight Investment Management (Global) Limited: Issued by Insight Investment Management (Global) Limited. Registered in England and Wales. Registered office 160 Queen Victoria Street, London EC4V 4LA; registered number 00827982. Authorised and regulated by the Financial Conduct Authority. For clients and prospects of Insight Investment Funds Management Limited: Issued by Insight Investment Funds Management Limited. Registered in England and Wales. Registered office 160 Queen Victoria Street, London EC4V 4LA; registered number 1835691. Authorised and regulated by the Financial Conduct Authority. Disclaimer This document is for information purposes only. No party shall have any right of action against Insight in relation to the accuracy or completeness of the information contained in it, or any other written or oral information made available in connection with it. Any investment advice that we provide to you is based solely on the limited initial information which you have provided to us. Notwithstanding that Insight may have reviewed the Statement of Investment Principles of any relevant trust, no part of any document or presentation provided by us prior to our formal appointment as discretionary investment manager by way of written agreement shall be deemed to constitute ‘proper advice’ for the purposes of the Pensions Act 1995 (as amended). Any limited initial advice given will be further discussed and negotiated in order to agree formal investment guidelines which will form part itten investment management agreement between the parties. © 2014 Insight Investment. All rights reserved IAPF Annual Investment Conference IAPF Annual Investment Conference www.iapf.ie
© Copyright 2024 ExpyDoc
