Red Manager Forum

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Red Manager Forum

  1. 1. Private & Confidential Redington : Manager Forum 12 February 2013Red Manager ForumThe Eight Club, BankRobert GardnerPete Drewienkiewicz1
  2. 2. Private & Confidential Redington : Manager Forum 12 February 2013Our Mission:To Design, Develop, and Deliver the best investment strategies for our clients2
  3. 3. Private & Confidential Redington : Manager Forum 12 February 2013Who Are We?3
  4. 4. Private & Confidential Redington : Manager Forum 12 February 2013Redington: Client Base4119.276.223.311.4AUC by Client Type (£ bio)TrusteeSponsor ClientsOther PensionsRelated ClientsNon-PensionsWork251138Number of ClientsTrustee ClientsSponsor ClientsOther PensionsRelated ClientsNon-Pensions Work59.02.760.473.534.5AUC by Relationship (£ bio)Total AUC (FullConsultant to Trustee)Total AUC (RetainedAdvisor to Sponsor)Total AUC (Project-Trustee)Total AUC (Project-Sponsor)Total AUC (Project-Other)Number ofClients47, including 10 of the UK’s25 largest pension schemesAssets underConsulting£230bnAppointmentType• Advisor to Sponsor• Advisor to Trustee• Non-Pensions• Project Basis
  5. 5. Private & Confidential Redington : Manager Forum 12 February 2013Take Control – The 7Steps to Full FundingRobert Gardner5
  6. 6. Private & Confidential Redington : Manager Forum 12 February 2013Redington PhilosophyOur Philosophy: We believe there are multiple risk premia to be earned It is not possible to control return But it is possible to manage and control riskOur 7 Steps Framework to Full FundingTMputs our clients in control of their investment objectives and strategy.6
  7. 7. Private & Confidential Redington : Manager Forum 12 February 2013Redington Philosophy7IF A MAN KNOWS NOTTO WHICH PORT HESAILS, NO WIND ISFAVOURABLELucius Annaeus Seneca
  8. 8. Private & Confidential Redington : Manager Forum 12 February 2013The Seven Steps to Full Funding TM8Design an efficient investmentstrategyDestination for agileimplementation of LDI strategyTransparency to make timelydecisionsArticulate clear objectives andconstraintsMission StatementTo help our clients achieve full-funding with the minimum level of risk
  9. 9. Private & Confidential Redington : Manager Forum 12 February 2013Our Mission:To Design, Develop, and Deliver the best investment strategies for our clients9DynamicContinuousMonitoringDeliverDevelopDesign
  10. 10. Private & Confidential Redington : Manager Forum 12 February 2013Step 1: Setting Clear Goals and Objectives10“The pessimist complains about the wind;The optimist expects it to change;The realist adjusts the sails.”- William A. Ward
  11. 11. Private & Confidential Redington : Manager Forum 12 February 2013Step 1: Setting Clear Goals and Objectives11Step 1. Description1. Articulate clear funding objectives and risk constraints2. Flight plan Analysis presents a projected path of the Scheme’s assets and liabilities andderives the Required Rate of Return3. Detailed 3 Lenses Risk Analysis of overall risk exposure and collateral requirements.4. Incorporate the above into a Pensions Risk Management Framework which will be usedto monitor the Scheme’s progress towards its stated objectives.
