07233_Insto Newsletter_V5


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07233_Insto Newsletter_V5

  1. 1. For professional investors only Issue 3 – Spring 2007 Investing Plus Insight: Welcome to the latest edition of Investing Plus, JPMorgan Asset Management’s regular newsletter updating you on key industry developments and the latest news from within JPMorgan Asset Management. In our third issue we take a look at three Next, we explain the benefits of adding a total of 30 new mandates won and areas of particular interest at the moment infrastructure exposure to your portfolio, 21 significant additional fundings made for institutional investors – liability showing how it can provide substantial by UK clients. One of the most gratifying driven investing, infrastructure diversification benefits and access to aspects of this success is that we are investments and total return strategies. another source of potentially strong winning mandates across a broad returns for institutional investors. Finally, spectrum of strongly performing Firstly, Simon Chinnery, one of our most with new and innovative strategies products, which is a great endorsement experienced client advisers, tells us why continuing to appear on the investment of our breadth and depth of expertise. LDI offers solutions to funding problems scene, Karen Roberton, Head of Defined Inside, you’ll see how client service has for defined benefit pension schemes, Contribution, tells us why total return contributed to our success with the although some doubts have been raised strategies should play a key role in recent launch of our new and improved over its effectiveness. Simon shows how DC investing. institutional website. LDI is serving an important purpose in linking asset performance more closely to I am also happy to have the opportunity I hope you enjoy this latest edition of the actual liabilities of a scheme, rather to keep you up to date with our Investing Plus. than against a stock market index or institutional business, which continues to against a peer group average. go from strength to strength. Following strong performance in 2005, 2006 was Peter Ball, another especially good year for us, with Head of UK Institutional Business Better insight + Better process = Better results
  2. 2. 2 | Investing Plus Spring 2007 Better insight + Better process = Better results Liability Driven Investing: LDI remains on the table After a flourish of publicity in recent years, what do trustees make of LDI now? Is it a fad whose brief time in the spotlight has been and gone? Is it time for defined benefit pension schemes to return to more ‘fundamental’ issues? Or can LDI genuinely play a part in the survival of the defined benefit pension scheme? Simon Chinnery, institutional client adviser at JPMorgan Asset Management, looks at the issues as they currently stand surrounding LDI and its effectiveness. Choosing the right definition of LDI LDI can embrace these definitions and This interest in liability matching has been perhaps many more. The biggest driven largely by the introduction of the challenge that trustees have is ensuring FRS 17 accounting standard as well as the they are offered the approach that is most funding regulation from the Pension Act acceptable to them. which are encouraging schemes to bring their assets closer in nature to their Critics are right, though, to point out that liabilities to reduce funding volatility. LDI can never be a cure-all – and should never be marketed as such. Like any For many people this is where the big investment strategy, it involves a constant problem lies with LDI: by encouraging trade-off between competing priorities. schemes to reduce deficit volatility by making their assets more ‘bond-like’, they However, every pension fund’s situation Simon Chinnery are in danger of losing out on the growth is different so every LDI solution needs to Institutional Client Adviser potential they need to fund the pension be flexible enough to reflect what is most promise over the long term. important to the scheme at any given Take-up of LDI in the UK point in time, given its funding position, Figures certainly suggest that a growing But the big flaw with criticising LDI is the its cashflow requirements, the available proportion of UK pension schemes are assumption that it means the same thing to resources of the sponsor – and the looking to match their assets more closely all people. Actually, liability-driven investing investment expertise that the trustees have to their liabilities. In our own JPMorgan embraces a vast range of activities from at their disposal. Liability Driven Investment Survey last pure cashflow matching (the most fiercely year, 31% of UK defined benefit schemes criticised approach) to implementing a A balance of risk management surveyed say they were considering a swaps strategy to reduce inflation/interest- But can LDI be instrumental in the liability-driven approach to managing rate risk, to introducing a cash- survival of