Survival of the FD

While the job description might not have mentioned it, the role of a finance director is about as varied and vital to a business as they come, writes James McColl

The grass is greener

Ethical investing principles have existed for some 25 years, evolving from a minority consideration to an increasingly popular culture with many different guises

Tailor made

Passive asset allocation is a tracking technique that is gaining momentum in part for its ability to reduce risk for investors

The end for bonds?

As the chancellor sets a flat rate of CGT, some in the industry are predicting the death of investment bonds. But insurers and fee-based IFAs still see a future for them

The long haul

As pension schemes evolve for the 21st century with one eye fixed firmly on the diversification of assets, are trustees prepared for the long road ahead?

Eastern promises

As the world gazes east with the approaching Beijing Olympics, investors may find the Chinese economy keeping a level head. But will this translate into long-term investment?

Riding the rollercoaster of risk

Absolute or total return strategies can be used to participate in long-term growth phases and control the risk of possible capital losses in the current market environment

Jump in the alternatives pool

Trustees are being increasingly lured towards pooled funds, both as a way of diversifying their portfolios and as a method of accessing specific areas of expertise

Back to school

The long-term appeal of university infrastructure is beginning to catch investors’ eyes as they focus on higher education as an asset class

Drawing a positive conclusion

Volatility may be portrayed as a disaster, but it can also provide opportunities to diversify funds

Following the herd

Investing ethically is currently a hot topic in most financial industries. But what are the reasons behind this shift, and what can businesses hope to gain from it?

A wider investment outlook

LDI strategies have become second nature to many large schemes, but where does this leave the smaller, more cautious pension funds?

Why choice is not always a good thing

The typical consumer has no problem choosing a meal in a restaurant. Maybe this is because we know that all pasta tastes more or less the same...

Delivering the goods?

Liability-driven investment (LDI) has established its place in trustees’ risk management tool set. But is it working? Bobby Riddaway reviews its performance

In search of the best buys

Diversifying into alternative asset classes can reduce risk but schemes must be careful not to lose money on overrated assets

An appropriate level of risk to give comfort

With the right diversification, a high level of allocation to return-seeking assets does not necessarily entail exposure to a high level of risk

Worth the weight

You may have heard of the non-market capitalisation weighted index, but what is it? Julian Harding explores this investment development in more detail

A catalyst in the market place

UCITS III is here and is accelerating the pace of change in the institutional marketplace

The risk-based approach

Risk-based techniques are the best way to establish an effective and secure fund

Running a proper race

The value unconstrained investing offers pension funds is often underestimated

Hedge your bets

For most investors high returns normally come with high risk, but not all risks are worth taking...

Market value

Actuarial advice can take trustees and employers only so far. Having access to knowledge about other pension schemes takes them further towards confident decision-making

— Trustees need guidance and encouragement over the long-term to best engage in long-term, long-only investment

LTLO is a marathon, not a sprint

Roger Emerson of GlaxoSmithKline, one of the members of the Marathon Club, considers the responses from the club’s consultation paper on long-term long-only investment

Fighting the good fight

John Ashcroft, head of strategy at the Pensions Regulator, sets out the regulator’s role in implementing scheme funding requirements and protecting members’ benefits

Long-term protection for assets

Gregory Perdon examines the unnecessary risks that British investors are assuming and explains how to protect one’s purchasing power with tri-currency diversification

A wasted opportunity?

UK financial institutions have defined contribution portfolios which are laying stagnant and becoming a burden to their business. Eddie McGuire believes it’s best to tackle the problem head-on

The search for true value

Obtaining evaluated pricing is the only sensible option for investors and asset managers who want consistent and unbiased bond valuations, argues Karl Mackelburg

Property’s become a global game

The property market doesn’t end with the UK. Ruth Emery looks at how investor-friendly overseas opportunities from Asia to Scandinavia are catching the attention of pensions experts

Choosing an outsourcing provider

Ian Ratoff looks at whether the continued trend of fund managers outsourcing their middle and back office functions is having any effect on pension funds

Pension pooling Dutch style

The pooling of assets has a fifty-year history in The Netherlands. Egon Tibboel argues that the Dutch model of flexibility, pragmatism and collaboration and service provision also has a role to play in the future

The way forward for index funds

In the past 10 years, index fund management has changed beyond recognition. Ian Richards looks at the risks and strategies involved in this growth area

A new approach to protection

More and more companies are turning to contingent security arrangements to fund their pension liabilities, says Watson Wyatt’s Hemal Popat