  12. 12. Private & Confidential Redington : Manager Forum 12 February 2013Application to SampleScheme12
  13. 13. Private & Confidential Redington : Manager Forum 12 February 2013The Pension Risk Management FrameworkObjective Measurement Performance Indicators Performance RAGPrimary FundingObjectiveTo reach 100% funded on a swapsflat basis by 2026Expected Returns (ER) > RequiredReturns (RR)RR: Libor + 300bpsER: Libor + 200bpsDifference: -100bpsInvestmentStrategyActual Returns should exceedExpected ReturnsActual Returns (AR) > ExpectedReturns (ER)AR: Libor + 210bpsER: Libor + 200bpsDifference: +10bpsRisk BudgetThe investment strategy should notrisk the deficit worsening by£600mm over a 1 year periodVaR95 < £600mm VaR95: £700mmHedgingStrategyNominal and inflation hedge ratioshould be maintained within +/- 5%of the funding ratioFunding Ratio (swaps flat) 70% n/aNominal Hedge Ratio (swaps flat) 50%Inflation Hedge Ratio (swaps flat) 85%CollateralMaintain sufficient eligible for thepurposes of covering margin callsthat may arise from the Scheme’scurrent derivative positions over a 1year period.Total available eligible collateral £900mmRemaining collateral after VaR95 event £600mm13RAG Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away
  14. 14. Private & Confidential Redington : Manager Forum 12 February 2013Calls To Action14Summary The Scheme needs to simultaneously:1. Increase Expected Returns to equal (at a minimum) the Minimum Required Returns, but should aim to targetthe Required Returns; and2. Reduce the risk it is exposed to (as measured by VaR95); while3. Maintaining sufficient levels of eligible collateral to withstand a VaR95 event.Objective RAG Comments Call to ActionPrimaryFundingObjectiveExpected Returns are 100bps below theRequired Returns to reach 100% funded ona swaps flat basis by 2026 Amend/adjust the investment strategy toincrease Expected ReturnsInvestmentStrategyActual Returns are 10bps above theExpected Returns No Action RequiredRisk BudgetThe current investment strategy risks thedeficit worsening by more than the £600mmRisk Budget Reduce risk in the investment strategyHedgingStrategyThe nominal and inflation hedge ratios arebelow and above the target hedge ratio (i.e.the funding ratio), respectively Increase nominal hedge ratio Decrease inflation hedge ratioCollateralMaintains £600mm collateral in excess ofwhat might be required after a VaR95 event No Action Required
  15. 15. Private & Confidential Redington : Manager Forum 12 February 2013Analysis and Recommendations15RecommendationsRecommendationsRecommendationsRecommendationsRecommendations
  16. 16. Private & Confidential Redington : Manager Forum 12 February 2013Step 2: Access to LDI Hub16Step 2. Description Implementation-to-date• Interest rate and inflation risk are typically oneof the largest “unrewarded risks” for a pensionscheme.• Setting up an LDI hub which gives the Schemethe ability to manage inflation and interest raterisk efficiently and effectively.• Appointment of XXX as LDI managerRecommendations1. Synthetic Equity Replication• Consider replicating physical equity exposure with futures and use the proceeds to purchase Gilts2. Target Hedge Ratio• Consider increasing/decreasing the nominal and inflation hedge ratios to equal the funding ratio:• Use full LDI toolkit including swaptions to increase nominal hedge ratio.
  17. 17. Private & Confidential Redington : Manager Forum 12 February 2013Liquid Alpha & Beta Strategies17Step 3. Description Implementation-to-date• To ensure that the scheme is receivingadequate compensation for the riskassociated with its investments• Instead of dividing assets into traditionalcategories of growth and matching assets,assets are assessed in terms of their liquidity.• This includes allocations to liquid active andpassive strategies such as investment inequities and certain hedge fund strategies:• 10% to Liquid Alpha Strategies• 15% to Liquid Beta Strategies• Total exposure: 25%Recommendations1. Volatility-Controlled Equity Exposure2. Risk Parity Strategies3. CTA Allocation
  18. 18. Private & Confidential Redington : Manager Forum 12 February 2013Liquid & Semi-Liquid Credit Strategies18Step 4. Description Implementation-to-date• Credit consists of a range of sub-classes withdifferent risk-return characteristics.• Includes Alpha oriented mandates where themanager can operate in the entire fixedincome universe. This enables the manager totake advantage of relative value betweendifferent instruments, aiming to earn long runrisk premia throughout the credit and economiccycle.• 15% to Liquid Credit• 3% to Semi-Liquid Credit Strategies• Total exposure 18%No Recommendations – current spreads for investment grade credit are not sufficiently attractiveConsiderations:• When credit spreads are wider (i.e. above the Required Returns), the 7 Steps to Full Funding TMframework andthe PRMF will allow you to dynamically shift into credit from other asset classes.
