10th November 2008The Art of Risk ManagementRedington Lens Technology
2Redington Lens TechnologyContentsMarket Risk Factors 3Non-Market Risk Factors 10Planning the Long Term Flight Plan 14Anal...
3Market Risk Factors
Bank Country Date StatusFannie Mae USA 07 Sep NationalisedFreddie Mac USA 07 Sep NationalisedLehman Bros USA 15 Sep Collap...
5Market SnapshotBreakeven 30 Year Inflation (last 5yrs)Source: Bloomberg / Redington
6Market SnapshotHistorical 30 Year Interest Rate SwapSource: Bloomberg / Redington
7Market SnapshotReal Yield on 1.125% 2037 Index-Linked GiltSource: Bloomberg / Redington
8Market SnapshotHistorical Credit SpreadsSource: Bloomberg / Redington
9Market SnapshotHistorical FTSE 100 PerformanceSource: Bloomberg / Redington
10Non-Market Risk Factors
Non Market Factors• Changing Accounting Standards:• FRS17;• IAS19.• Pension Protection Fund:• Risk Based Levy.• Changing R...
The risk that a specific population will live longer than anticipated (Blake et al, 2006).Facts• Life expectancy is increa...
13KIPPERS - Who is… What is… Generation Y?Source: KPMGNon-Market FactorsThe Longer Term Issue
14Planning the Long Term Flight Plan
Minimum Funding LevelCone of UncertaintyCone of UncertaintyFRS 17/IAS 19BUYOUT S75Cone of Uncertainty15Destination “Fully ...
Analysing the Pension Scheme* The intention of this material is simply to illustrate the type of analysis that can and sho...
VaRDoes notcapture “BlackSwan” eventsUnder-estimates “FatTails”InconsistentresultsIgnores CreditDefault Risk“BackwardLooki...
Redington Lens TechnologyRisk AttributionRisk Attribution Analysis18
Analysing the Pension Scheme* The intention of this material is simply to illustrate the type of analysis that can and sho...
Redington Lens TechnologyPresent Value by Bases and Member Type20
Redington Lens TechnologySensitivity Analysis (PV01) (Delta Ladders)Inflation PV01 (Current)Interest Rate PV01 (Current)In...
Convexity Chart (Current)Redington Lens TechnologyKite ChartsConvexity Chart (100% Hedged)22
Credit Exposure by ManagerRedington Lens TechnologyCredit Portfolio Analysis23Credit Exposure by SectorCredit Exposure by ...
24Longevity RiskDeterministic Projections
25Longevity RiskMarginal Impact of Longevity on an ALM Basis
* The intention of this material is simply to illustrate the type of analysis that can and should, in our view, be carried...
Stress Testing• The purpose of stress testing is to determine how a fund performs in extreme market conditions. Thisis ach...
Single Risk Factor Stress TestingRedington Lens TechnologyStress Testing28
* The intention of this material is simply to illustrate the type of analysis that can and should, in our view, be carried...
30Achieving Risk Adjusted ReturnHedging Risk – VaR Road Map
Excess ReturnRisk (VaR95)Return + AlternativesRARoC + Alternatives= Risk Adjusted Return____________31Achieving Risk Adjus...
32Markets Can Remain Irrational …
33Source: BloombergTough DecisionsBreakeven 30 Year Inflation (last 5 years) (Up, up and away)
34Historical Performance of Brent CrudeToo expensive?Application of Risk ManagementCase Study
35To our dear customers,When our inaugural flight took off in January 2007, we pledged to change the face of air travel. Y...
36“Southwest owns long-term contracts to buy most of its fuel through 2009 forwhat it would cost if oil were $51 a barrel....
ContactsDawid Konotey-Ahulu | Partner Direct: +44 (0) 207 250 3415dawid@redingtonpartners.comRobert Gardner | Partner Dire...