First step to pan-European model

With pensions pooling for multinational companies now imminent, Ted Hall looks at the potential benefits of this first step towards a unified pan-European pensions market

Think global, act local

Alasdair Reid explains how local authorities can benefit from the services of a global custodian

TIP the balance in your favour

Mike Morrison elaborates on the advantages to be gained from choosing the TIP as an alternative to investing in residential property and other esoteric options, and its effectiveness in offering a more balanced exposure

Crossing the European divide

Recent guidelines permit providers to create funds that apply across Europe, however, specialist help may be required to adhere to different countries’ rules and regulations, says Egon Tibboel

The areas to watch for ‘06

With all the fuss being made over state pensions and Turner’s report, much of the media coverage of pensions has been deflected from what for many people is their primary concern, running occupational pensions schemes.

Best value from corporates

The outlook for UK gilts is a bit uninspiring. There is a chance that the market may be undervalued if there is a cut in interest rates early in 2006. At the longer end of the market there is very little value as pension funds continue to buy for risk reasons, regardless of price.

REITs will increase choice

Although the details for real estate investment trusts (REITs) remain sketchy, it does at last look like they will be introduced, and once the detail is sorted out, they will be rolled out very quickly.

Metals will strengthen

The year should see further strengthening of prices for base metals due to the continuing supply/demand imbalance. Strong demand from Asia, particularly China, will continue, but a lack of investment in production from suppliers has meant that supply has failed to keep up and this will continue to be the case.

Demand grows for swaps

The increase in demand for inflation-linked swaps will continue as pension funds seek more flexible types of investment that can alter the nature of the risks they face, enhance fund performance, and provide a better match with liabilities.

European equities look attractive

Europeans equities are coming off the back of a good year and the prospects for next year seem equally sound. Expected growth should be in the region of seven, eight or nine per cent and this is due to attractive current valuations. Despite good growth last year, the value of European equities are below average on a global basis, particularly against US equities, and this alone makes them attractive for 2006.

Restructuring pays off for Japan firms

The current good value of Japanese equities is down to structural factors rather than a cyclical process. Following a decade of poor performance of the Japanese economy, the costly restructuring process is starting to pay off for many firms. Increased cash flows have started a circle of virtuousness with companies able to spend cash, not only on share buy backs, but also on expansion and capital expenditure. This creates more employment which fuels demand and creates further increase in cash flow for these companies.

Finding neutral ground

A manager-of-managers portfolio balances different approaches and styles to minimise style risk and add value over the long term, says Tony Earnshaw

Do you know where you’re going to?

There’s more to finding a transition manager than looking one up in the Yellow Pages. Tim Wilkinson outlines how trustees might undertake a search for the right person

Measuring performance

The case for outsourcing performance measurement to a specialist provider appears to outweigh the argument for retaining the capability in-house, says Ian Ratoff

— Trustees should maintain an ongoing dialogue with the employer with a view to reaching agreement, though they should act independently in negotiations

Funding defined benefits

The Pensions Act 2004 sets out new requirements for funding defined benefits, expected to come into force from September 2005. David Unsworth explains what the new requirements mean for trustees, employers and scheme actuaries

The devil’s in the detail

The benefits to be gained from the maturation of multinational pension pooling could be a major opportunity for countries across Europe, if we can create unified regulations, says Kerry White

Conflicts of interest

Any potential users of transition management would be advised to disregard the common assumption that only the investment banking platforms that face potential conflicts of interest, says Tim Wilkinson

Money matters

The need to ensure that assets work as hard as they can makes currency management a vital component of investment strategies of all sizes, says Marek Siwicki

Ready for the challenge?

It is vital for pension schemes and their investment managers to work with service providers, as the asset servicing industry can provide significant support to schemes in light of the most recent developments, says Jemma Broadgate

Keeping one step ahead

Custody providers have many ways of setting themselves apart from their competition, but for each custodian that exits there is another prepared to forge its way into a new market and use an aggressive pricing strategy to achieve this, says Kate Parker

Weighing up your stock options

This is an active asset management technique that aims to overweight stocks with potential and underweight poor ones – while exploiting a given equity market’s anomalies to add value, reports Alistair Sayer

Effective fixed income management

Fixed income is being called upon to fulfil specific objectives and, as such, investment managers need to look at the asset class in a different way. New instruments and techniques are enabling managers to create more dynamic portfolios and, crucially, pension schemes are granting managers more freedom to run their mandates. Like modern building engineers, fixed income managers must seek new ways to improve the quality and performance of their structures.

