Fri, 11 Oct 2013 14:29:43 GMT
"Prediction is difficult, especially about the future."
Niels Bohr - Danish Physicist
Nowhere has this been truer in the last 20 years than in the area of human longevity forecasting. In the first of a series of blogs dealing with the investment implications of longevity improvements let’s take a look at the approaches that have been taken by UK pension schemes in the area of forecasting longevity improvements, and summarise where the industry is currently.
Source: ONS, Redington, CMI
It is well known that longevity in isolation is a significant ...
Thu, 10 Oct 2013 16:31:23 GMT
It may surprise my readers to discover that I am a fan of equity investments. I think they are likely to offer higher returns to a long-term investor than most other asset classes. The issue is that you cannot rely on the returns.
To invest in anything, it’s important to know the risks involved; and I worry that many investors have vast allocations, 50% or more of their portfolios, in an asset class they don’t fully understand. For instance, investors wary of leverage often have few qualms investing in leveraged companies. For this blog though, I’m going to focus on a p ...
Thu, 26 Sep 2013 17:39:50 GMT
Pension funds face an eternally difficult process of setting goals and then making sure they reach them. It doesn’t sound complicated, but it is.
The better a pension fund can get, though, at setting well thought-out goals, the better chances they have of reaching those goals. Ultimate goals for pension funds often include repairing the pensions deficit, reaching full funding and improving member security. When people’s pensions are on the line, it’s vital that these goals and milestones that come before them are set in a way that’s SMART: Specific, ...
Wed, 25 Sep 2013 14:13:53 GMT
I've been involved in identifying, assessing, hiring, developing and managing talented investment managers for most of my career. In 2004, I worked on an initiative, at my then employer, with some organisational psychologists to uncover ‘What are the common traits of the best fund managers?’. A decade later, my current project and the article in this week’s FTfm have brought the question of ‘what makes a really good fund manager’ and ‘is it really possible to identify them through manager research’ back to the surface of my attention. More b ...
Wed, 25 Sep 2013 11:28:36 GMT
Taper talk: search volume for taper related queries this year
Ever since the world’s major central banks first started their various programs of liquidity injection and asset purchase, financial markets have for the most part existed in an odd world where, paradoxically, bad news on the economy was believed to hail increased asset purchases and therefore was positive news for the prices of equities, credit and sovereign debt.
This paradigm was shaken in May and June of 2013 as the Fed revealed to markets the circumstances under which it would begin to &ldquo ...
Tue, 24 Sep 2013 12:33:12 GMT
A combination of increasing equity values and increasing interest rates is likely to have led to an improvement in the funding level of most pension schemes. Indeed, we are currently experiencing the most attractive time to switch from growth assets to protection assets in more than two years.
The progressions of equity markets, nominal interest rates (the average term to payment of the 30-year coupon-bearing swap rates is similar to most pension schemes) and inflation rates (the average term to payment of the 20-year zero-coupon swap rates is similar to most pension schemes) ove ...
Fri, 20 Sep 2013 11:59:50 GMT
Summary of changes
The issue of Dodd-Frank raises its head again. On October 9th the current CFTC exemption is due to expire. From October 10th any clearable swaps dealt with entities covered by the Dodd-Frank protocol will have to be cleared. In a nutshell this means that any pension scheme or client that deals interest rate swaps with certain US swap counterparties will have to update their ISDA documentation if they want to avoid Dodd-Frank. This avoidance of Dodd-Frank stems from reasons of simplicity, clarity and the sheer regulatory burden of being caught by two sets of regulation ...
Thu, 19 Sep 2013 13:47:30 GMT
A common argument in favour of equity investments is that, even though they go down, and go down hard, they will bounce right back up again. Effectively, the argument goes, equity returns will revert to a mean. But mean reversion is a strange concept - like the soul, there are more people saying it does or doesn’t exist than there are people saying what they think it means. My plan is to resolve the debate, once and for all; and do so in the next few hundred words.
There is, as mentioned, no single accepted definition of mean reversion1 ; since the issue is quite subtle, we br ...
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. ...