Red Manager Forum 26 Feb 2014

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Red Manager Forum 26 Feb 2014

  1. 1. Redington Manager Forum 26 February 2014
  2. 2. Redington: Business Update
  3. 3. Our first client 7 years ago...
  4. 4. ... our current list of clients.
  5. 5. 21 55 98 100 185 225 250 300 335 0 50 100 150 200 250 300 350 400 2006 2007 2008 2009 2010 2011 2012 2013 Current GBPbillionsAssets Under Consulting: Evolution
  6. 6. Client size (assets) Trustee: Full Advisor Trustee: Project Sponsor Non- Pension Total > £10Bn 1 4 3 3 11 £5Bn - £10Bn 0 6 1 1 8 £1Bn - £5Bn 10 5 4 2 21 £500m - £1Bn 0 2 1 2 5 < £500m 4 1 1 3 9 Total 15 18 10 11 54
  7. 7. 12 Full Time Equivalents doing Manager Research
  8. 8. Manager Research: Business Update
  9. 9. Our Manager Research Team 3 years ago...
  10. 10. ... our Manager Research Team today.
  11. 11. Investment Strategy & Research Team Risk Analysis and Modelling Asset Class and Manager Research• Analysis and modelling of both asset and liability side risks across different key metrics • Ongoing monitoring of Fund progress against objectives and risk constraints • Design of strategic asset allocations • Disciplined framework for hiring and terminating managers • Team specialisations cover entire universe of asset classes through categorisation by portfolio role • Significant expertise in designing and implementing investment strategies Focused ResearchRelevant Advice Practicable Strategies Integrated Investment Strategy and Manager Research
  12. 12. Comparison vs. ‘Traditional’ Investment Consultancy Model Redington ‘Traditional’ Investment Consultancy Model Business Model Retained Fee Small Retainer and ‘Add-On’ Work Research Team Smaller, Focused Larger, Maintenance Research Manager Selection Included in Retainer Additional Fee Work Manager Views Preferred Lists Ratings Use of Managers High Conviction Many High-Rated Managers, Few Win Capital Philosophy Absolute Return, Risk- Allocation Focused Benchmark Focused Client Decision- Making Process Flexible, Quick to Act Constrained, Slow
  13. 13. Preferred List Process Advantages: Why? High Conviction 3 to 5 managers in each sub asset class, typically each will bring a different approach to the strategy Clarity for clients Clients on our retainer fee model will have access to all of our preferred list recommendations and be able to see our views Clarity for managers Feedback will be easier to deliver and clearer to understand Governance Having existing preferred lists allows clients to allocate to an asset class in a far more streamlined fashion Alignment With our retainer fee model – we are no longer incentivised to “churn” asset managers or drum up search business Scalable We build up IP over time and much client work can be delivered from existing resources Flexible We continue to offer a bespoke search process if desired and for our non-retained client base
  14. 14. LDI HUB LIQUID MARKET STRATEGIES LIQUID & SEMI-LIQUID CREDIT STRATEGIES ILLIQUID CREDIT STRATEGIES ILLIQUID MARKET STRATEGIES REPORTING AND MONITORING CLEAR GOALS AND OBJECTIVES The 7 Steps to Full Funding
  15. 15. LDI Hub Liquid Markets Liquid Credit Illiquid Credit Illiquid Markets Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate CTA Emerging Market Debt Distressed Debt Global Macro Absolute Return Bonds Senior CRE Debt Equity Long-Short Total Return Sub-IG Credit Relative Value Steps 2-6:
  16. 16. 2 6 5 11 £4.0bn Allocated in 2013 (ex-LDI)* 25 Allocations Made in 2013: Average Across Steps 3-6 = £176m LDI Hub Liquid Credit Liquid Markets Illiquid Credit *£7.3bn inc. LDI 0.8 0.92.4
  17. 17. ALM / IC Input     14   14     6       11     7    2 Total Manager Research Personnel (FTE): 12 Division of Team Responsibilities
  18. 18. Investment Strategy
  19. 19. Multiple Investment Strategy Processes Inconsistent Poor Quality Possible Time Consuming One Investment Strategy Process Consistent Quality Control Efficient
  20. 20. Redington Investment Committee
  21. 21. Manager Research Process
  22. 22. 10 x 10 x 10 Our approach to screening, selecting and monitoring managers
  23. 23. Universe Meetings Preferred Sterling Credit DGF Infra- structure Debt Senior CRE Debt Absolute Rtn. Bonds Oct 2013 Dec 2013 Dec 2013 Jan 2014 Jan 2014 43 33 25 30 86 9 15 8 7 20 3 3 2 3 4 Screening the Universe Ones to watch
  24. 24. How we reduce the universe down to a manageable list Qualitative / Judgemental Factual / Quantitative Business alignment Capacity available Commitment to product Fee level and structure AUM Portfolio analysis Team Performance & risk analysis Transparency Product appropriateness
  25. 25. In our selection process, we are explicitly looking to identify areas of competitive advantage. We believe the very best managers differentiate themselves in one of the following ways. What are we looking for in preferred list managers?
