Liability–Driven Investment solutions


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Liability–Driven Investment solutions

  1. 1. For professional investors only Liability–Driven Investment solutions Strategies to stabilise and improve your pension scheme’s funding position Better insight + Better process = Better results
  2. 2. JPMorgan Asset Management is one of the world’s six largest investment managers with over £515 billion under management. Employing over 670 investment professionals across 20 investment centres worldwide, JPMorgan Asset Management is known for its breadth and depth of expertise across equities, fixed income and alternative asset classes such as managed currency, real estate, hedge funds and private equity. In recent years, the firm has become particularly well known for its innovation in multi-asset products, offering pioneering concepts in portable alpha, tactical asset allocation, total return and absolute return solutions. Today, 10% of assets under management are in the balanced/multi-asset sphere. JPMorgan Asset Management is part of JPMorgan Chase, the global financial services group. Source: JPMAM as at 31 December 2006.
  3. 3. Simple, effective answers to the funding challenge Using JPMorgan Asset Management’s skills across multiple asset classes, defined benefit pension schemes of any size can now create transparent liability-driven investment strategies The new pension challenge Achieving the balancing act Selected pooled solutions Defined benefit pension schemes are At JPMorgan Asset Management Through a select range of pooled coming under unprecedented pressure we recognise that addressing these strategies, we can help your pension to make the right investment choices pressures is a difficult balancing act. scheme achieve two key aims: and manage their risks more effectively. On the one hand, pension schemes 1. STABILISE your funding position The move to International Financial need to align the nature of their assets by giving your scheme’s assets a Reporting Standards (IFRS) means that more closely to their liabilities to similar duration and inflation profile any volatility in a scheme’s funding reduce funding volatility. But they also to its liabilities. position now directly impacts its need to retain the potential to generate sponsor’s balance sheet. additional investment returns to guard 2. IMPROVE your funding position against deficits. and reduce asset volatility through At the same time, increased life diversified return-generating strategies. expectancy, falling bond yields and Whilst many complex liability-driven lower real returns from stock markets investment (LDI) strategies have Using the strategies we’ve highlighted have made it harder for pension been devised to achieve these aims, here, we believe a wide range of schemes to ensure that their assets we’ve looked to offer a simpler pension schemes can manage their keep pace with their liabilities. approach that any scheme and its biggest risks – and target the advisers can implement. investment returns they need to meet their pension promises. The JPMorgan range of LDI solutions We believe that equities and We offer a broad range of pooled strategies that can help reduce funding risk alternative asset classes will and/or increase your investment returns relative to your liabilities. On the provide the best long-term returns. following pages, we have profiled three of these offerings in depth. However, we also recognise that Return vs many schemes are under Liability* increasing pressure to manage Reduce Funding Risk Diversify Equity Risk their duration risk and hence have developed a range of strategies which can help pension schemes achieve both of these aims. JPM High alpha strategies +4%+ JPM Diversified growth fund +2-4% JPM Duration & Alpha funds JPM Hedge funds +0-2% Risk vs Liability** 0-5% 15-25% *Value at risk of the asset class vs typical liability. **The value of assets at risk assuming a 99% confidence level. 03
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  5. 5. Trust JPMorgan’s experience When it comes to delivering an appropriate LDI solution, proven expertise is essential The expertise to keep it simple Trusted in derivatives Respected in asset management Putting together the right liability- We have deep understanding of the best Meanwhile, as one of the world’s top driven strategy can be daunting for any way to integrate derivatives into an LDI five asset managers, we generate sources pension scheme. Which is why at strategy, such as using swaps to mitigate of investment return across the risk JPMorgan Asset Management, we’ve interest rate risk. spectrum, using the skills of more than looked to keep our LDI offering simple. 