DB schemes? The experience their assets, although only 16% of benchmarked total return approach to of WH Smith suggests not, but the respondent schemes had so far generate excess return without increasing adoption of de-risking LDI strategies implemented a specific strategy. funding volatility. Moreover, only 13% of schemes we The table below shows how UK pension surveyed believed LDI to be a transient schemes are choosing to define LDI. fashion. Among the vast majority of schemes canvassed, LDI was seen as an Which of the following most closely matches your definition of liability-driven investing? essential means of managing investment Conduct and apply an asset liability modelling study 7% risk. One in four schemes believed that Using cashflow matching strategies 22% LDI would be adopted by between 50- Using derivatives to match liabilities and LIBOR as the benchmark for assets 9% 75% of their peers by 2011. Using liabilities as the benchmark for the management of scheme assets 53% Managing a funding deficit over a short to long-term basis 9% Responses of UK defined benefit pension schemes Source: JPMorgan Liability Driven Investment Survey 2006
  3. 3. 3 | Investing Plus Spring 2007 Better insight + Better process = Better results by blue-chip names such as BAA, Granted, the market sell-off since then Although LDI on its own cannot assure J Sainsbury and Friends Provident has reclaimed a little of this progress the survival of defined benefit pensions, suggests LDI is becoming an effective (and, therefore, reinforced the benefits of we believe that the better risk management bargaining chip when persuading sponsors the multi-asset, total-return approach it offers will allow many sponsors to keep and shareholders to keep a scheme open. that is integrated into many LDI their schemes open for longer. Moreover, solutions) but it’s a powerful reminder of LDI providers are working hard to deliver It is true that the thorny issue of just what an appropriate growth-focused solutions that do not mean sacrificing longevity is unlikely to be addressed investment strategy can achieve for a substantial growth potential. perfectly by LDI providers in the short pension scheme when market conditions term (although investment banks are are right. LDI will – like any investment approach intently looking for a means to securitise – always be a series of compromises. mortality risks). People question as well the interest rate But it is possible to de-risk a pension swaps – which are a key component of scheme to an effective degree, while still Because of this, liability-driven investing LDI solutions – as being too expensive. achieving strong asset growth to help can only be one part of the solution to This is not the case. Buying a long term tackle unknowns such as longevity and helping DB schemes survive. Additional bond costs no more in brokerage fee as salary inflation. contributions by the sponsor or even by buying a swap for the same duration. members are likely to remain a fact of life In addition, swaps offer a yield pick Getting the message across for DB schemes. up compared to gilts (currently 30bp Whether or not you think LDI is set for per year). widespread adoption in the UK, one But just because there are risks that a thing cannot be denied – the wisdom of scheme can’t wholly control through its Lastly through FRS 17, liabilities are linking asset performance more closely investment strategy (i.e. longevity risk) discounted with AA rates, which behave to the actual liabilities of a scheme, rather doesn’t mean a scheme shouldn’t address more like swaps’ rates than gilts, hence than against a stock market index or (an those risks that can be managed using swaps rather than traditional gilts even more arcane concept) against peer reasonably effectively (i.e. interest-rate can reduce the overall volatility of schemes. group. If the aggressive marketing of LDI and inflation risk). solutions has only made trustees aware Future adoption of LDI of this one important aspect – then it has What pension schemes must be careful In short, liability-driven investing is served some purpose. of is managing these risks at the expense still on course to become a mainstream of allowing the pension scheme the scope activity among defined benefit pension * Engaged Investor, 1 March 2007. to continue to grow. If there is one ray of schemes. We strongly believe that within hope for defined benefit schemes it’s the the next five years, 50 to 75% of DB fact that growth in equities markets have schemes (both closed and open) will To request a copy of the JPMorgan helped deficits among the UK’s 200 benchmark their risks and their Liability-Driven Survey, please largest pension schemes to halve over the investment strategy primarily against contact Sue Hale on 020 7742 5518 year to end-February 2007 to £45 billion, their liabilities. or at susan.a.hale@jpmorgan.com according to AON Consulting*. Alternatively contact your usual JPMorgan Asset Management representative.