End of the road for index funds?

Does the decline in DB schemes and the increasing emphasis on liability-matching techniques, plus the emergence of enhanced indexation mean index funds have had their day, asks Barry Holman

Local authorities take the lead

PFI equity offers a way to enhance returns meaningfully without assuming the high risks and some of the earliest investors have been UK local authority pension funds. Guy Pigache reports

Richard Boardman

1. Structurally, we see the next generation of LDI as containing a mix of cash, bonds, fixed income derivatives plus alpha and beta products. The genuine LDI component will consist of the former categories, with alpha and beta being supplied by a range of diversified growth assets.
2. A big increase in the governance budget might be required to manage such a structure, at least initially. Generically, we see many schemes as having a loosely managed risk mandate which operates within the governance budget. Next generation LDI approaches are more tightly risk managed, but potentially step outside of many existing governance budgets.
3. The availability of liquidity at ultra-long durations in the fixed income derivatives market makes such hedging a real possibility. We do understand the problems associated with model risk, but are nevertheless keen to progress adaptive solutions which reduce investment risk without raising the spectre of unnecessary model risk. However, it is always sensible to remember the uncertainty that will remain due to demographic factors.
4. We do believe that such products will encourage the use of LDI and we applaud these. Investing in pooled funds that are transacting strategically, directly with an investment banking counterparty is a question which we find needs to be answered by trustee bodies on a case by case basis.

Hugh Cutler

1. Liability-driven investing (LDI) is about establishing a transparent link between liabilities and assets and minimising uncompensated risks. For schemes looking to outperform their liabilities, a wide range of asset classes and strategies will help get the best return for the risk taken, including government and corporate bonds, equities, hedge funds, commodities, swaps and potentially other derivatives.
   Schemes with a low risk appetite, and hence lower expected returns, may restrict investments to bonds and/or swaps. However, for most schemes, LDI will lead to more asset classes and a greater use of active returns – this diversification brings risk reduction without reducing expected returns.
2. An LDI approach means a much closer relationship between trustees and their various advisors. In particular, actuaries, investment advisors and fund managers need to communicate much more closely.
   The benchmark for an LDI scheme is to achieve returns in line with, or ahead of, their liabilities. The governance of schemes needs to ensure effective processes are in place for monitoring this objective and the risks taken to achieve it.
   Monitoring requires a detailed understanding of the liabilities and how their value will change in response to changes in market conditions. Monitoring is often best performed by an LDI manager with the technology and systems to perform this analysis. Trustees may also ask their investment consultants to undertake independent checks to ensure that the calculation methodology is appropriate and robust.
3. LDI approaches should be aware that the benchmark depends on non-investment assumptions, such as longevity, that cannot be predicted with certainty. As such, there are some risks that cannot be removed completely in the capital markets.
   However, this does not invalidate the concept of LDI, but suggests that it is not worth incurring significant costs in achieving what is likely to prove to be spurious accuracy in liability matching. For most schemes, the LDI objective is going to be to outperform the liabilities, and the risks from demographic assumptions proving to be wrong will remain only a part of the total risk.
   Even schemes that are currently 100% funded on a realistic set of assumptions may wish to try and outperform their liabilities to build a cushion against unexpected improvements in mortality.
4. The inaccuracies inherent in liability forecasts can mean that segregated solutions do not always bring benefits. An appropriate set of pooled funds can still produce a bespoke solution that is a good fit for the liability profile in a very cost-effective manner.
   In this way, pooled fund products can allow smaller schemes to access techniques that otherwise would not be available to them, eg the cost-effective use of swaps for removing unwanted risks and the use of portable alpha to introduce active returns from other asset classes onto a liability benchmark.
   They also allow larger schemes to implement LDI investments at lower cost and lower risk, eg through better diversification of counterparty exposure in swaps transactions.

Making LDI really fly

Last month’s Q&A on liability-driven investments wrongly transposed the answers of Hugh Cutler and Richard Boardman. Here are their answers correctly attributed to them

Bringing home the Bacon

Pension funds and their custodians have a fundamental responsibility to safeguard the members’ assets and maintain the confidence in and reputation of the scheme, says Ann Doherty

An attractive alternative

PFI offers an investment opportunity for pension funds with an attractive risk/return profile as one of its many selling points, says David Toplas