  19. 19. Private & Confidential Redington : Manager Forum 12 February 2013Illiquid Credit Strategies19Step 5. Description Implementation-to-date• We believe there are a number of opportunitiesavailable which can provide “long-dated,inflation-linked” cash flows at a higher yieldthan traditional matching assets (we call them“Flight Plan Consistent Assets”).• Typically, these assets tend to fit well with theoverall objectives of pension schemes whenassessed in the context of a scheme’s PRMF• Total 0%RecommendationsMake allocations to the below to increase credit diversification and Expected Returns.• SME Lending• Secondary UK PFI and core-infrastructure refinancing• Social housing• Secured Leases• Ground rents
  20. 20. Private & Confidential Redington : Manager Forum 12 February 2013Illiquid Alpha & Beta Strategies20fdStep 6. Description Implementation-to-date• Assets under this category provide attractivereturns but are typically more complex andilliquid e.g. private equity and PFI equity.• 7% Private Equity• 3% Property (EU and UK)• Total 10%RecommendationsInsurance-Linked Strategies (catastrophe risk)• Make allocation to increase diversification and expected returns
  21. 21. Private & Confidential Redington : Manager Forum 12 February 2013Ongoing Monitoring21Objective Measurement Performance Indicators Performance RAGPrimary FundingObjectiveTo reach 100% funded on a swapsflat basis by 2026Expected Returns (ER) >Required Returns (RR)RR: Libor + 300bpsER: Libor + 320bpsDifference: +20bpsInvestmentStrategyActual Returns should exceedExpected ReturnsActual Returns (AR) > ExpectedReturns (ER)AR: Libor + 210bpsER: Libor + 200bpsDifference: +10bpsn/aRisk BudgetThe investment strategy should notrisk the deficit worsening by£600mm over a 1 year periodVaR95 < £600mm VaR95: £450mmHedgingStrategyNominal and inflation hedge ratioshould be maintained within +/- 5%of the funding ratioFunding Ratio (swaps flat) 70% n/aNominal Hedge Ratio (swaps flat) 70%Inflation Hedge Ratio (swaps flat) 70%CollateralMaintain sufficient eligible for thepurposes of covering margin callsthat may arise from the Scheme’scurrent derivative positions over a 1year period.Total available eligible collateral £600mmRemaining collateral after VaR95event£150mm
  22. 22. Private & Confidential Redington : Manager Forum 12 February 2013 22Online iRIS to be launched in November. (blurb from Teresa)*Technical Resources from BlackrockThe easiest wayto monitor yourpension scheme.Watch our video to learn more about how iRISmakes risk monitoring accessible.LoginTrack progress against clear goals andobjectivesEasy access.Login anytime, anywhereMonitor funding levelMonitoring: A Preview of Online iRIS
  23. 23. Private & Confidential Redington : Manager Forum 12 February 2013Manager ResearchPete Drewienkiewicz23
  24. 24. Private & Confidential Redington : Manager Forum 12 February 2013Who Are We?24PeteDrewienkiewicz,Head of ManagerResearchKenny Nicoll,Director: LDISpecialistHuayin Liu,Vice PresidentTom McCartan,AssociateAniket Das,AssociateKate Mijakowska,AnalystGreg Fedorenko,AnalystTeam Size2011 32012 52013 7
  25. 25. Private & Confidential Redington : Manager Forum 12 February 2013How Do We Look at the World?25Step(2)LDI(3)Liquid α & β(4)Semi-Liquid Credit(5)Illiquid Credit(6)Illiquid α & βCollateralManagementEquities Corporate Bonds Infrastructure Debt Insurance-LinkedHedging Multi AssetAsset BackedSecuritiesSocial Housing Debt Private EquityActive LDI Sovereign Bonds High Yield Direct SME LendingInfrastructureEquityGilts Commodities / CTA Leveraged Loans Mezzanine Finance Unlisted PropertyCurrenciesEmerging MarketDebtDistressed DebtHedge Funds withLonger Lock-UpsLiquid Hedge FundsCommercial RealEstate DebtLong Leases /Ground Rents
  26. 26. Private & Confidential Redington : Manager Forum 12 February 2013Strategic Managers26ManagerStep(2)LDI(3)Liquid α & β(4)Semi-LiquidCredit(5)Illiquid Credit(6)Illiquid α & βABC   DEF   GHI  JKL  
