Tue, 20 Aug 2013 09:46:35 GMT
For those managing personal or institutional money, the world is becoming more volatile, uncertain, complex and ambiguous.
The globalisation of the world economy, combined with the acceleration of technology, means stock, bond and currency markets are more volatile than ever. The 2008 Global Financial Crisis has been followed by bouts of volatility on the back of economic or political bad news like the developments in Greece and Europe and question marks like QE tapering in the US.
And the world is more uncertain, too, as a result of rapidly evolving geo political systems, rules and re ...
Fri, 16 Aug 2013 08:53:51 GMT
Changes to the swap discounting methodology have created an additional risk for many pension schemes, thankfully there is a way to understand and mitigate them.
There is a new market standard for discounting swaps. Pre-financial crisis, all interest rate swaps were projected and discounted using a LIBOR curve (the reference rate for swap fixings). Following the crisis, market participants realised LIBOR did not truly reflect a risk-free rate.
The significant jump in LIBOR versus Overnight Index Swap (OIS) rates in 2007-8 (see chart) was due to fears over the creditworthiness of banks. ...
Thu, 15 Aug 2013 09:35:02 GMT
The tightening of liquid credit spreads means they are no longer attractive against many schemes’ required return to full funding, however, other attractive credit opportunities do still exist.
The chart shows how spreads have tightened across the liquid credit universe, which has particularly affected higher credit beta instruments.
The hunt for yield in a QE world has led to institutional investors globally chasing the same assets, particularly where the securities offer contractual cashflows with underlying security in case of default. Many assets which seemed to offer ...
Wed, 14 Aug 2013 08:57:59 GMT
Protecting members’ benefits from inflation leads to added complexity for pension schemes, even with the RPI-CPI debate closed (for now).UK Pension funds and inflation
UK defined-benefit pension funds tend to have liabilities linked to inflation, due to the contractual revaluation of benefit payments for active and deferred members each year, and the annual increases granted on pensions in payment.
Historically this risk exposure to (rising) inflation, and inflation expectations, was one of the largest risks facing pension funds, which has over time led pension funds more and more ...
Tue, 13 Aug 2013 14:06:40 GMT
Pensions is one of the five global challenges we all face; it’s up to us to solve it.
The first challenge facing the planet is global security. We are spending trillions of dollars trying to keep the bad guys at bay. Vast resources and effort are being deployed to keep ourselves safe.
The second challenge is how to live sustainably; in other words, how to minimise and control the world’s ever-growing carbon footprint.
Third, we face a global health epidemic. The four non-communicable diseases – Alzheimer’s, cancer, coronary heart disease and diabetes – are ...
Fri, 09 Aug 2013 13:39:15 GMT
Back in January we took a survey of market expectations for the year ahead. The difference from many similar surveys was that we were asking about asset class volatility as opposed to returns.
We didn’t expect these “instincts” to be accurately borne out in reality, but when we looked at the results we were interested to see whether expectations were for volatility to be greater or less than the previous year, and above or below the longer term averages since 2006.
The results suggested that people were expecting volatility across asset classes in 2013 to be higher tha ...
Fri, 02 Aug 2013 16:18:21 GMT
Research by Deutsche Bank helps pension funds understand differences between the models commonly used by asset managers and advisors to allocate their assets.
Deutsche Bank (DB) recently published a substantial piece of work analysing different approaches to portfolio construction which makes a useful contribution to the existing material available on the issue.
As DB rightly point out, historically there has been a focus among the institutional investor community on chasing “alpha adding” ideas such as individual trades, asset rotational theories or identifying star asset m ...
Thu, 01 Aug 2013 11:25:02 GMT
The first time it struck me I was in the aisle of Trader Joe’s late one night, just off Sunset Boulevard in LA. I wandered in with the intention of purchasing cereal for the following day.
I normally consider this to be a simple task, and one that I’ve performed with panache for years. I stroll confidently towards the cereal aisle, swiftly scan for any of my favourite brands (one will always be there), make a quick judgement call and head towards the cashier brandishing my box of [Cheerio’s] - without so much as breaking my stride. My hunter-gatherer forbears wo ...
Wed, 24 Jul 2013 15:08:28 GMT
The OTC (over the counter) derivative market is due to change significantly in the next couple of years, with a knock-on effect to all pension funds running an LDI strategy. In short, schemes will face a shift in focus from OTC bilateral transactions (between two counterparties) towards centrally cleared transactions, driven by new regulations in Europe (EMIR) and US (DoddFrank Act).
This change is taking place because, in the wake of the Global Financial Crisis, G20 ministers agreed to introduce changes to OTC derivative markets to prevent a repeat of the systemic failure within ...
Mon, 22 Jul 2013 16:36:27 GMT
The shift from Defined Benefit (DB) to Defined Contribution (DC) pension provision, unaccompanied by Financial Education for Young People, has the potential to precipitate socio-economic crisis.
Recent years have seen the vast majority of UK based DB pension schemes close to new members (according to Pensions Insight just 13% remain open to new members), with many of these closed funds also closed to future accrual for existing members.
These closures represent the final acknowledgement of what has been industry consensus for some time; the DB system of reti ...