Redington13-15 Mallow StreetLondon EC1Y 8RDT. 020 7250 3416www.redington.co.ukPutting It All TogetherRobert Gardner30 August 20121
The Pensions Risk Management Framework (PRMF)Objective Performance Indicators Actual PerformanceFunding StrategyTo reach full funding by2020Funding ratio on IAS19 basis 85%Funding ratio on Gilts Flat basis 70%Expected returns inexcess of requiredreturnsExpected returns from currentinvestment strategyGilts + 300bpsRisk target1-year 1-in-20 minimumworst-case loss shouldnot exceed 15% ofliabilities1-year 95% Value-at-Risk >%Aspirational targetTo be fully inflation andinterest rate hedgedNominal hedge ratio <%Inflation hedge ratio <%Scheme constraintLiquidity & collateralrequirementsLiquidity: cash held sufficient to pay twomonths of benefits£50mCollateral: available eligible collateralsufficient to meet potential collateralcalls on derivative positions>£500mSource: Redington.
Credit Spread and Gilt Yield Evolution-1000100200300400500600bps20-Year Gilt Real Yield Sterling IG 15+ Corporate Spread IG Spread + Real YieldSource: Redington; Bloomberg, Bank of America Merrill Lynch.
The Fixed Income UniverseNumbers refer to the approximate size ofeach investment universe ($trn).Source: Redington; Barclays (IG, ABS); iBoxx (Subfins); Babson Capital (High Yield, Lev Loans, CLOs); Bluebay Asset Management, Stone Harbor Investment Partners (EM).
• Credit Spread VaR is calculated using monthly data under a lognormal assumption with 95%confidence.• Leveraged Loans Index is the Credit Suisse Leveraged Loans Index.• High Yield Index is the Merrill Lynch Global High Yield Index.• Investment Grade index is the Merrill Lynch Sterling Corp & Collateralised All Stocks ex SubIndex.• Emerging Market Debt index is the Merrill Lynch Emerging Markets Plus Index.• Sub-Financials index is a custom Merrill Lynch Index including Tier 1, Upper Tier 2 and LowerTier 2 instruments.• ABS index is Merrill Lynch Sterling ABS/MBS Index.The Case for Unconstrained Fixed Income: 31/12/2006
The Case for Unconstrained Fixed Income: 2006-2012
The Case for Unconstrained Fixed Income: 31/07/2012
ImplementationSource: Redington; Barclays (IG, ABS); iBoxx (Subfins); Babson Capital (High Yield, Lev Loans, CLOs); Bluebay Asset Management, Stone Harbor Investment Partners (EM).
Interest Rate CycleCredit Spread Cycle• Diversify from other risk exposures• Absolute return strategies may be uncorrelated with equity or bond portfolios• Low risk strategy but higher returns than a cash fund• Advantage of the wide universe of funds is that a fund can be chosen to meet the specific riskappetite of any client• Access manager alpha• But in a more accountable, affordable and transparent structure than investing in a hedge fundAbsolute Return Fixed IncomeSource: Redington
Conclusion: Expanding the ToolkitSource: Redington; Barclays (IG, ABS); iBoxx (Subfins); Babson Capital (High Yield, Lev Loans, CLOs); Bluebay Asset Management, Stone Harbor Investment Partners (EM).