670 investment professionals. Within our investment management We’ve pared it down to the key essentials business alone, we are responsible for Of course, any of our investment that we believe the majority of pension around 200 interest-rate positions strategies can be used to help pension schemes require to put their funding across four major currencies, and at scheme assets work harder. However strategy on the right track. any one time we have around 800 credit for LDI we have focused on a small derivatives outstanding. number of return-generating ideas that This simplified approach is only possible between them can allow a pension because of our longstanding expertise We assess the whole market for the best scheme to target its specific risk tolerance in this market. Globally, JPMorgan terms – whilst restricting our very precisely. Asset Management has more than transactions only to the most highly- 25 years’ experience in helping pension rated counterparties. In short, by taking some of the complexity funds manage their assets against out of liability-driven investing, we their liabilities. hope we can offer your scheme a more attractive and effective LDI solution. What JPMorgan offers as your LDI provider • Over 25 years’ experience in asset-liability modelling. • Leading expertise in swaps and derivatives structuring. • Pooled life funds to minimise complexity and administration. • A simple flexible choice of LDI solutions that can effectively address most pension schemes’ key risks. 05
  6. 6. JPM Life Duration & Alpha Funds An innovative range of pooled funds to manage interest-rate and inflation risks – and generate additional investment return in a risk-controlled way A transparent, familiar approach Achieve two aims with one fund Four ways to match duration JPM Life Duration & Alpha (D&A) Funds JPM Life D&A Funds are only possible There will be four JPM Life D&A Funds have been created as a straightforward because of JPMorgan Asset to choose from, offering 15-year or way for pension schemes of any size to Management’s extensive experience 30-year duration exposure, either on match their liabilities and generate both in derivatives management and a nominal basis or linked to the Retail potential excess return. alpha generation. Price Index (RPI). As pooled life funds, JPM Life D&A By buying units in a JPM Life D&A Rather than using traditional fixed Funds offer the reassurance of a familiar Fund, a pension scheme gets access to: income instruments, we achieve the and tax-efficient vehicle. In addition, 1. Long duration or inflation exposure targeted duration and inflation exposure by taking a pooled approach, pension to match liabilities. using swaps arranged with leading schemes can avoid many of the 2. Potential excess return to help reduce investment banks. Swaps are arranged complexities of a segregated liability- funding deficits. with a number of banks to reduce driven investment strategy – such as counterparty risk, and each counterparty dealing with derivative counterparties. The funds are innovatively structured is carefully assessed for its credit quality. using swaps so that both these aims However, the flexibility of JPM Life can be met using the same ‘cash pool’. The innovative structure of JPM Life D&A Funds still allows them to This can make JPM Life D&A Funds D&A Funds means that the end- accommodate each scheme’s profile ideal for pension schemes with limited investor is never called upon to meet and adapt whenever a scheme’s funds at their disposal, including collateral calls for the swaps. Instead, liabilities or risk tolerance change. schemes with significant funding these are met by using cash and deficits. Government bonds integrated into each D&A strategy. JPM Life D&A Funds • Designed both to stabilise and improve funding levels; • Flexible enough to match most pension schemes’ duration; • Leveraged structure ideal for cash-strapped pension funds; • Innovative total return feature to generate return over liabilities. 06
  7. 7. Tailor to your risks Addressing the funding gap Aim for steady growth potential By blending the four JPM Life D&A Funding deficits mean that few pension By using LIBOR as its benchmark, the Funds in appropriate proportions, schemes can afford only to perform total return strategy is designed to pension schemes can match the in line with their liabilities. Instead, experience far less volatility than duration of their liabilities. This can most need to generate additional traditional equity strategies – with the help to ensure that assets and liabilities investment return. potential to deliver steady performance have approximately the same sensitivity throughout the market cycle. to changes in real interest rates. This in Potential for generating additional turn can reduce funding volatility and return within JPM Life D&A Funds is It may therefore be effective in helping help limit the risk of a widening deficit. provided via exposure to a ‘total return’ to reduce funding volatility – particularly strategy managed by JPMorgan Asset the risk that deficits will widen during JPM Life D&A Funds are designed to Management’s highly-regarded Global market downturns. keep pace with a pension funds’ changing Multi-Asset Group. risk profile. Please note, the total return strategy Using flexible asset allocation across is allowed a maximum equity exposure Working with