  26. 26. 1. Information Advantage 2. Screening Advantage 3. Decision-Making Advantage 4. Conviction Advantage 5. Self-Awareness Advantage 6. Teamwork Advantage 7. Risk Management Advantage 8. Execution Advantage 9. Strategic Advantage 10. Innovation Advantage Competitive assessment - preferred list managers
  27. 27. Red Radar: Helping clients remain alert to what could go wrong 2. Client Dependency 3. Leadership Change 4. Culture Change 5. Key Person 6. Complexity 7. Process Drift 8. Capacity Management 9. Operational Infrastructure 10. Risk Culture 1. Business Management
  28. 28. Our approach to research meetings – what we are looking for Meetings by category within a short time period (allows comparison) Information and presentation in advance (so we can come prepared) Avoid turning pages (not assessing presentation skills) Focus on portfolio positioning, changes and decisions Meet different people at all levels Informal interaction, floor walk, attend morning meetings Detailed information and transparency (portfolio analysis) Keep us updated (monitor decisions over time)         In return we waste less of your valuable time in meetings, we focus on what matters, make decisions quicker and give you more open feedback.
  29. 29. Research Developments
  30. 30. Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate CTA Emerging Market Debt Distressed Debt Global Macro Absolute Return Bonds Senior CRE Debt Equity Long-Short Total Return Sub-IG Credit Relative Value
  31. 31. Our LDI Philosophy 1. LDI fits within the PRMF (Step 1) risk budget and objectives of each client. 2. LDI is part of the overall ALM framework. Rates and Inflation are merely the largest components of risk. 3. Redington make LDI decisions based on Risk impact and Required Return expectations. 4. LDI strategy is outcome-focused for each client. 5. Redington do not call markets. We prefer Funding Ratio Triggers and dislike market-based hedging strategies.
  32. 32. LDI Implementation in Practice Start Structure Risk What resources does each client have? • CIO Function • Legal Resource What structure is most appropriate given size, resource and derivative usage? • Pooled vs. seg mandate • QIF • Own docs vs. Agency How best to manage and monitor risk? • Risk policies • IMA • Reporting pack
  33. 33. LDI Implementation: Areas of Expertise Banking Group Liquidity & Leverage Regulation Assess the size / quality of the banking group and related Swap and Repo documentation • Best Terms? • Fairness and Consistency Ensure client has enough collateral given OTC usage and pension outflows • Has the client got enough leverage given required Portfolio returns? What are the impacts of EMIR on pension schemes? • What are the implications of Banking regulation on dealing costs and liquidity? Review As the hedge increases over time, how does the risk profile of the portfolio change? • When is it appropriate to change an LDI mandate from Passive to Active?