  4. 4. 4 | Investing Plus Spring 2007 Better insight + Better process = Better results Infrastructure – the next asset class Infrastructure investing allows investors to benefit from the construction and operation of a wide array of facilities that provide an essential service, such as transportation (roads, airports, pipelines) or utilities (water, gas, electricity). Here, Peter Ball, explains the compelling investment opportunities created by ‘user-paid infrastructure’ projects. User-paid infrastructure has federal and state authorities are particularly strong potential increasingly using Public-Private Although social infrastructure is attracting Partnerships (PPPs). significant investor interest in Europe through the Private Finance Initiative PPPs are contractual agreements between framework, it may not offer the same a public agency and a private sector return potential as user-paid infrastructure. entity that allow greater private sector This is because social infrastructure participation in project delivery and projects have comparatively shorter-term service provision. Currently the pipeline operating spans and limited room for of US PPP projects is thought to be over efficiency gains. US $100bn*. Peter Ball Head of UK Institutional Business Within user-paid infrastructure there are Infrastructure activity in Europe has also a number of “Core” sectors, such as toll picked up significantly in recent years, Infrastructure investing allows investors roads, airports, gas pipelines and electric with the total transaction value of projects, to benefit from the construction and transmission lines, whose attributes have both equity and debt, standing at around operation of a wide array of facilities a major impact on the way they are 140bn. However, because Europe has that provide an essential service, such as operated and financed. These ‘Core’ a long record of privatising toll roads, transportation (roads, airports, pipelines) attributes include: airports and telecommunication networks, or utilities (water, gas, electricity). privatisation opportunities may be more • Capital-intensive assets with limited than in the US. The focus of this article is on the long service lives; investment opportunities created by • Essential service provision; Instead, established regulatory frameworks ‘user-paid infrastructure’ projects, which and market acceptance create opportunities include facilities that involve an explicit • Very high economies of scale for massive acquisitions, such as last resulting in natural monopolies; payment by the user. For example, highway years’ £11.4bn acquisition of BAA Plc by tolls, landing fees or utility tariffs. • Fairly low operating risks; a consortium led by Grupo Ferrovial. • Low usage risk and low elasticity There are, however, infrastructure of demand; Investment considerations investment opportunities in other areas, • Predictable revenues based on Regulation such as “social infrastructure” projects, stable usage. Facilities such as ports, airports, toll roads, which are generally provided by the railroads and transmission lines are similar government and do not involve explicit PPPs and acquisitions driving returns to public utilities in that they provide an user fees. Social infrastructure investments Some particularly strong user-paid essential service, face little competition include public hospitals, prisons and infrastructure opportunities are currently and have certain monopolistic attributes. shadow toll roads. to be found in the US, where faced with For these reasons, some are regulated just the prospect of diminishing resources for like utilities and, as a result, their return roadway investment, and encouraged by magnitude is similar to a regulated utility visible support from elected officials and with a significant component of cash yield. global interest by investors and operators,
  5. 5. 5 | Investing Plus Spring 2007 Better insight + Better process = Better results Efficiency gains Investors should look for Furthermore, although risks are not as Infrastructure entities generally match good regulatory frameworks in high for mature facilities as for green field the long service lives of their productive developed markets ones, they are still present in the rate- assets to long-term financing instruments, Because many, if not most, of these setting process of regulated entities such such as long-dated debt and “patient” infrastructure facilities are subject to some as transmission lines, pipelines and some equity. Among publicly traded companies, measure of rate regulation and expect airports. Because the result of the exercise utility stocks have traditionally been the government regulator to preserve is a fee per unit (passenger, kW, etc) there the staple of investors seeking long-term their economic balance to some degree, may be a variance between forecast stability and a steady income. The added even in the case of termination, revenues and what is actually achieved. benefit to private investors is the additional a reasonably established regulatory return potential resulting from significant framework is essential. Conclusion efficiency gains. We expect a continuing strong demand Closely related to regulation is the need for private investment in infrastructure Inflation hedge for a stable legal system to address projects due to the limited government Current yield is typically a significant regulation failures and assure a fair resources provided to them. In addition, component of infrastructure’s total return, representation of the rights of all parties a multitude of concession opportunities which makes this asset class similar to project documents. Project experience are expected in the US in the wake of to fixed income investments. However, of the past decade is rich with examples several recent successful transactions. unlike typical fixed-income instruments, from emerging markets such as India, infrastructure offers a hedge against Indonesia, Brazil, etc. that highlight the Infrastructure segments which we’ve inflation. For example, many of the circumstances impeding stable income defined as Core have historically generated public agencies operating utility and flows to project sponsors. moderate, but stable returns with a transportation assets have an independent significant current yield component. authority to adjust user fees for inflation Risks of investing in Infrastructure Their ability to deliver stable returns, and to pass through changes in certain Infrastructure assets usually have one along with their low correlation with operating costs such as fuel. Also, recent specialised use and don’t easily lend other asset classes observed to date, toll road concessions in the US allow toll themselves to conversion for alternative provide a basis for recommending that escalation to compensate for inflation. use. Therefore, depending on the point investors consider making some space in the market cycle, it may be difficult available within their portfolios for Diversification benefits to liquidate an investment at an infrastructure investments. Like property, infrastructure is an asset acceptable price. class with low correlation with other *Source: JPMorgan Asset Management. asset classes. This suggests that a Regulation is also central to the operation portfolio can reap diversification benefits of many infrastructure assets. For a from allocating a certain portion of it utility-type entity, regulation directly to infrastructure. determines its financial performance through the rate making process and To learn more about this compelling matters of corporate governance. Overly asset class, please contact your restrictive or unpredictable regulation can usual JPMorgan Asset Management severely undermine investment potential. representative.
