1. Private & Confidential Redington : Manager Forum 12 February 2013
Red Manager Forum
The Eight Club, Bank
Robert Gardner
Pete Drewienkiewicz
1
2. Private & Confidential Redington : Manager Forum 12 February 2013
Our Mission:
To Design, Develop, and Deliver the best investment strategies for our clients
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4. Private & Confidential Redington : Manager Forum 12 February 2013
Redington: Client Base
4
119.2
76.2
23.3
11.4
AUC by Client Type (£ bio)
Trustee
Sponsor Clients
Other Pensions
Related Clients
Non-Pensions
Work
25
11
3
8
Number of Clients
Trustee Clients
Sponsor Clients
Other Pensions
Related Clients
Non-Pensions Work
59.0
2.7
60.4
73.5
34.5
AUC by Relationship (£ bio)
Total AUC (Full
Consultant to Trustee)
Total AUC (Retained
Advisor to Sponsor)
Total AUC (Project-
Trustee)
Total AUC (Project-
Sponsor)
Total AUC (Project-Other)
Number of
Clients
47, including 10 of the UK’s
25 largest pension schemes
Assets under
Consulting
£230bn
Appointment
Type
• Advisor to Sponsor
• Advisor to Trustee
• Non-Pensions
• Project Basis
5. Private & Confidential Redington : Manager Forum 12 February 2013
Take Control – The 7
Steps to Full Funding
Robert Gardner
5
6. Private & Confidential Redington : Manager Forum 12 February 2013
Redington Philosophy
Our Philosophy:
We believe there are multiple risk premia to be earned
It is not possible to control return
But it is possible to manage and control risk
Our 7 Steps Framework to Full FundingTM
puts our clients in control of their investment objectives and strategy.
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7. Private & Confidential Redington : Manager Forum 12 February 2013
Redington Philosophy
7
IF A MAN KNOWS NOT
TO WHICH PORT HE
SAILS, NO WIND IS
FAVOURABLE
Lucius Annaeus Seneca
8. Private & Confidential Redington : Manager Forum 12 February 2013
The Seven Steps to Full Funding TM
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Design an efficient investment
strategy
Destination for agile
implementation of LDI strategy
Transparency to make timely
decisions
Articulate clear objectives and
constraints
Mission Statement
To help our clients achieve full-funding with the minimum level of risk
9. Private & Confidential Redington : Manager Forum 12 February 2013
Our Mission:
To Design, Develop, and Deliver the best investment strategies for our clients
9
Dynamic
Continuous
Monitoring
Deliver
Develop
Design
10. Private & Confidential Redington : Manager Forum 12 February 2013
Step 1: Setting Clear Goals and Objectives
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“The pessimist complains about the wind;
The optimist expects it to change;
The realist adjusts the sails.”
- William A. Ward
11. Private & Confidential Redington : Manager Forum 12 February 2013
Step 1: Setting Clear Goals and Objectives
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Step 1. Description
1. Articulate clear funding objectives and risk constraints
2. Flight plan Analysis presents a projected path of the Scheme’s assets and liabilities and
derives the Required Rate of Return
3. Detailed 3 Lenses Risk Analysis of overall risk exposure and collateral requirements.
4. Incorporate the above into a Pensions Risk Management Framework which will be used
to monitor the Scheme’s progress towards its stated objectives.
12. Private & Confidential Redington : Manager Forum 12 February 2013
Application to Sample
Scheme
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13. Private & Confidential Redington : Manager Forum 12 February 2013
The Pension Risk Management Framework
Objective Measurement Performance Indicators Performance RAG
Primary Funding
Objective
To reach 100% funded on a swaps
flat basis by 2026
Expected Returns (ER) > Required
Returns (RR)
RR: Libor + 300bps
ER: Libor + 200bps
Difference: -100bps
Investment
Strategy
Actual Returns should exceed
Expected Returns
Actual Returns (AR) > Expected
Returns (ER)
AR: Libor + 210bps
ER: Libor + 200bps
Difference: +10bps
Risk Budget
The investment strategy should not
risk the deficit worsening by
£600mm over a 1 year period
VaR95 < £600mm VaR95: £700mm
Hedging
Strategy
Nominal and inflation hedge ratio
should be maintained within +/- 5%
of the funding ratio
Funding Ratio (swaps flat) 70% n/a
Nominal Hedge Ratio (swaps flat) 50%
Inflation Hedge Ratio (swaps flat) 85%
Collateral
Maintain sufficient eligible for the
purposes of covering margin calls
that may arise from the Scheme’s
current derivative positions over a 1
year period.