  27. 27. Private & Confidential Redington : Manager Forum 12 February 2013Team Responsibilities               27
  28. 28. Private & Confidential Redington : Manager Forum 12 February 2013How Do We Divide Our Time?Recommended level of interface for investedstrategies:• Quarterly quantitative monitoring• Annual formal review• Constant contact in respect of specific queries:• Impact based approach:Increase contact for increasingly complex /bespoke strategy (e.g. LDI portfolio), Larger AUM/ VARContact–+Level of interface for non-invested strategies:• Regular research meetings• Tracking vs. 7 steps28Less contact e.g. Passive equities
  29. 29. Private & Confidential Redington : Manager Forum 12 February 20131. Do returnscontribute to overallexpected returnsbeing greater thanrequired returns toreach full funding?2. Do returnscompensateinvestors for thelevel of risk theyare being exposedto?293. Are better risk-adjusted returnsavailableelsewhere?4. What are theimplementationchallenges?Building on the 7 Steps to Full FundingTM, we outline below the Four Investment Filters:The 4 Investment Filters provide clients with a framework in which to quickly assess and comparedifferent opportunities within and across different asset classes.How Do We Prioritise Opportunities?ExpectedReturnsRiskAssessmentImplementationRelativeValue
  30. 30. Private & Confidential Redington : Manager Forum 12 February 2013eVestment30• eVestment adopted June 2012• Comprehensive database of43,000 strategies acrosstraditional and hedge fundproviders• Fund manager performance• Peer group comparisons• Database provides qualitativedata, including personnelchanges• Growth / decline in firm AUM,mandates won and lost• Portfolio holdings information• Fee schedulesRegularPerformanceUpdatesUpdated Docs& FundLiteraturePersonnelChangesHedgedReturnsData Net ofFeesWhat weNeed fromYou:
  31. 31. Private & Confidential Redington : Manager Forum 12 February 2013Implementing a New Allocation31a b cUse of eVestmentfor pooled strategiesN.B. Many clientshave bespokeinvestments notfound on funddatabases.Classify investmentaccording to relevantpart of 7 StepFrameworkAccount teams decideon appropriateness forindividual clientsImplementClientBespokeIndustryNet
  32. 32. Private & Confidential Redington : Manager Forum 12 February 2013Breakdown of Recent Search Activity32Search ActivityPooled LDI, Segregated LDI,Segregated LDI (within a multi-managerframework)Equity Income, Diversified Growth Fund,Emerging Market Equities, Risk Parity (2searches)Investment Grade Credit (2 searches),Leveraged Loans & High-Yield Credit,Absolute Return Bonds / Credit Multi-Strategy (3 searches), Asset-BackedSecuritiesSecured Leases (2 searches), IlliquidInflation-Linked Assets, Distressed Debt,SME LendingInsurance-Linked Securities£365£1,520£565£100Assets Allocated in 2012 (ex-LDI) - £mioLiquid Alpha & BetaLiquid & Semi-LiquidCreditIlliquid CreditIlliquid Alpha & Beta35751Number of Searches in 2012LDI HubLiquid Alpha &BetaLiquid & Semi-Liquid CreditIlliquid CreditIlliquid Alpha &Beta
  33. 33. Private & Confidential Redington : Manager Forum 12 February 2013Steps 2-7:Application33
  34. 34. Private & Confidential Redington : Manager Forum 12 February 2013Step 2: LDI Hub34
  35. 35. Private & Confidential Redington : Manager Forum 12 February 2013The LDI Manager as “Quarterback”35• Trust• Technical Skills• Transparency
  36. 36. Private & Confidential Redington : Manager Forum 12 February 2013Step 3: Liquid Alpha and Beta Strategies36
  37. 37. Private & Confidential Redington : Manager Forum 12 February 2013Liquid Alpha & Beta37Key Features• Built in risk diversification – equities,commodities and rates• Built in risk control through target volatility• Built in nimbleness through dailyrebalancing• Historically improved risk adjusted returns• Low cost• Easy to implement• Highly liquid• Efficient use of collateralTrend Following StrategiesRisk ParityVolatility-ControlledEquityIndex-Linked GiltsSwap OverlayA One-Stop Liquid Alpha & Beta Portfolio:
  38. 38. Private & Confidential Redington : Manager Forum 12 February 2013Liquid Alpha & Beta Strategy: Historical Performance ComparisonCumulative Excess Returns of Liquid Alpha & Beta StrategiesSince 200138Full Calendar Year Excess Returns of Liquid Alpha & BetaStrategies Since 2001Source: Bloomberg, MSCI, Redington-50%-40%-30%-20%-10%0%10%20%30%40%50%2002 2003 2004 2005 2006 2007 2008 2009 2010 2011050100150200250300Liquid Alpha & Beta PortfolioPassive Equity
  39. 39. Private & Confidential Redington : Manager Forum 12 February 2013Step 4: Liquid & Semi-Liquid Credit, Step 5: Illiquid Credit39
  40. 40. Private & Confidential Redington : Manager Forum 12 February 2013Credit as a Core Building Block for Flight Planning40CorporateBondsDirectLendingAbsoluteReturnFPCAFPCAGiltsCash
  41. 41. Private & Confidential Redington : Manager Forum 12 February 2013Equity Replacement Strategy4140%20%20%20%Sample Equity Replacement PortfolioRisk ParityLong / ShortCreditDirect Lending(SMEs)Distressed DebtSources of FundingDevelopedEquityEM EquityPrivate Equity50%35%15%Current Allocation25%50%25%Replacement PortfolioPortfolio Weightings: Whole Scheme• Overall risk in the return-seekingassets bucket reduced by a fifth• Overall expected return on schemeassets increased by more than 10%Equities Credit Alternatives
  42. 42. Private & Confidential Redington : Manager Forum 12 February 2013Step 6: Illiquid Alpha & Beta Strategies42
  43. 43. Private & Confidential Redington : Manager Forum 12 February 2013Insurance-Linked Securities432.26%2.28%2.30%2.32%2.34%2.36%2.38%Current Allocation Current +Aggressive ILSAllocationCurrent +Conservative ILSAllocationSample Scheme: Impact on Portfolio Expected ReturnsProbability0%Rtn• Assets under this category provideattractive returns but are typically morecomplex, e.g. private equity, PFI equity.• Inclusion of these assets depends on theoverall objectives and governance budgetof the scheme.Exceedance Curve (Illustrative)• Catastrophe risk offers chance to earnuncorrelated returns with major assetclasses.• Sample scheme – ca. £50m allocation(of c. £3bn overall assets) increasedexpected returns while decreasing overallrisk.
  44. 44. Private & Confidential Redington : Manager Forum 12 February 2013Step 7: Ongoing Monitoring44
  45. 45. Private & Confidential Redington : Manager Forum 12 February 2013Manager Monitoring / Quarterly Reporting45Fund Allocationas at7/12/2012Allocationas at17/9/2012ManagerMonitoring*Fund A 13% 14%Fund B 14% 14%Fund C 25% 24%Fund D 23% 23%Fund E 3% 3%Cash 22% 30%EquityFutures32% 33%SyntheticGilts60% 48%• Managers reviewed as part of overallscheme positioning• Use of RAG ‘traffic lights’ in quarterlyquantitative reports echoes PRMF
  46. 46. Private & Confidential Redington : Manager Forum 12 February 2013Performance Monitoring and Position-Based Reporting46USDCreditEURCreditGBPCreditTotalMarketValue(%)26.3 9.6 64.1 100Yield toWorst(%)4 11.9 5 5.4Duration(yrs)13.6 0.6 7.8 8.7SpreadDurationContribution (yrs)3.4 0.5 5.4 9.3LiborSpread(bps)177.9 799.5 236 274.8UKFranceNetherlandsItaly SwitzerlandJersey Chan IsleAustraliaDenmarkFinlandGermanyJapanNorwaySpainUnited States0100200300400500600700800LiborSpread(bps)Market Value and Libor Spread by CountryPortfolio Benchmark8.5%10.4%40.5%33.0%5.1%1.4% 1.0%0%5%10%15%20%25%30%35%40%45%Aaa Aa A Baa Ba B Not RatedMarketValueMarket Value by Average Rating
  47. 47. Private & Confidential Redington : Manager Forum 12 February 2013Conclusion: Our Principles47• Identify managers who candeliver return streams thatmeet our strategic goalsClient Focus• Consistent performance inuncertain markets, downsideprotectionDisciplined Process• Transparency in investmentprocess, returns and reportingClarityPriorities: How to Interact with Us:UseeVestmentRelateOfferings toStepsDifferentiateOffering
