Repositioning Assets for Buyouts and Buy-ins
-
Upload
redington -
Category
Economy & Finance
-
view
199 -
download
2
Transcript of Repositioning Assets for Buyouts and Buy-ins
Westminster and City 17 April 2013
Repositioning Assets for
Buyouts & Buy-ins from
Gilts to Infrastructure Robert Gardner, Co-CEO of Redington
Westminster and City
1
Westminster and City 17 April 2013
Repositioning Assets for Buyouts and Buy-ins from Gilts to Infrastructure
2
The Seven Steps to Full Funding
Westminster and City 17 April 2013
Step 1 Description
• A strategic Pension Risk Management Framework that sets out funding objectives, risk budget
and other constraints such as liquidity and collateral requirements
• A Flight Plan that charts each plan’s path to full funding and generates required returns used
to set investment strategy
Setting Clear Goals and Objectives
3
Westminster and City 17 April 2013
Objective Measurement Performance Indicators Performance (31 Jan 13) RAG
Primary Funding
Objective
To reach full funding by [2026] (based
on discount rate of Gilts + 0.75%)
Expected Returns (ER) > Required
Returns (RR)
RR: Libor + 300bps
ER: Libor + 200bps
Difference: -100bps
Secondary
Funding Objective
To reach full funding on a buyout basis
by [2032] (based on a discount rate of
gilts flat)
Expected Returns (ER) > Required
Returns (RR)
RR: Libor + 250bps
ER: Libor + 200bps
Difference: -50bps
Investment
Strategy
Actual Returns should exceed
Expected Returns
Actual Returns (AR) > Expected Returns
(ER)
AR: Libor + xxxbps
ER: Libor + 200bps
Difference: xxbps
Risk Budget
The investment strategy should not risk
the deficit worsening by [20%] of
liabilities over a 1 year period
VaR95 < [20%] of liabilities VaR95: 28.0%
Hedging Strategy
Nominal/Inflation hedge ratio should be
maintained within +/- 5% of the funding
ratio.
Funding Ratio (gilts + 0.75%) 60%
Nominal Hedge Ratio (gilts + 0.75%) 20%
Inflation Hedge Ratio (gilts + 0.75%) 25%
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 xx mn
Remaining collateral after VaR95 event yy mn
The Pension Risk Management Framework
4
RAG Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away
Westminster and City 17 April 2013
1,000
1,500
2,000
2,500
3,000
3,500
4,000
20
12
20
13
20
13
20
14
20
14
20
15
20
15
20
16
20
17
20
17
20
18
20
18
20
19
20
20
20
20
20
21
20
21
20
22
20
22
20
23
20
24
20
24
20
25
20
25
20
26
£m
m
Flight Plan
liability (swap flat) asset (swaps flat)
The Flight Plan
5
100% - Swaps Flat by 2026
Required Returns Libor + 300bps
Expected Returns Libor + 200bps
Contributions & Asset Returns
Liability Basis
Time Horizon
Westminster and City 17 April 2013
Access to LDI Hub
6
Step 2 Description
• Interest rate and inflation risk are typically two of the largest “unrewarded risks” for a
pension scheme
• Setting up an LDI hub which gives the scheme the ability to manage inflation and interest
rate risk efficiently and effectively
Westminster and City 17 April 2013
Steps 3 – 6: Designing an Efficient Investment Strategy
7
Step
Liquid α & β Semi-Liquid Credit Illiquid Credit Illiquid α & β
Equities Corporate Bonds Infrastructure Debt Insurance-Linked
Multi Asset Asset Backed
Securities Social Housing Debt Private Equity
Commodities / CTA High Yield Direct SME Lending Infrastructure Equity
Currencies Leveraged Loans Mezzanine Finance Unlisted Property
Liquid Hedge Funds Emerging Market
Debt Distressed Debt
Hedge Funds with
Lock-Ups
Commercial Real
Estate Debt
Long Leases /
Ground Rents
Westminster and City 17 April 2013
Asset Class Universe: Results of Manager Survey
8
Distressed Debt
Multi Asset
Long Leases
Ground Rents
High Yield
Private Equity
EM Debt
SME Lending Currencies
EM Equity
Social Housing
Infrastructure Equity
Mezz Debt
Lev Loans
ILS
CTA
ABS
Developed Equity
Corporate Bonds
Infra Debt
CRE Debt
Unlisted Property
-5
-4
-3
-2
-1
0
1
2
3
4
5
-5 -4 -3 -2 -1 0 1 2 3 4 5
Predictable
Illiquid Liquid
Unpredictable
Westminster and City 17 April 2013
Credit as a Core Building Block for Flight Planning
9
Westminster and City 17 April 2013
Repositioning Assets: Steps 4, 5 and 6
10
Westminster and City 17 April 2013
Liquid & Semi-Liquid Credit Strategies
Step 4 Description
• Credit consists of a range of sub-classes with different risk-return characteristics
• Bulk of excess returns are compensation for credit risk
Emerging Market Debt Investment Grade
11