Total available eligible collateral £900mm
Remaining collateral after VaR95 event £600mm
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RAG Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away
14. Private & Confidential Redington : Manager Forum 12 February 2013
Calls To Action
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Summary
The Scheme needs to simultaneously:
1. Increase Expected Returns to equal (at a minimum) the Minimum Required Returns, but should aim to target
the Required Returns; and
2. Reduce the risk it is exposed to (as measured by VaR95); while
3. Maintaining sufficient levels of eligible collateral to withstand a VaR95 event.
Objective RAG Comments Call to Action
Primary
Funding
Objective
Expected Returns are 100bps below the
Required Returns to reach 100% funded on
a swaps flat basis by 2026
Amend/adjust the investment strategy to
increase Expected Returns
Investment
Strategy
Actual Returns are 10bps above the
Expected Returns
No Action Required
Risk Budget
The current investment strategy risks the
deficit worsening by more than the £600mm
Risk Budget
Reduce risk in the investment strategy
Hedging
Strategy
The nominal and inflation hedge ratios are
below and above the target hedge ratio (i.e.
the funding ratio), respectively
Increase nominal hedge ratio
Decrease inflation hedge ratio
Collateral
Maintains £600mm collateral in excess of
what might be required after a VaR95 event
No Action Required
15. Private & Confidential Redington : Manager Forum 12 February 2013
Analysis and Recommendations
15
Recommendations
Recommendations
Recommendations
Recommendations
Recommendations
16. Private & Confidential Redington : Manager Forum 12 February 2013
Step 2: Access to LDI Hub
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Step 2. Description Implementation-to-date
• Interest rate and inflation risk are typically one
of the largest “unrewarded risks” for a pension
scheme.
• Setting up an LDI hub which gives the Scheme
the ability to manage inflation and interest rate
risk efficiently and effectively.
• Appointment of XXX as LDI manager
Recommendations
1. Synthetic Equity Replication
• Consider replicating physical equity exposure with futures and use the proceeds to purchase Gilts
2. Target Hedge Ratio
• Consider increasing/decreasing the nominal and inflation hedge ratios to equal the funding ratio:
• Use full LDI toolkit including swaptions to increase nominal hedge ratio.
17. Private & Confidential Redington : Manager Forum 12 February 2013
Liquid Alpha & Beta Strategies
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Step 3. Description Implementation-to-date
• To ensure that the scheme is receiving
adequate compensation for the risk
associated with its investments
• Instead of dividing assets into traditional
categories of growth and matching assets,
assets are assessed in terms of their liquidity.
• This includes allocations to liquid active and
passive strategies such as investment in
equities and certain hedge fund strategies:
• 10% to Liquid Alpha Strategies
• 15% to Liquid Beta Strategies
• Total exposure: 25%
Recommendations
1. Volatility-Controlled Equity Exposure
2. Risk Parity Strategies
3. CTA Allocation
18. Private & Confidential Redington : Manager Forum 12 February 2013
Liquid & Semi-Liquid Credit Strategies
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Step 4. Description Implementation-to-date
• Credit consists of a range of sub-classes with
different risk-return characteristics.
• Includes Alpha oriented mandates where the
manager can operate in the entire fixed
income universe. This enables the manager to
take advantage of relative value between
different instruments, aiming to earn long run
risk premia throughout the credit and economic
cycle.
• 15% to Liquid Credit
• 3% to Semi-Liquid Credit Strategies
• Total exposure 18%
No Recommendations – current spreads for investment grade credit are not sufficiently attractive
Considerations:
• When credit spreads are wider (i.e. above the Required Returns), the 7 Steps to Full Funding TM
framework and
the PRMF will allow you to dynamically shift into credit from other asset classes.
19. Private & Confidential Redington : Manager Forum 12 February 2013
Illiquid Credit Strategies
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Step 5. Description Implementation-to-date
• We believe there are a number of opportunities
available which can provide “long-dated,
inflation-linked” cash flows at a higher yield
than traditional matching assets (we call them
“Flight Plan Consistent Assets”).
