For professional investors only Issue 3 – Spring 2007
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 | 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 | 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 firstname.lastname@example.org
according to AON Consulting*. Alternatively contact your usual
JPMorgan Asset Management
4 | Investing Plus Spring 2007 Better insight + Better process = Better results
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*.
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 | 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 | 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 | Investing Plus Spring 2007 Better insight + Better process = Better results
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
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 email@example.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 | Investing Plus Spring 2007 Better insight + Better process = Better results
Matching your liabilities
Reducing your funding gap
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 firstname.lastname@example.org
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.