  48. 48. Private & Confidential Redington : Manager Forum 12 February 2013Red Manager Forum SurveyAsset Class Matrix48-5-4-3-2-1012345-5 -4 -3 -2 -1 0 1 2 3 4 5DevelopedEquityGiltsSME LendingPredictableUnpredictableLiquidIlliquidPrivate Equity
  49. 49. Private & Confidential Redington : Manager Forum 12 February 2013Link to Survey49http://svy.mk/XyuSCW
  50. 50. Private & Confidential Redington : Manager Forum 12 February 201313-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.ukContactsRobert GardnerFounder & Co-CEODirect Line: 020 7250 3416robert.gardner@redington.co.uk50Pete DrewienkiewiczDirector | Head of Manager ResearchDirect Line: 020 3326 7138pete.drewienkiewicz@redington.co.ukDisclaimer textFor professional investors only. Not suitable forprivate customers.The information herein was obtained from varioussources. We do not guarantee every aspect of itsaccuracy. The information is for your privateinformation and is for discussion purposes only. Avariety of market factors and assumptions may affectthis analysis, and this analysis does not reflect allpossible loss scenarios. There is no certainty that theparameters and assumptions used in this analysis canbe duplicated with actual trades. Any historicalexchange rates, interest rates or other referencerates or prices which appear above are notnecessarily indicative of future exchange rates,interest rates, or other reference rates or prices.Neither the information, recommendations oropinions expressed herein constitutes an offer to buyor sell any securities, futures, options, or investmentproducts on your behalf. Unless otherwise stated,any pricing information in this document is indicativeonly, is subject to change and is not an offer totransact. Where relevant, the price quoted isexclusive of tax and delivery costs. Any reference tothe terms of executed transactions should be treatedas preliminary and subject to further due diligence.This presentation may not be copied, modified orprovided by you , the Recipient, to any other partywithout Redington Limited’s prior writtenpermission. It may also not be disclosed by theRecipient to any other party without RedingtonLimited’s prior written permission except as may berequired by law. “7 Steps to Full Funding” is a trademark of Redington Limited.Redington Limited is an investment consultantcompany regulated by the Financial ServicesAuthority. The company does not advise on allimplications of the transactions described herein.This information is for discussion purposes and priorto undertaking any trade, you should also discusswith your professional, tax, accounting and / or otherrelevant advisers how such particular trade(s) affectyou. All analysis (whether in respect of tax,accounting, law or of any other nature), should betreated as illustrative only and not relied upon asaccurate.Registered Office: 13-15 Mallow Street, London EC1Y8RD. Redington Limited (reg no 6660006) isregistered in England and Wales.©Redington Limited 2012. All rights reserved.
  51. 51. Private & Confidential Redington : Manager Forum 12 February 201313-15 Mallow Street London EC1Y 8RDTelephone : +44 (0) 20 7250 3331www.redington.co.ukThe TeamPete DrewienkiewiczDirector | Head of Manager ResearchDirect Line: 020 3326 7138pete.drewienkiewicz@redington.co.uk51Kenny NicollDirector | Manager ResearchDirect Line: 020 3326 7111kenny.nicoll@redington.co.ukHuayin LiuVice President | Manager ResearchDirect Line: 020 3326 7105huayin.liu@redington.co.ukTom McCartanAssociate | Manager ResearchDirect Line: 020 3326 7139tom.mccartan@redington.co.ukAniket DasAssociate | Manager ResearchDirect Line: 020 3326 7153aniket.das@redington.co.ukKate MijakowskaAnalyst | Manager ResearchDirect Line: 020 3326 7106kate.mijakowska@redington.co.ukGreg FedorenkoAnalyst | Manager ResearchDirect Line: 020 3326 7122greg.fedorenko@redington.co.uk

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