• Typically, these assets tend to fit well with the
overall objectives of pension schemes when
assessed in the context of a scheme’s PRMF
• Total 0%
Recommendations
Make allocations to the below to increase credit diversification and Expected Returns.
• SME Lending
• Secondary UK PFI and core-infrastructure refinancing
• Social housing
• Secured Leases
• Ground rents
20. Private & Confidential Redington : Manager Forum 12 February 2013
Illiquid Alpha & Beta Strategies
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fdStep 6. Description Implementation-to-date
• Assets under this category provide attractive
returns but are typically more complex and
illiquid e.g. private equity and PFI equity.
• 7% Private Equity
• 3% Property (EU and UK)
• Total 10%
Recommendations
Insurance-Linked Strategies (catastrophe risk)
• Make allocation to increase diversification and expected returns
21. Private & Confidential Redington : Manager Forum 12 February 2013
Ongoing Monitoring
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Objective Measurement Performance Indicators Performance RAG
Primary Funding
Objective
To reach 100% funded on a swaps
flat basis by 2026
Expected Returns (ER) >
Required Returns (RR)
RR: Libor + 300bps
ER: Libor + 320bps
Difference: +20bps
Investment
Strategy
Actual Returns should exceed
Expected Returns
Actual Returns (AR) > Expected
Returns (ER)
AR: Libor + 210bps
ER: Libor + 200bps
Difference: +10bps
n/a
Risk Budget
The investment strategy should not
risk the deficit worsening by
£600mm over a 1 year period
VaR95 < £600mm VaR95: £450mm
Hedging
Strategy
Nominal and inflation hedge ratio
should be maintained within +/- 5%
of the funding ratio
Funding Ratio (swaps flat) 70% n/a
Nominal Hedge Ratio (swaps flat) 70%
Inflation Hedge Ratio (swaps flat) 70%
Collateral
Maintain sufficient eligible for the
purposes of covering margin calls
that may arise from the Scheme’s
current derivative positions over a 1
year period.
Total available eligible collateral £600mm
Remaining collateral after VaR95
event
£150mm
22. Private & Confidential Redington : Manager Forum 12 February 2013 22
Online iRIS to be launched in November. (blurb from Teresa)
*Technical Resources from Blackrock
The easiest way
to monitor your
pension scheme.
Watch our video to learn more about how iRIS
makes risk monitoring accessible.
Login
Track progress against clear goals and
objectives
Easy access.
Login anytime, anywhere
Monitor funding level
Monitoring: A Preview of Online iRIS
23. Private & Confidential Redington : Manager Forum 12 February 2013
Manager Research
Pete Drewienkiewicz
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24. Private & Confidential Redington : Manager Forum 12 February 2013
Who Are We?
24
Pete
Drewienkiewicz,
Head of Manager
Research
Kenny Nicoll,
Director: LDI
Specialist
Huayin Liu,
Vice President
Tom McCartan,
Associate
Aniket Das,
Associate
Kate Mijakowska,
Analyst
Greg Fedorenko,
Analyst
Team Size
2011 3
2012 5
2013 7
25. Private & Confidential Redington : Manager Forum 12 February 2013
How Do We Look at the World?
25
Step
(2)
LDI
(3)
Liquid α & β
(4)
Semi-Liquid Credit
(5)
Illiquid Credit
(6)
Illiquid α & β
Collateral
Management
Equities Corporate Bonds Infrastructure Debt Insurance-Linked
Hedging Multi Asset
Asset Backed
Securities
Social Housing Debt Private Equity
Active LDI Sovereign Bonds High Yield Direct SME Lending
Infrastructure
Equity
Gilts Commodities / CTA Leveraged Loans Mezzanine Finance Unlisted Property
Currencies
Emerging Market
Debt
Distressed Debt
Hedge Funds with
Longer Lock-Ups
Liquid Hedge Funds
Commercial Real
Estate Debt
Long Leases /
Ground Rents
28. Private & Confidential Redington : Manager Forum 12 February 2013
How Do We Divide Our Time?