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Transcript of "The Art of Risk Management- Redington Lens Technology"

  1. 1. 10th November 2008The Art of Risk ManagementRedington Lens Technology
  2. 2. 2Redington Lens TechnologyContentsMarket Risk Factors 3Non-Market Risk Factors 10Planning the Long Term Flight Plan 14Analysing the Pension Scheme – Through the Lenses 16Portfolio Optimisation 29Markets Can Remain Irrational… 32
  3. 3. 3Market Risk Factors
  4. 4. Bank Country Date StatusFannie Mae USA 07 Sep NationalisedFreddie Mac USA 07 Sep NationalisedLehman Bros USA 15 Sep CollapsedMerrill Lynch USA 15 Sep Taken overAIG USA 16 Sep Part-nationalisedHBOS UK 17 Sep Taken overWaMu USA 25 Sep Collapsed and soldFortis Netherland 28 Sep NationalisedBradford & Bingley UK 29 Sep NationalisedWachovia UK 29 Sep Taken overGlitnir Iceland 29 Sep NationalisedHypo Real Estate Germany 06 Oct Rescue packageRBS UK 13 Oct Part-nationalisedLloyds TSB UK 13 Oct Part-nationalisedSep 2008 Oct 20084Source: BBC News WebsiteImpacts of the Global Financial Crisis• Volatile markets;• Severe lack of liquidity;• Declining asset values.Market SnapshotFinancial CrisisMarket Performance1 September 2008 to 31October 2008UK (FTSE 100) -22% (1,225 points)US (S&P 500) -24% (314 points)Japan (Nikkei 225) -33% (4,257 points)Europe(DJ Euro Stoxx 50)-23% (773 points)
  5. 5. 5Market SnapshotBreakeven 30 Year Inflation (last 5yrs)Source: Bloomberg / Redington
  6. 6. 6Market SnapshotHistorical 30 Year Interest Rate SwapSource: Bloomberg / Redington
  7. 7. 7Market SnapshotReal Yield on 1.125% 2037 Index-Linked GiltSource: Bloomberg / Redington
  8. 8. 8Market SnapshotHistorical Credit SpreadsSource: Bloomberg / Redington
  9. 9. 9Market SnapshotHistorical FTSE 100 PerformanceSource: Bloomberg / Redington
  10. 10. 10Non-Market Risk Factors
  11. 11. Non Market Factors• Changing Accounting Standards:• FRS17;• IAS19.• Pension Protection Fund:• Risk Based Levy.• Changing Regulation:• The Pensions Regulator;• Financial Services Authority;• European Federation of Retirement Provision;• International Organisation of Pension Supervisors;• Rating Agencies.11Non-Market FactorsFactors Driving Behavioural Change
  12. 12. The risk that a specific population will live longer than anticipated (Blake et al, 2006).Facts• Life expectancy is increasing 5 hours a day;.• The most frequently used life expectancy byFTSE100 DB pension schemes for a 65 yr oldman is 20 years;• The Pension Protection Fund (PPF)’s latestS143 and S179 valuation assumptions set lifeexpectancy for a 65yr old man as 22 years;• “If the life expectancy for a male currentlyaged 60 is understated by two years,depending on the assumptions adopted, thiscould understate the value of his pension byaround 5%.”The Purple Book (2007).Longevity Risk05101520251920 1940 1960 1980 2000LifeExpectancyIncrease in Life Expectancy65 year old in England & WalesMale Female12Non-Market FactorsImpact of Other Factors
  13. 13. 13KIPPERS - Who is… What is… Generation Y?Source: KPMGNon-Market FactorsThe Longer Term Issue
  14. 14. 14Planning the Long Term Flight Plan
  15. 15. Minimum Funding LevelCone of UncertaintyCone of UncertaintyFRS 17/IAS 19BUYOUT S75Cone of Uncertainty15Destination “Fully Funded”Flight Plan
  16. 16. Analysing the Pension Scheme* The intention of this material is simply to illustrate the type of analysis that can and should, in our view, be carried out in order to helpformulate a clear strategy for funding, risk management and asset allocation. You should not rely upon any calculations or numbers as correct.They are obtained from limited publicly available information and are for illustration purposes only.16Risk Telescope Sensitivity Microscope Scenario Kaleidoscope
  17. 17. VaRDoes notcapture “BlackSwan” eventsUnder-estimates “FatTails”InconsistentresultsIgnores CreditDefault Risk“BackwardLooking”IlliquidityReduces riskto a singlenumber17Redington Lens TechnologyUnderstanding the Limitations of VaR
  18. 18. Redington Lens TechnologyRisk AttributionRisk Attribution Analysis18
  19. 19. Analysing the Pension Scheme* The intention of this material is simply to illustrate the type of analysis that can and should, in our view, be carried out in order to helpformulate a clear strategy for funding, risk management and asset allocation. You should not rely upon any calculations or numbers as correct.They are obtained from limited publicly available information and are for illustration purposes only.19Sensitivity MicroscopeRisk Telescope Scenario Kaleidoscope
  20. 20. Redington Lens TechnologyPresent Value by Bases and Member Type20
  21. 21. Redington Lens TechnologySensitivity Analysis (PV01) (Delta Ladders)Inflation PV01 (Current)Interest Rate PV01 (Current)Inflation PV01 (100% Hedged)Interest Rate PV01 (100% Hedged)21
  22. 22. Convexity Chart (Current)Redington Lens TechnologyKite ChartsConvexity Chart (100% Hedged)22
  23. 23. Credit Exposure by ManagerRedington Lens TechnologyCredit Portfolio Analysis23Credit Exposure by SectorCredit Exposure by Maturity Credit Exposure by Rating
  24. 24. 24Longevity RiskDeterministic Projections
  25. 25. 25Longevity RiskMarginal Impact of Longevity on an ALM Basis
  26. 26. * The intention of this material is simply to illustrate the type of analysis that can and should, in our view, be carried out in order to help formulate aclear strategy for funding, risk management and asset allocation. You should not rely upon any calculations or numbers as correct.They are obtained from limited publicly available information and are for illustration purposes only.Analysing the Pension Scheme26Sensitivity MicroscopeRisk Telescope Scenario Kaleidoscope
  27. 27. Stress Testing• The purpose of stress testing is to determine how a fund performs in extreme market conditions. Thisis achieved by simulating market moves during a period of high market volatility.Redington Lens TechnologyStress Testing27In January 2006equities increasedand real yieldsdecreasedsignificantly.The stress testingshows howunhedged schemeslost all the gain inequities because ofthe increase inliabilities (whichresulted from thedecrease in realyields). Hedgedschemes capturedthe former andwere protectedagainst the latter.
