Tue, 10 Nov 2015 09:59:25 GMT
Clients often ask us to what extent our expected returns should adjust to changing market conditions. For an investment grade bond, this is relatively easy - you will earn the credit spread less any defaults. So it’s quite straightforward and objective. For equities, it is much harder to say whether the market is over or under-valued. There are lots of measures that appear to work historically, but interpreting the evidence is fraught with subtleties. One commonly used metric is the Shiller P/E ratio- but does the evidence hold up?
Shiller P/E Ratio
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Thu, 13 Aug 2015 14:44:39 GMT
In our previous RedBlog post, my colleague Dan discussed how to incorporate expected rate rises into the liability hedging decision. In this piece I offer an alternative perspective on yields and liability hedging.
A Little Background
Over the last few years, many investors have delayed hedging as they believed that benchmark yields would increase, meaning that hedging would be cheaper later. These increases were expected as a result of the end of quantitative easing and central banks raising their historically low policy rates.
It has been a long wait.
Today, unemployment is c ...
Tue, 11 Aug 2015 12:34:08 GMT
Most pension scheme trustees would agree on one thing. Long-term interest rates are at low levels in the UK today (compared to their history). It’s easy to find explanations for this among economists. It's just as easy to find predictions they will go up, down, or stay the same. Unfortunately economists and markets have a poor track record of predicting interest rate moves.
The point of this post is not to offer another view on interest rates.
If we believe rates are rising should we still be hedging?
Pension schemes feel like they are stuck between a rock and ...
Mon, 27 Jul 2015 16:55:33 GMT
How can the language of music help to decipher the jargon in pensions? Many industries and professionals carry their own technical language (“jargon” for everybody else), so it can be helpful to translate this into more familiar terms.
During her one week internship at Redington, A-level student Antara Roy did just this – read on to see how playing a flute is useful in learning how to prepare a flight plan:
"A passion of mine has always been music; whether it has been listening to ...
Mon, 06 Jul 2015 18:33:14 GMT
“When deciding how to invest a pension fund’s resources you must consider the indexation treatment of each liability tranche to get an accurate picture of the interest rate and inflation sensitivity of scheme liabilities”…
…was definitely not what was going through our heads when first joining Redington. It’s easy to look back just 10 months and laugh at those, frankly, basic questions.
The asset universe is an endless world of complexity. A world full of mystery and confusion.
Even the acronyms themselves were more than enough to deal with, ...
Tue, 30 Jun 2015 15:05:59 GMT
In my last Pensions Expert column, I wrote about the challenge for the new Pensions Minister in balancing short-term political expediency with truly progressive pensions policy.
If we are to achieve long-term sustainable retirement provision, policy needs to be aligned with long-term objectives rather than short-term vote-winning.
There have been calls from some quarters for the new Pensions Minister, Ros Altmann, to consolidate the changes made under Steve Webb and his predecessors and resist radical reform. Yet affordability of pensions is one of the UK’s biggest challenges ...
Tue, 23 Jun 2015 09:37:23 GMT
Because sadly, prioritisation doesn’t always mean doing the easiest thing first…. or the sexiest.
In their quest for performance, amateur cyclists, like a number of Trustees and CIOs, can sometimes focus their attention on the wrong things… in this respect, setting the right investment strategy is not dissimilar to cycling and gives rise to the same pitfalls.
We love to focus on the “sexy” and forget about the basics.
What’s Your Average Amateur Cyclist Got To Do With Investment Strategy?
Take your average enthusiastic amateur cyclist. You ...
Thu, 30 Apr 2015 10:55:26 GMT
The tax paid* on your overseas equity dividends is not usually top of the pile when talking about your investment strategy.
However, the issue is significant. Long-term returns can vary by up to 0.5% p.a between two identical global equity indices due to the differing treatment of dividends*.
30 years to 31.12.2014
Net Dividends Index
Gross Dividends Index
Source: Bloom ...
Thu, 16 Apr 2015 10:14:39 GMT
Negative interest rates don’t seem to make a lot of sense.
People value money now, more than potential money in the future. You need to pay people to deposit their money longer-term.
Think about it...
This means interest rates should always be positive. The lognormal distribution is often used for interest rate moves. This does not allow negative rates1. Besides, if it costs money to lend money, it seems likely that people will stop lending.
That’s the theory; what’s the reality?
Like a great many arguments this is ...
Mon, 13 Apr 2015 10:00:03 GMT
What does last week’s Pension Freedom Day mean for more than just the individual? The media coverage has been largely monochrome in its assessment of economic risk.
What about the big picture?
Opinion of the new policy aside, commentators seem to agree on one thing. ‘The risk’ is of retirees blowing their hard-earned savings in a spending spree and becoming dependent upon state welfare programs for maintenance. The imagined queue of new retirees outside Lamborghini showrooms and Luxury cruise operator offices makes for a compelling news story, after all.