Alice: I can’t help it, I’m growing
Dormouse: You’ve no right to grow here
Alice: Don’t talk nonsense, you know you’re growing too
Dormouse: Yes, but I grow at a reasonable pace, not in that ridiculous fashion
Pension schemes: The real risk
Historically UK pension schemes’ largest financial exposures have been short positions in long-dated interest rates and inflation, arising from the liabilities. This can be seen as being short the long dated real interest rate. While many schemes have instigated LDI programs in recent years to address and manage inflation and rates risk, it is still real rates that remain a core driver of the financial position of the UK DB pension scheme community.
The story of the last few years in LDI has been an increase in sophistication of pension schem ...
I was recently invited by Sanofi, the fourth largest healthcare company in the world by prescription sales, to talk to 500 of their UK and Irish employees about my experiences with innovation in the investment management industry. As I prepared for the presentation, talked to Sanofi’s leadership team and participated in their workshops, I came to realise the massive parallels between the pharmaceutical and fund management industries. Both industries are in the middle of an outcomes revolution.
Investment outcomes in investment management
I was first drawn to investment man ...
(This article first appeared in the June 2013 edition of Investment & Pensions Europe magazine and is reproduced with kind permission)
The events of 2008-09 prompted a long hard look at traditional investment portfolios; they were found to be flimsy in the face of the crisis, despite according with principles enshrined in a half-century or so of academic research. Since then, academics and others have suggested ways in which portfolios could have been constructed to fare better. Here, we examine one such approach – risk parity.
Portfolio construction has a ...
Netting comes up time and time again in risk management, but it has several levels to it and pitfalls to avoid. Being able to look through the levels of netting to your position at CSA, ISDA, Entity and Group level can seem daunting. Why are there so many types of netting and why does it matter to structure your credit exposure?
To demonstrate what can and cannot be netted let me give a hypothetical case where we have positions versus ABC Bank. To keep the example simple I am using one derivative position and one loan. Assume there is no CSA on the derivative position.
In 2012, the “London Whale” trades resulted in losses of $6billion. JPMorgan were widely renowned as among the best managers of banking risk in the world, and had navigated the financial crisis far better than most; yet these losses resulted from inappropriate use of a risk model that seems not to have been fit for purpose.
There was nothing new in this. In 2007, David Viniar of Goldman Sachs famously described seeing “25 standard deviation events, several days in a row”. To put this in perspective, for a normal distribution this is equivalent to buyi ...
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”
- Ernest Hemingway.
“Recovery in sight, says departing Bank of England governor Mervyn King..”
- The Daily Telegraph.
In one of the most powerful and memorable metaphors in finance, Charles Ellis, the founder of Greenwich Associates, cited the work of Simon Ramo in a study of the strategy of one particular sp ...
There continues to be potential for pension capital appearing where bank lending no longer wants to go. Commentators in the UK and continental Europe have heightened expectations that pension funds will step in to help fill the continent’s bank financing gap. Societe Generale, for instance, recently predicted further “disintermediation” by investors sidestepping banks and looking for greater seniority than bond holding. Over in the US, the news that average yields on high-yield debt have fallen below 5 per cent for the first time, according to the Barclays US High Yiel ...
Since George Osborne’s Autumn Statement in 2011, pension funds and their advisors have been discussing the idea of investing in infrastructure. And the logic for this investment is sound: pension funds need low risk, long dated inflation-linked cash flows. They always have, they always will. Happily, the UK needs new infrastructure, much of the funding for which is long-dated and inflation-linked. Banks, which previously funded these endeavours, are no longer funding them, and pension funds seem to be the natural rebound relationship that might just turn st ...
High yield debt has enjoyed a nice rally during 2012, as have many other risky assets. Articles and press coverage have addressed the asset class’s future as a result; is this the new way to capture high risk but high reward returns? At Redington, we always look at risk-adjusted returns (or bang for your risk buck) and it seems that, while this asset class could offer some interesting opportunities for pension funds, the potential downside inherent in it at present could be a showstopper.
Since the credit crisis, the high yield asset class has been traded on an absolute yie ...