Nothing seems to polarise opinion in investment circles more than the level and future direction of interest rates. This is problematic, as moves in long-dated rates have been the main driver of Defined Benefit pension fund financial health over the last decade.
DB pension schemes that hedged their interest rate risks before the summer of 2016 will have had the pain of recent falls in interest rates partly or fully mitigated. But many schemes have not – with long-dated gilt rates now below 2%p.a. have these schemes now missed the boat? Is it too late to hedge? In this piece we take a balanced look at the arguments for and against interest rate hedging at these levels and provide a framework to help all stakeholders move discussions forward.
Continue reading “Is It Too Late to Hedge?”
Derivatives can be powerful risk management tools for pension schemes, but the amount of assets that need to be held as collateral (to provide a buffer against adverse market movements) needs to be set carefully and monitored regularly as part of the scheme’s overall strategic asset allocation. The amount is likely to be between 26% and 40% of assets, depending on which stage the scheme is in.
Continue reading “Collateral – How Much Is the Right Amount?”
Every pension scheme is unique. Each differs in its current position, where it is looking to go and also by the constraints it faces.
That said, there are commonalities which can help schemes understand where they are now and prepare for where they go next. Using the language of chess, we believe there are three distinct and progressive stages in which all schemes operate:
- Opening Game
- Middle Game
- End Game
Continue reading “How to Know Which Stage Your Scheme Is In”
Investors are Paying for Equity Alpha, but are they getting it?
The landscape for equity investors (whether DB pension funds, DC schemes or individuals) has changed and evolved hugely in recent years. Much of what was previously considered “alpha” can now be explained by well documented factors and systematic approaches. True alpha still exists beyond this, but equity portfolios probably need fewer managers than has been historically the case.
Continue reading “Is Equity Alpha Worth Paying For?”
Most pension scheme trustees would agree on one thing. Long-term interest rates are at low levels in the UK today (compared to their history). It’s easy to find explanations for this among economists. It’s just as easy to find predictions … Continue reading Liability Hedging – A Rock and a Hard Place
Alpha describes the excess returns a fund can generate relative to the return of a reference benchmark. This benchmark return is called Beta.
Traditionally, these benchmarks were market cap weighted indices, such as the FTSE All Share or S&P 500. Since the 1970’s, it has been possible to buy cheap access to them via passive funds. Continue reading “Introducing True Alpha”
The landscape for managing pension schemes continues to change.. Now, more than ever, pension trustees and corporate sponsors are facing a number of challenges: lower yields, sponsor balance sheet and new regulations to name a few. However, the fundamental problem … Continue reading How can you adopt a more integrated approach to fund deficits?
In our previous RedBlog post, my colleague Dan discussed how to incorporate expected rate rises into the liability hedging decision. In this piece I offer an alternative perspective on yields and liability hedging. A Little Background Over the last few … Continue reading Liability hedging in a rising rate environment
EXECUTIVE SUMMARY Download the PDF version for offline viewing In May 2015 the UK reported its first year-on-year fall in the Consumer Price Index since the official CPI series began in 1996, with a -0.1% reading. Given pension schemes pay … Continue reading Should Pension Schemes Fear Deflation?
Summary: Implementing our investment principles means that it would be useful to measure the complexity of different assets and asset allocations via a complexity ranking. As complexity increases the average expected return tends to increase but the average fund manager … Continue reading Managing Complexity