their advisers, a pension cash, bonds, convertibles and equities, of 40%. This can help to protect against scheme can agree targets for movement this total return strategy is designed losses in a falling market. However, around the maturity of liabilities. with the aim to deliver consistently in a rising equity market, it means the Allocation between the four JPM Life positive returns. The target return is fund will have lower growth potential D&A Funds can then easily be 2% p.a. above one-month London than one that is allowed higher levels rebalanced as and when required. Interbank Offer Rate (LIBOR) over of equity exposure. three years – net of fees. D&A: duration and alpha Long duration Replicates the liabilities. fixed income Stabilises funding status. D&A: Duration and alpha Extra return potential using Offers potential for out- performing the liabilities. multi-asset Improves funding status. strategies 07
  8. 8. JPM Life Diversified Growth Fund A uniquely diversified strategy to help to address significant funding deficits by aiming for 8-10% p.a. returns, net of fees Access to six asset classes Three kinds of diversification A solution to industry demand JPM Life Diversified Growth Fund offers JPM Life Diversified Growth Fund is We launched the JPM Life Diversified a pioneering pooled solution for pension designed to offer exceptional risk Growth Fund specifically in response schemes looking for high levels of long- diversification. At any one time it may to schemes and their consultants asking term growth to address funding shortfalls. include 30 or more different funds and us to develop a pooled global strategy strategies. It therefore not only offers that could help reduce portfolio Using a fund-of-funds structure, it diversification by asset class and market, volatility through long-term exposure provides exposure to six asset classes but also by investment methodology. to multiple asset classes. chosen specifically for their high-return potential and low correlation: Active risk/reward management We believe the fund offers one of the Allocation across the different asset easiest means to gain exposure to classes and strategies is actively managed alternative asset classes that may be global equities by the investment team. By increasing and too complex or too resource-intensive high-yield bonds decreasing exposure to each asset class for many pension schemes to access private equity in line with predicted risk/return levels, directly – including absolute return commodities the portfolio managers are able to funds and private equity. optimise the fund’s aggregate efficiency. property By including these assets, many pension absolute return strategies The result is a fund that aims for a schemes can open up their portfolio to return of 8-10% p.a. net of fees, while new sources of return. And by targeting Exposure to these asset classes is predicted volatility is also around 8- higher returns than traditional achieved primarily using JPMorgan 10% – a compelling risk-reward balanced funds, JPM Life Diversified Asset Management’s proven expertise proposition in pooled investment. Growth Fund offers an ideal means to in these areas. However external funds tackle funding concerns. may be included if more appropriate. JPM Life Diversified Growth Fund Six asset classes – low correlation • Exceptional diversification by The asset classes in JPM Life Diversified Growth have been specifically asset, market and methodology; selected for their low correlation with one another • Exposure to asset classes less available to pooled investors; Global Absolute High Property Commodities Private Equities Returns Yield Equity • Targets higher returns than traditional balanced funds; Global Equities 1.00 • Very attractive risk/return profile, Absolute Returns 0.40 1.00 targeting 8-10% p.a. after fees. High Yield 0.75 0.31 1.00 Property 0.57 0.41 0.40 1.00 Commodities 0.04 -0.11 0.06 0.10 1.00 Private Equity 0.82 0.31 0.57 0.50 0.06 1.00 08
  9. 9. JPM High Alpha strategies For pension schemes that need to target very high potential levels of investment return, we offer the JPMorgan Asset Management range of high alpha strategies High conviction investing JPM Life Global Dynamic Fund Combined for outperformance Pension schemes requiring high growth One of our key high alpha products is Our research has shown that growth potential to address their funding levels the JPM Life Global Dynamic Fund. and value stocks each tend to may need to consider aggressive outperform in 60% of time periods. investment strategies as part of their This strategy brings together the most return-seeking portfolio. attractive growth and value stocks we By combining the most compelling have identified across world markets. growth and value stocks in one portfolio, Typically aiming for an excess return we are able to deliver a strategy with of 4%+ p.a. all these strategies are Growth stocks are companies that are the potential to outperform the market aggressively managed. experiencing above-average share price 70-90% of the