  28. 28. Single Risk Factor Stress TestingRedington Lens TechnologyStress Testing28
  29. 29. * The intention of this material is simply to illustrate the type of analysis that can and should, in our view, be carried out in order to helpformulate a clear strategy for funding, risk management and asset allocation. You should not rely upon any calculations or numbers as correct.They are obtained from limited publicly available information and are for illustration purposes only.Portfolio OptimisationRisk Adjusted Return & Strategy Analysis29
  30. 30. 30Achieving Risk Adjusted ReturnHedging Risk – VaR Road Map
  31. 31. Excess ReturnRisk (VaR95)Return + AlternativesRARoC + Alternatives= Risk Adjusted Return____________31Achieving Risk Adjusted ReturnHedging Risk and Re-Allocating Some Assets
  32. 32. 32Markets Can Remain Irrational …
  33. 33. 33Source: BloombergTough DecisionsBreakeven 30 Year Inflation (last 5 years) (Up, up and away)
  34. 34. 34Historical Performance of Brent CrudeToo expensive?Application of Risk ManagementCase Study
  35. 35. 35To our dear customers,When our inaugural flight took off in January 2007, we pledged to change the face of air travel. Yourappreciation of our unique values and your belief in our product has allowed us to achieve this.Your belief in us was shared by our investors - but regrettably, due to unforeseen circumstances, they wereunable to unlock the finance that we needed. As a result, we are very sad to announce that from 30 May 2008,we will cease operations and we are no longer able to honour flight reservations.We extend our sincerest apologies to those of you who have travel plans with Silverjet in the future and atpresent. You are advised to seek alternative travel arrangements with other carriers, and contact your creditcard company or travel agent directly for information on obtaining refunds.We are working actively with new investors who are prepared to inject new funds so we can recommenceoperations. If we are able to achieve this, we will make an announcement as soon as possible and we hope tobe able to bring you our very sivilised flying experience again.Thank you for your support - it has meant everything.Yours sincerely,Lawrence Hunt, CEOApplication of Risk ManagementCase Study
  36. 36. 36“Southwest owns long-term contracts to buy most of its fuel through 2009 forwhat it would cost if oil were $51 a barrel. The value of those hedges soaredas oil raced above $90 a barrel, and they are now worth more than $2 billion.”Source: The New York Times, 27 November 2007Application of Risk ManagementCase Study
  37. 37. ContactsDawid Konotey-Ahulu | Partner Direct: +44 (0) 207 250 3415dawid@redingtonpartners.comRobert Gardner | Partner Direct: +44 (0) 207 250 3416robert.gardner@redingtonpartners.comRedington Partners LLP13 -15 Mallow Street London EC1Y 8RDTelephone: +44 (0) 207 250 3331www.redingtonpartners.comTHE DESTINATION FOR ASSET & LIABILITY MANAGEMENTContactsDisclaimerDisclaimer For professional investors only. Not suitable for private customers.The information herein was obtained from various sources. We do not guarantee every aspect of its accuracy. The information is for your private information and is for discussionpurposes only. A variety of market factors and assumptions may affect this analysis, and this analysis does not reflect all possible loss scenarios. There is no certainty that theparameters and assumptions used in this analysis can be duplicated with actual trades. Any historical exchange rates, interest rates or other reference rates or prices which appearabove are not necessarily indicative of future exchange rates, interest rates, or other reference rates or prices. Neither the information, recommendations or opinions expressedherein constitutes an offer to buy or sell any securities, futures, options, or investment products on your behalf. Unless otherwise stated, any pricing information in this message isindicative only, is subject to change and is not an offer to transact. Where relevant, the price quoted is exclusive of tax and delivery costs. Any reference to the terms of executedtransactions should be treated as preliminary and subject to further due diligence .Please note, the accurate calculation of the liability profile used as the basis for implementing any capital markets transactions is the sole responsibility of the Trustees actuarialadvisors. Redington Partners will estimate the liabilities if required but will not be held responsible for any loss or damage howsoever sustained as a result of inaccuracies in thatestimation. Additionally, the client recognizes that Redington Partners does not owe any party a duty of care in this respect.Redington Partners are investment consultants regulated by the Financial Services Authority. We do not advise on all implications of the transactions described herein. Thisinformation is for discussion purposes and prior to undertaking any trade, you should also discuss with your professional tax, accounting and / or other relevant advisers howsuch particular trade(s) affect you. All analysis (whether in respect of tax, accounting, law or of any other nature), should be treated as illustrative only and not relied upon asaccurate.37

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