Recommended level of interface for invested
strategies:
• Quarterly quantitative monitoring
• Annual formal review
• Constant contact in respect of specific queries:
• Impact based approach:
Increase contact for increasingly complex /
bespoke strategy (e.g. LDI portfolio), Larger AUM
/ VAR
Contact
–
+
Level of interface for non-invested strategies:
• Regular research meetings
• Tracking vs. 7 steps
28
Less contact e.g. Passive equities
29. Private & Confidential Redington : Manager Forum 12 February 2013
1. Do returns
contribute to overall
expected returns
being greater than
required returns to
reach full funding?
2. Do returns
compensate
investors for the
level of risk they
are being exposed
to?
29
3. Are better risk-
adjusted returns
available
elsewhere?
4. What are the
implementation
challenges?
Building on the 7 Steps to Full FundingTM, we outline below the Four Investment Filters:
The 4 Investment Filters provide clients with a framework in which to quickly assess and compare
different opportunities within and across different asset classes.
How Do We Prioritise Opportunities?
Expected
Returns
Risk
Assessment
ImplementationRelative
Value
30. Private & Confidential Redington : Manager Forum 12 February 2013
eVestment
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• eVestment adopted June 2012
• Comprehensive database of
43,000 strategies across
traditional and hedge fund
providers
• Fund manager performance
• Peer group comparisons
• Database provides qualitative
data, including personnel
changes
• Growth / decline in firm AUM,
mandates won and lost
• Portfolio holdings information
• Fee schedules
Regular
Performance
Updates
Updated Docs
& Fund
Literature
Personnel
Changes
Hedged
Returns
Data Net of
Fees
What we
Need from
You:
31. Private & Confidential Redington : Manager Forum 12 February 2013
Implementing a New Allocation
31
a b c
Use of eVestment
for pooled strategies
N.B. Many clients
have bespoke
investments not
found on fund
databases.
Classify investment
according to relevant
part of 7 Step
Framework
Account teams decide
on appropriateness for
individual clients
Implement
Client
Bespoke
Industry
Net
35. Private & Confidential Redington : Manager Forum 12 February 2013
The LDI Manager as “Quarterback”
35
• Trust
• Technical Skills
• Transparency
36. Private & Confidential Redington : Manager Forum 12 February 2013
Step 3: Liquid Alpha and Beta Strategies
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37. Private & Confidential Redington : Manager Forum 12 February 2013
Liquid Alpha & Beta
37
Key Features
• Built in risk diversification – equities,
commodities and rates
• Built in risk control through target volatility
• Built in nimbleness through daily
rebalancing
• Historically improved risk adjusted returns
• Low cost
• Easy to implement
• Highly liquid
• Efficient use of collateral
Trend Following Strategies
Risk Parity
Volatility-Controlled
Equity
Index-Linked Gilts
Swap Overlay
A One-Stop Liquid Alpha & Beta Portfolio:
40. Private & Confidential Redington : Manager Forum 12 February 2013
Credit as a Core Building Block for Flight Planning
40
Corporate
Bonds
Direct
Lending
Absolute
Return
FPCA
FPCA
Gilts
Cash
41. Private & Confidential Redington : Manager Forum 12 February 2013
Equity Replacement Strategy
41
40%
20%
20%
20%
Sample Equity Replacement Portfolio
Risk Parity
Long / Short
Credit
Direct Lending
(SMEs)
Distressed Debt
Sources of Funding
Developed
Equity
EM Equity
Private Equity
50%
35%
15%
Current Allocation
25%
50%
25%
Replacement Portfolio
Portfolio Weightings: Whole Scheme
• Overall risk in the return-seeking
assets bucket reduced by a fifth
• Overall expected return on scheme
assets increased by more than 10%
Equities Credit Alternatives
42. Private & Confidential Redington : Manager Forum 12 February 2013
Step 6: Illiquid Alpha & Beta Strategies
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43. Private & Confidential Redington : Manager Forum 12 February 2013
Insurance-Linked Securities
43
2.26%
2.28%
2.30%
2.32%
2.34%
2.36%
2.38%
Current Allocation Current +
Aggressive ILS
Allocation
Current +
Conservative ILS
Allocation
Sample Scheme: Impact on Portfolio Expected Returns
Probability
0%
Rtn
• Assets under this category provide
attractive returns but are typically more
complex, e.g. private equity, PFI equity.
