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Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
Repositioning Assets for Buyouts and Buy-ins
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Repositioning Assets for Buyouts and Buy-ins

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  • 1. Westminster and City 17 April 2013Repositioning Assets forBuyouts & Buy-ins fromGilts to InfrastructureRobert Gardner, Co-CEO of RedingtonWestminster and City1
  • 2. Westminster and City 17 April 2013Repositioning Assets for Buyouts and Buy-ins from Gilts to Infrastructure2The Seven Steps to Full Funding
  • 3. Westminster and City 17 April 2013Step 1 Description• A strategic Pension Risk Management Framework that sets out funding objectives, risk budgetand other constraints such as liquidity and collateral requirements• A Flight Plan that charts each plan’s path to full funding and generates required returns usedto set investment strategySetting Clear Goals and Objectives3
  • 4. Westminster and City 17 April 2013Objective Measurement Performance Indicators Performance (31 Jan 13) RAGPrimary FundingObjectiveTo reach full funding by [2026] (basedon discount rate of Gilts + 0.75%)Expected Returns (ER) > RequiredReturns (RR)RR: Libor + 300bpsER: Libor + 200bpsDifference: -100bpsSecondaryFunding ObjectiveTo reach full funding on a buyout basisby [2032] (based on a discount rate ofgilts flat)Expected Returns (ER) > RequiredReturns (RR)RR: Libor + 250bpsER: Libor + 200bpsDifference: -50bpsInvestmentStrategyActual Returns should exceedExpected ReturnsActual Returns (AR) > Expected Returns(ER)AR: Libor + xxxbpsER: Libor + 200bpsDifference: xxbpsRisk BudgetThe investment strategy should not riskthe deficit worsening by [20%] ofliabilities over a 1 year periodVaR95 < [20%] of liabilities VaR95: 28.0%Hedging StrategyNominal/Inflation hedge ratio should bemaintained within +/- 5% of the fundingratio.Funding Ratio (gilts + 0.75%) 60%Nominal Hedge Ratio (gilts + 0.75%) 20%Inflation Hedge Ratio (gilts + 0.75%) 25%CollateralMaintain sufficient eligible for thepurposes of covering margin calls thatmay arise from the Scheme’s currentderivative positions over a 1 yearperiod.Total available eligible collateral xx mnRemaining collateral after VaR95 event yy mnThe Pension Risk Management Framework4RAG Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away
  • 5. Westminster and City 17 April 20131,0001,5002,0002,5003,0003,5004,0002012201320132014201420152015201620172017201820182019202020202021202120222022202320242024202520252026£mmFlight Planliability (swapflat) asset(swapsflat)The Flight Plan5100% - Swaps Flat by 2026Required Returns Libor + 300bpsExpected Returns Libor + 200bpsContributions & Asset ReturnsLiability BasisTime Horizon
  • 6. Westminster and City 17 April 2013Access to LDI Hub6Step 2 Description• Interest rate and inflation risk are typically two of the largest “unrewarded risks” for apension scheme• Setting up an LDI hub which gives the scheme the ability to manage inflation and interestrate risk efficiently and effectively
  • 7. Westminster and City 17 April 2013Steps 3 – 6: Designing an Efficient Investment Strategy7StepLiquid α & β Semi-Liquid Credit Illiquid Credit Illiquid α & βEquities Corporate Bonds Infrastructure Debt Insurance-LinkedMulti AssetAsset BackedSecuritiesSocial Housing Debt Private EquityCommodities / CTA High Yield Direct SME Lending Infrastructure EquityCurrencies Leveraged Loans Mezzanine Finance Unlisted PropertyLiquid Hedge FundsEmerging MarketDebtDistressed DebtHedge Funds withLock-UpsCommercial RealEstate DebtLong Leases /Ground Rents
  • 8. Westminster and City 17 April 2013Asset Class Universe: Results of Manager Survey8Distressed DebtMulti AssetLong LeasesGround RentsHigh YieldPrivate EquityEM DebtSME Lending CurrenciesEM EquitySocial HousingInfrastructure EquityMezz DebtLev LoansILSCTAABSDeveloped EquityCorporate BondsInfra DebtCRE DebtUnlisted Property-5-4-3-2-1012345-5 -4 -3 -2 -1 0 1 2 3 4 5PredictableIlliquid LiquidUnpredictable
  • 9. Westminster and City 17 April 2013Credit as a Core Building Block for Flight Planning9
  • 10. Westminster and City 17 April 2013Repositioning Assets: Steps 4, 5 and 610
  • 11. Westminster and City 17 April 2013Liquid & Semi-Liquid Credit StrategiesStep 4 Description• Credit consists of a range of sub-classes with different risk-return characteristics• Bulk of excess returns are compensation for credit riskEmerging Market DebtInvestment Grade11
  • 12. Westminster and City 17 April 2013Liquid & Semi-Liquid Credit Strategies12LLHYEMDIGSFABSLLHYEMDIGSFABS01002003004005006000 100 200 300 400 500 600GBPCreditSpreadoverSwaps(bps)Credit Spread VaR 95 (bps)Leveraged Loans High Yield Investment Grade Sub Financials ABS Emerging Market DebtQ1 2007Q4 2012Equity expectedreturn: 300bpsover swapsSources: Babson Capital, Redington 25
  • 13. Westminster and City 17 April 2013Illiquid Credit Strategies13Step 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 overallobjectives of pension schemes when assessed in the context of a scheme’s PRMF• Careful consideration should be placed on ensuring the scheme invests in opportunitiesproviding the best risk-adjusted returns and offers better relative-valueSecured Leases Social HousingInfrastructure Ground Rents
  • 14. Westminster and City 17 April 2013Illiquid Alpha & Beta Strategies14fdStep 6 Description• Assets under this category provide attractive returns but are typically more complex andilliquid e.g. private equity and PFI equity• Inclusion of these asset classes in the scheme’s investments will depend on the overallobjectives and governance budget of the scheme as set out in its PRMF• Examples: Private Equity, Property, Insurance Linked SecuritiesInsurance-Linked Securities
  • 15. Westminster and City 17 April 2013Step 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 thatyou 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 caneasily assess investment opportunities via-à-vis the liabilitiesOngoing MonitoringTrack scheme’s progress towards clear goals and objectives15
  • 16. Westminster and City 17 April 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.uk16Disclaimer 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.Risk Management Firmof the Year (2011, 2012)Pension Consultant of theYear 2012http://twitter.com/robertjgardnerhttp://uk.linkedin.com/in/robertjgardner

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