  34. 34. Contractual Non-contractual LiquidIlliquid
  35. 35. Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate CTA Emerging Market Debt Distressed Debt Global Macro Absolute Return Bonds Senior CRE Debt Equity Long-Short Total Return Sub-IG Credit Relative Value Done / In Progress
  36. 36. 0% 10% 20% 30% 40% 50% 60% 70% AnnualizedVolatility(%) MSCI World Rolling Volatility Voatility Control Rolling Vol One of the main advantages of liquid asset classes such as equities, sovereign bonds and commodities is that they can be rebalanced using futures relatively cheaply. This allows for the possibility of volatility control. MSCI World Rolling Volatility MSCI World Volatility Controlled Index
  37. 37. Strategic/Static Allocation Dynamic Allocation Total Return Absolute Return Relative Value Systematic Risk Parity Active Risk Parity Relatively static asset allocation Long-only Medium (30- 60%) equity weighting High correlation to equity markets Large expected drawdowns Dynamic asset allocation Mostly long-only (can hold relative value) Medium (30- 60%) equity weighting High correlation to equity markets Medium expected drawdowns Highly dynamic asset allocation Mostly long-only (can hold relative value) Highly varying (10-60%) equity weighting Varying correlation to equity markets Medium expected drawdowns Risk-based allocation Long/short Low equity beta Low correlation to equity markets Small expected drawdowns High use of leverage Risk-based model-driven allocation Long-only Low equity beta Low correlation to equity markets Medium expected drawdowns High use of leverage Risk-based discretionary allocation Long-only Low equity beta Low correlation to equity markets Medium expected drawdowns High use of leverage Breakdown of the Multi-Asset Universe
  38. 38. Current Focus Areas Lower client demand / lesser focus Higher client demand / greater focus Alternative Risk Premia Risk Parity CTAs Global Macro Fundamental Long / Short Equity Fundamental Active Equity
  39. 39. Contractual Non-contractual LiquidIlliquid
  40. 40. Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate CTA Emerging Market Debt Distressed Debt Global Macro Absolute Return Bonds Senior CRE Debt Equity Long-Short Total Return Sub-IG Credit Relative Value Done / In Progress
  41. 41. S eparation of interest rate risk and credit risk I ntegration of interest rate duration into the LDI framework M aking asset allocation according to the PRMF P lacing managers according to their specialised areas L eading discussions in mandate design E stablishing a reviewing and monitoring framework Our Philosophy: “SIMPLE”
  42. 42. Historical Asset Allocation for 6 Largest Reporting Clients: As of 30 September 2013
  43. 43. ARB/ Total Return Global IG Global HY Loans ABS EMD Sterling IG Absolute Return Strategies Total Return Strategies Credit Relative Value Strategies Multi-Asset Credit Strategies (Sub IG) …with a strong focus on generating risk-adjusted returns 2014: What are we looking for?
  44. 44. How we categorise strategies? 1 Absolute Return Macro 2 Absolute Return Diversifie d 3 GFI Dynamic Allocatio n 4 Credit Total Return 5 Multi- Asset Credit 6 Credit Relative Value Correlation with bond/credit market Negligible (<0.1) Low (0.3) Moderate (0.6) High (0.8) Moderate- High Low Liquidity High/ Daily Moderate/ Daily Moderate/ Weekly Moderate/ Weekly Low/ Monthly Low/ Quarterly Average Credit Rating AA BBB BBB BBB Sub-IG Sub-IG Investment Target (Gross) Cash + 5% Cash +3% Cash + 3% to 4% Cash + 3% to 4% Cash + 5% 10-15% Performance Fee Sometimes No No Sometimes Yes Yes Structure Typically UCITS Typically UCITS Typically UCITS Can be UCITS Non-UCITS Non-UCITS
  45. 45. Contractual Non-contractual LiquidIlliquid
  46. 46. Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate CTA Emerging Market Debt Distressed Debt Global Macro Absolute Return Bonds Senior CRE Debt Equity Long-Short Total Return Sub-IG Credit Relative Value Done / In Progress
  47. 47. Pension funds have long dated non-transferable liabilities. If there is such thing as an ‘illiquidity premium’, they are leaving return on the table by not allocating to illiquids. Assets which have a foot in both the hedging and growth camp can diversify a client’s hedge, reduce reliance on derivatives, and reduce collateral requirements.