Westminster and City 17 April 2013
Liquid & Semi-Liquid Credit Strategies
12
LL
HY
EMD
IG
SF
ABS
LLHY
EMD
IG
SF
ABS0
100
200
300
400
500
600
0 100 200 300 400 500 600
GB
P C
red
it S
pre
ad
over
Sw
ap
s (b
ps)
Credit Spread VaR 95 (bps)
Leveraged Loans High Yield Investment Grade Sub Financials ABS Emerging Market Debt
Q1 2007
Q4 2012
Equity expected
return: 300bps
over swaps
Sources: Babson Capital, Redington 25
Westminster and City 17 April 2013
Illiquid Credit Strategies
13
Step 5 Description
• Long-dated, hold to maturity instruments that pay an illiquidity premium
• Usually for high-quality, inflation-linked cash flows
• Typically, these Flight Plan Consistent Assets (FPCAs) tend to fit well with the overall
objectives of pension schemes when assessed in the context of a scheme’s PRMF
• Careful consideration should be placed on ensuring the scheme invests in opportunities
providing the best risk-adjusted returns and offers better relative-value
Secured Leases Social Housing Infrastructure Ground Rents
Westminster and City 17 April 2013
Illiquid Alpha & Beta Strategies
14
fd Step 6 Description
• Assets under this category provide attractive returns but are typically more complex and
illiquid e.g. private equity and PFI equity
• Inclusion of these asset classes in the scheme’s investments will depend on the overall
objectives and governance budget of the scheme as set out in its PRMF
• Examples: Private Equity, Property, Insurance Linked Securities
Insurance-Linked Securities
Westminster and City 17 April 2013
Step 7 Description
• Effective monitoring is key to measuring a scheme’s progress against its objectives
• Once you have set clear goals and objectives (step 1), the value of monitoring (step 7) is that
you can make better decisions by tracking where you are against your objectives.
• A scheme that regularly monitors understands the impact of its investment decisions and can
easily assess investment opportunities via-à-vis the liabilities
Ongoing Monitoring
Track scheme’s progress towards clear goals and objectives
15
Westminster and City 17 April 2013
13-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk
Contacts
Robert Gardner Founder & Co-CEO
Direct Line: 020 7250 3416
16
Disclaimer text
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 that the parameters and assumptions used in this analysis can be duplicated with actual trades. Any historical exchange rates, interest rates or other reference
rates or prices which appear above are not necessarily indicative of future exchange rates, interest rates, or other reference rates or prices. Neither the information, recommendations or opinions expressed herein constitutes an offer to buy or sell any securities, futures, options, or investment products on your behalf. Unless otherwise stated, any pricing information in this document is indicative only, is subject to change and is not an offer to transact. Where relevant, the price quoted is exclusive of tax and delivery costs. Any reference to the terms of executed transactions should be treated as preliminary and subject to further due diligence.
This presentation may not be copied, modified or provided by you , the Recipient, to any other party without Redington Limited’s prior written permission. It may also not be disclosed by the Recipient to any other party without Redington Limited’s prior written permission except as may be required by law. “7 Steps to Full Funding” is a trade mark of Redington Limited. Redington Limited is an investment consultant company regulated by the Financial Services Authority. The company does not advise on all implications of the transactions described herein. This information is for discussion purposes and prior
to undertaking any trade, you should also discuss with your professional, tax, accounting and / or other relevant advisers how such particular trade(s) affect you. All analysis (whether in respect of tax, accounting, law or of any other nature), should be treated as illustrative only and not relied upon as accurate. Registered Office: 13-15 Mallow Street, London EC1Y 8RD. Redington Limited (reg no 6660006) is registered in England and Wales. ©Redington Limited 2012. All rights reserved.
Risk Management Firm
of the Year (2011, 2012) Pension Consultant of the
Year 2012
http://twitter.com/robertjgardner
http://uk.linkedin.com/in/robertjgardner