  6. 6. 6 | Investing Plus Spring 2007 Better insight + Better process = Better results Putting total return at the heart of DC investing scheme trustees, there is a new option consistently positive returns by measuring emerging that can provide a one-stop themselves against a cash benchmark solution to these default fund concerns. rather than a stock market index. Typically This solution comes in the form of a new the cash benchmark is one-month LIBOR breed of investment funds known as ‘total – the one-month rate of interest at which return funds’, which offer a very close fit banks lend to one another and a common with the expectations and needs of the proxy for bank base rates. vast majority of DC scheme members. Furthermore, total return strategies can Total return funds will typically have be used successfully to meet the needs of an objective to outperform their cash a wide range of DC members at different benchmark by a certain amount each year Karen Roberton stages in their life. Karen Roberton, Head – this can range from 1% p.a. to 6-7% p.a. Head of DC Services of DC Services provides an insight into the merits of Total Return investing. To outperform cash, a total return fund Defined contribution pension schemes has to take some additional risk and are set to see huge growth in assets under What do we mean by total return? therefore still has the potential to fall in management as they become the main ‘Total return’ refers to long-only value. To address this potential for loss, source of occupational retirement investment strategies that aim to deliver a total return fund will usually specify a provision in the UK. Figures show that the vast majority of DC contributions Total return – a better fit for DC member objectives go into a scheme’s ‘default’ investment option. However, this option may Total return Typical default be costly in the long run for scheme Simple objective X members because the funds offered as default can often be unsuited to their Low absolute risk X investment needs. Growth potential Therefore, DC schemes need to focus Explicit time/reward target X more attention to the type of fund that For further information about our DC Total Return Funds and our complete life fund range, is offered by schemes as their default please contact your usual JPMorgan Asset Management representative or visit our dedicated DC website investment option. Fortunately for at www.jpmorgan.com/assetmanagement/pensions News in brief NAPF Annual Conference and Exhibition 2007 We will be exhibiting at the NAPF exhibition on 24-25 May 2007 at Manchester Central. We look forward to welcoming those attending the conference to our stand where JPMorgan representatives from Asset Management, Worldwide Securities Services, Transition Management and the Investment Bank will be available. UK Pensions Awards 2007 JPMorgan Asset Management have recently been short-listed in the UK Pensions Awards, to be held on 24 April, in the following categories: Currency Manager of the Year and Alternative Investment Manager of the Year. JPMorgan Asset Management expertise recognised in latest Citywire rankings Austin Forey, senior fund manager within our Global Emerging Markets team has been ranked as No. 1 Fund Manager in Citywire’s Global Emerging Markets Sector, and No. 6 in the Citywire Top 100 Fund Managers 2007. In addition, Georgina Brittain and Mark David, two of our most experienced fund managers within our UK Small Cap team are ranked joint No. 2 in the Top 100. JPMorgan Asset Management has eight rated fund managers (over 1 and 3 years) and more AAA rated fund managers than any other asset management group.