• Inclusion of these assets depends on the
overall objectives and governance budget
of the scheme.
Exceedance Curve (Illustrative)
• Catastrophe risk offers chance to earn
uncorrelated returns with major asset
classes.
• Sample scheme – ca. £50m allocation
(of c. £3bn overall assets) increased
expected returns while decreasing overall
risk.
44. Private & Confidential Redington : Manager Forum 12 February 2013
Step 7: Ongoing Monitoring
44
45. Private & Confidential Redington : Manager Forum 12 February 2013
Manager Monitoring / Quarterly Reporting
45
Fund Allocation
as at
7/12/2012
Allocation
as at
17/9/2012
Manager
Monitoring*
Fund A 13% 14%
Fund B 14% 14%
Fund C 25% 24%
Fund D 23% 23%
Fund E 3% 3%
Cash 22% 30%
Equity
Futures
32% 33%
Synthetic
Gilts
60% 48%
• Managers reviewed as part of overall
scheme positioning
• Use of RAG ‘traffic lights’ in quarterly
quantitative reports echoes PRMF
46. Private & Confidential Redington : Manager Forum 12 February 2013
Performance Monitoring and Position-Based Reporting
46
USD
Credit
EUR
Credit
GBP
Credit
Total
Market
Value
(%)
26.3 9.6 64.1 100
Yield to
Worst
(%)
4 11.9 5 5.4
Duration
(yrs)
13.6 0.6 7.8 8.7
Spread
Duration
Contribu
tion (yrs)
3.4 0.5 5.4 9.3
Libor
Spread
(bps)
177.9 799.5 236 274.8
UK
France
Netherlands
Italy Switzerland
Jersey Chan Isle
Australia
Denmark
Finland
Germany
Japan
Norway
Spain
United States
0
100
200
300
400
500
600
700
800
LiborSpread(bps)
Market Value and Libor Spread by Country
Portfolio Benchmark
8.5%
10.4%
40.5%
33.0%
5.1%
1.4% 1.0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Aaa Aa A Baa Ba B Not Rated
MarketValue
Market Value by Average Rating
47. Private & Confidential Redington : Manager Forum 12 February 2013
Conclusion: Our Principles
47
• Identify managers who can
deliver return streams that
meet our strategic goals
Client Focus
• Consistent performance in
uncertain markets, downside
protection
Disciplined Process
• Transparency in investment
process, returns and reporting
Clarity
Priorities: How to Interact with Us:
Use
eVestment
Relate
Offerings to
Steps
Differentiate
Offering
48. Private & Confidential Redington : Manager Forum 12 February 2013
Red Manager Forum Survey
Asset Class Matrix
48
-5
-4
-3
-2
-1
0
1
2
3
4
5
-5 -4 -3 -2 -1 0 1 2 3 4 5
Developed
Equity
Gilts
SME Lending
Predictable
Unpredictable
LiquidIlliquid
Private Equity
49. Private & Confidential Redington : Manager Forum 12 February 2013
Link to Survey
49
http://svy.mk/XyuSCW
51. Private & Confidential Redington : Manager Forum 12 February 2013
13-15 Mallow Street London EC1Y 8RD
Telephone : +44 (0) 20 7250 3331
www.redington.co.ukThe Team
Pete Drewienkiewicz
Director | Head of Manager Research
Direct Line: 020 3326 7138
pete.drewienkiewicz@redington.co.uk
51
Kenny Nicoll
Director | Manager Research
Direct Line: 020 3326 7111
kenny.nicoll@redington.co.uk
Huayin Liu
Vice President | Manager Research
Direct Line: 020 3326 7105
huayin.liu@redington.co.uk
Tom McCartan
Associate | Manager Research
Direct Line: 020 3326 7139
tom.mccartan@redington.co.uk
Aniket Das
Associate | Manager Research
Direct Line: 020 3326 7153
aniket.das@redington.co.uk
Kate Mijakowska
Analyst | Manager Research
Direct Line: 020 3326 7106
kate.mijakowska@redington.co.uk
Greg Fedorenko
Analyst | Manager Research
Direct Line: 020 3326 7122
greg.fedorenko@redington.co.uk