time. and earnings growth, supported by They use the same proven processes we strong newsflow. This approach has been validated by the apply to our core products. However, fund’s performance. From launch, the they have the freedom to deviate Conversely, value stocks are companies strategy* has outperformed in 78% of significantly from their benchmark index. that are fundamentally sound but quarters, leading to outperformance of have fallen out of favour with the 5.7% p.a. over the last five years. Please This allows each strategy to focus on market and are therefore trading remember that past performance is not our best ideas and minimise exposure at cheap valuations. a guide to the future. to less compelling stocks. *Strategy launched December 2000, launched as a life fund January 2006. JPM High Alpha strategies High alpha performance from the JPM Life Global Dynamic Fund • Bring together our very best investment ideas across world 15.3 JPM Life Global Dynamic Fund** markets; MSCI World (Net) 11.3 • Potential for high aggressive 8.8 9.2 returns without index constraints; • Can be used as part of 5.3 3.6 a diversified LDI portfolio to address funding deficits. 1 Year 3 Year* 5 Year* 1 yr % 3 yrs % 5 yrs % Geometric excess return 3.3 3.5 5.4 Source: Global Dynamic Composite JPMorgan, 31 December 2006. Gross of fees, £. Inception date is 1 January 2001. *Annualised. **Composite performance prior to January 2006. 09
  10. 10. Glossary of terms The JPMorgan Life Fund Range Absolute return investing – Investment approaches that measure their success Cash funds Europe (ex-UK) equity funds by their absolute performance rather • JPM Life UK Liquidity Fund • JPM Life Continental Europe than their performance relative Equity Fund to an index. Aims to deliver consistently Bond funds • JPM Life Continental Europe positive returns by using tactics such • JPM Life UK Bond Fund Select Equity Fund as short selling, leverage and market- neutral investing. • JPM Life UK Index-Linked Long-Dated Bond Fund US equity Alpha – Outperformance of a stock • JPM Life UK Long-Dated Bond Fund • JPM Life US Researched Enhanced market or sector, generated by • JPM Life Global ex-UK Bond Fund Index 250 Fund investor skill. • JPM US Equity Balanced funds Dynamic investing – Investment that • JPM Life Cautious Fund Asia & emerging markets is unconstrained by benchmark • JPM Life Moderate Fund • JPM Life Asia Equity Fund index weightings. • JPM Life Balanced Fund • JPM Life Japan Equity Fund Duration – The average life of a bond • JPM Life Japan Select Equity Fund or bond-like investment – and Corporate bond funds • JPM Life All-Emerging Markets a measure of its sensitivity to changes • JPM Life UK Corporate Bond Fund Equity Fund in interest rates. UK equity funds Alternatives Duration matching – Giving assets the • JPM Life UK Equity Fund same duration as liabilities so they will • JPM Life Diversified Growth Fund • JPM Life UK Disciplined experience similar changes in value if Equity Fund • JPM Life UK Property Fund real interest rates rise or fall. • JPM Life UK Specialist Equity Fund Duration & Alpha Fund volatility – The tendency for the • JPM Life UK Dynamic Fund • JPM Life D&A 15 yr/2% difference between a pension scheme’s • JPM Life UK Small Cap Equity Fund • JPM Life D&A 15 yr RPI/2% assets and liabilities to fluctuate. Global equity funds • JPM Life D&A 30 yr/2% Swap – A derivative contract that allows • JPM Life Global Equity Fund • JPM Life D&A 30 yr RPI/2% a variable stream of payments to be • JPM Life Global ex-UK swapped for a fixed stream of payments Opportunities Fund in order to create more payment certainty. • JPM Life Growth Fund Total return investing – An investment • JPM Life Global Dynamic Fund approach that aims to deliver consistently positive returns by having the flexibility to invest across multiple asset classes. For more information on pooled LDI solutions from JPMorgan Asset Uses a cash return (e.g. LIBOR) Management, call Simon Chinnery on 0207 742 5657. as a benchmark. 10
  11. 11. JPMorgan Asset Management Finsbury Dials 20 Finsbury Street London EC2Y 9AQ Telephone calls are recorded for your security and you may receive a follow up call. Past performance is not a guide to future returns. The value of investments and the income from them may go down as well as up. Exchange rates may also cause the value of underlying overseas investments to go down as well as up. The level of tax benefits and liabilities will depend on individual circumstances and may change in the future. The opinions expressed herein are those held by JPMorgan at the time of going to print. JPMorgan Life Limited is part of JPMorgan Asset Management. JPMorgan Life funds are marketed by JPMorgan Asset Management Marketing Limited which is authorised and regulated by the Financial Services Authority and is part of the JPMorgan Asset Management marketing group, which sells investments, life assurance and pension products. Registered in England No: 288553. Registered office: 125 London Wall, London EC2Y 5AJ. LV – JPM1178 03/07