  7. 7. 7 | Investing Plus Spring 2007 Better insight + Better process = Better results The new JPMorgan Asset Management UK Institutional website: Access all areas JPMorgan Asset Management has always been recognised for its expertise and innovative solutions. And now, you can get access to more of it online through our enhanced website www.jpmorganassetmanagement.co.uk /institutional certain time horizon over which its target It is vital that the asset management annualised return can be achieved. The sector therefore finds a core investment In addition to our brand new interactive higher the fund’s target excess return option that is more closely aligned with factsheets and daily fund prices at the Fund above cash, the longer the specified time the needs and expectations of members Centre you can also: that investors must be prepared to invest. than traditional ‘relative return’ investment • Get instant access to our weekly stock options that have been ‘inherited’ from market review and a fresh perspective on How total return funds achieve the defined benefit market. We believe the global economy from our top global their target that total return funds offer a far better fit strategists in Commentary and Analysis. The concept of total return investing has with member expectations than traditional • Go directly to the information you need filtered through from the retail investment DC default/core options such as index- with our dedicated sections for: market, rather than the institutional tracking, balanced or managed funds. » Consultants – which includes the ‘hot pensions market. In particular, it has been list’ – the latest strategies from JPMAM, fuelled by the introduction of UCITS III For example, total return funds offer the new innovations and the latest research for – the EU-wide directive that has given potential for consistent positive return, institutional investors. retail-marketed funds wider investment they actively look to limit downside risk » Charities – featuring our range of funds powers to use derivatives, hold money and they specifically ‘reward’ investors for and services in this sector. You can also market instruments and mix different moving capital out of cash. Moreover, download our ‘Growing Funds for assets in the same fund. they offer a highly explicit time/reward Growing Charities’ brochure. trade off that can allow members to make a » Pension schemes – whether Defined Total return funds aim to achieve much better link between their investment Contribution or Defined Benefit schemes consistently positive returns through goals and their time to retirement. our services and solutions are outlined the combination of a number of tactics – here, along with the link to our dedicated DC site which features our interactive including diversification, tactical asset We do not for one moment suggest these investor profile tool, pensions calculator allocation, derivative-based risk protection funds should be a wholesale replacement and an education in DC planning. and neutral cash position. for traditional relative return funds. But by introducing total return strategies • Find everything you need to know about our products and services in Investment Why total return is the best option as a default/core proposition, we believe Expertise – whether you’re looking for As the DC market grows and represents DC pension schemes are far better placed equities, hedge funds, real estate, fixed a larger proportion of UK pension assets, to meet the objectives that are most income, multi asset strategies, and more. it needs to be recognised that the power important to their members, especially to invest or not invest shifts into members’ those who are not investment aware. control. With the growth in DC, pension scheme members are set to become far For further information on any of the more sensitive to downside market risk news items covered on this page, than they were in the defined benefit please contact Sue Hale, Relationship pension environment. The impact of Manager Support, on 020 7742 5518 a future bear market on employees’ or at susan.a.hale@jpmorgan.com confidence in their pension provision Alternatively, please contact your usual could therefore be far more acute than JPMorgan Asset Management it has been in past market downturns. representative.
  8. 8. 8 | Investing Plus Spring 2007 Better insight + Better process = Better results Matching your liabilities Reducing your funding gap + Liability-enhanced solutions = from JPMorgan JPMorgan Asset Management is perfectly positioned to classes, size, style and investment processes. Together, provide the essential components needed for integrated our liability-matching expertise and wide range of liability-driven investment solutions – liability matching alpha sources mean we can help match your liabilities and alpha generation. more closely, while generating extra returns to reduce your funding deficit – all within your risk budget. We have over 25 years’ experience creating liability- matching strategies, and provide access to over 200 If you haven’t spoken to us yet about our liability- sources of alpha generation across different asset enhanced solutions, perhaps you should. Investment Funds, Investment Trusts, Pensions and ISAs For more information, call Simon Chinnery on 020 7742 5657 or email simon.e.chinnery@jpmorgan.com www.jpmorganassetmanagement.co.uk/institutional Better insight + Better process = Better results This material is intended for professional investors only. Issued in the UK by JPMorgan Asset Management UK Limited which is authorised and regulated by the Financial Services Authority and is part of the JPMorgan Asset Management marketing group which sells investments, life assurance and pension products. Registered in England. No: 288553. Registered Office: 125 London Wall, London EC2Y 5AJ.