  48. 48. 525 245 250 600 500 245 CRE Debt Distressed Debt Illiquid Corporate Debt Infrastructure Debt Total: £2.4bn Allocations to Illiquid Credit over 2013 (£m)
  49. 49. Contractual Non-contractual LiquidIlliquid
  50. 50. Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate CTA Emerging Market Debt Distressed Debt Global Macro Absolute Return Bonds Senior CRE Debt Equity Long-Short Total Return Sub-IG Credit Relative Value Done / In Progress
  51. 51. Reinsurance
  52. 52. Long Lease Real Estate
  53. 53. Manager Monitoring
  54. 54. Quarterly Semi-Annually Annually Desktop review, check news updates vs. RedRadar As quarterly, including face-to-face meeting / call with ‘ones to watch’ Full review of Preferred List, requiring IC sign- off Monitoring Preferred Manager Lists
  55. 55. People, business and strategy changes Prompt information about any material changes (both positive and negative) Quantitative reporting Monthly return data, net of fees, clearly labelled, in Excel format Bespoke position-based monitoring ISINs and notional values, clearly labelled, in Excel format Qualitative and Quantitative reports Bespoke analysis – e.g. return contribution, portfolio breakdown. Face to face meeting with investment team. Ongoing monitoring of preferred managers Quarterly, semi-annual and annual reviews
  56. 56. • Standardised reporting processes • Standardised preferred list maintenance and review process • Data collection process enhancements – data feeds • More efficient interaction with asset managers • More predictable workload both for Redington and for asset managers
  57. 57. Conclusion
  58. 58. Done / In Progress DGF Sterling Credit (IG) Infrastructure Debt Real Estate (Long Lease) Risk Parity Absolute Return Bonds Senior CRE Debt Reinsurance CTA Global Credit (IG) Distressed Debt Style Premia Total Return Sub-IG Senior Direct Lending Credit Relative Value To Do: Q3 2014 Global Macro High Yield / Loans Infrastructure Equity Long / Short Emerging Market Debt To Do: Q4 2014 Segregated LDI DM Equity ABS Structured Finance Private Equity Pooled LDI EM Equity Mezzanine Our “Direction of Travel”: Preferred List Prioritisation
  59. 59. How to Keep in Touch Specific client reporting-related: ClientXYZreporting@redington.co.uk Product information (not specifically client-related) fundreporting@redington.co.uk
  60. 60. Dos and Don’ts Do Don't Be proactive Product push Be selective Take a "Scatter gun" approach Be innovative Be unrealistic Be patient as we work through our preferred lists in 2014 Be shy about letting us know if there are products we should be making sure to include in these processes Read our website, blog & thought pieces to understand our investment philosophy Waste meeting time talking about why a particular asset class or strategy makes sense – we know! Send us highlights and "executive summaries" of new or innovative products Fill our mailbox with unsolicited multi- megabyte attachments Let us know when relevant PMs and key personnel are in town Expect us to be able to take every single meeting, especially at short notice Keep us in the loop with product and strategy ideas shared with our clients Spring new ideas on clients at Investment Committees without pre-warning us
  61. 61. How do We Stack Up? http://snurl.com/28mcjay
  62. 62. ©Redington Limited. All rights reserved. This contains confidential and proprietary information of Redington Limited (“Redington”) and is intended for the exclusive use of the party for whom it was produced by Redington. Redington accepts no responsibility for any consequences arising from any third party relying on this document or the opinions we have expressed. This document is not intended by Redington to form a basis of any decision of a third party to do or omit to do anything. Its content may not be modified, sold, supplied or otherwise provided , in whole or in part, to any other person or entity without Redington’s prior written permission. Information contained herein has been obtained from a variety of sources. While the information is believed to be reliable, this information carries no guarantee of accuracy or completeness and Redington makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for direct, indirect, consequential or incidental damages), for any error , omission or inaccuracy in the data supplied by any third party. The findings, ratings and/or opinions expressed herein are the intellectual property of Redington and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results. This does not contain regulated investment advice in respect of actions you should take. Registered Office: Austin Friars House, 2-6 Austin Friars, London EC2N 2HD. Redington Limited (reg no 6660006) is registered in England and Wales.

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