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Browse by CategoryHome » Category List » LDI
“Portable Alpha Theory & Practice”: Exclusive chapter downloads at AllAboutAlpha.com8 May 2008
Impressed with what we saw in the book, we called up its author Sabrina Callin and have now arranged to provide you, the loyal AllAboutAlpha.com reader, with two of its chapters for free. Today, we give you chapter one - the introduction by Callin that provides a good summary of the entire book. And next week, we’ll post the Epilogue by Callin’s PIMCO colleague Chris Dialynas. But for those who are totally pressed for time, here’s a “summary of the summary” reflected by the chapter titles and a few key excerpts from chapter one:
Comments »Alpha-centric Newsreel14 March 2008
Morgan Stanley says Alpha/Beta Separation “the way of the future”. The AllAboutAlpha site partner lays out its alpha-centric philosophy telling IPE that the pension industry is about to experience a “second wave” of LDI strategies based on the separation of alpha and beta. Dutch Insurer Aegon splits portfolio into alpha and beta segments are farms each one out to a different manager. According to the firm’s press release, “By managing the parts separately from one another, better risk-return ratios are possible. This way, more sources of value added will be available and a greater focus can be created in the portfolio. Separating the US share portfolio has created an increase of a yearly average of the total return of 2.5% without any risk increase.”
Comments »No Country for Old Men25 February 2008
But there are a few factors that can’t easily be hedged. Chief among them is “longevity risk” - the risk that retirees live longer than the pension plan had expected. This has put the spotlight on the mortality assumptions underpinning pension plans. Apparently, since we stopped smoking during pregnancy and allowing our kinds to eat lead paint, we’re all living a lot longer. Still, predicting the future of the human lifespan has been devilishly hard and remains open to opinion. Last week British pension regulators tried to standardize things a little - and, it hopes, prevent pension plans from using overly pessimistic mortality predictions in order to reduce funding shortfalls. This article on the British Telecom pension plan says that the new regulations would immediately put the plan into hawk - knocking it from a slight surplus to a 2 billion pound deficit:
Specifically, the UK pension regulator (known officially as “TPR” for “The…Pension…Regulator”) said it would now keep a closer eye on plans that use over pessimistic mortality assumptions or that assume the century-long rise in longevity will eventually come to an end. Warned the regulator:
Comments »Why the fountain of youth would unleash a flood of liabilities7 February 2008
Then one day, magician David Copperfield announces that his quest for the fountain of youth has finally yielded some results. He has scientific evidence that the stream running through his Bahamian plantation will allow anyone on Earth life to the age of 100. “Damn that Copperfield!” you exclaim. Now you have to save a lot more for retirement than you had planned. All of a sudden, beating the S&P 500 ain’t looking so hot anymore, eh? You’re now on the hook to support yourself for an extra 15 years. Pension plans face this problem all the time. In fact, a scan of FTSE 100 companies this week reveals that 10% of them had to raise their expectations of longevity this year alone - significantly increasing their future liabilities.
Comments »Manager suggests possible conflict of interest in Liability-Driven Investing4 September 2007When institutions want to match their assets to their liabilities (i.e. their scheduled payments to pensioners), they have essentially two choices. They can invest in a portfolio of bonds that has the requisite payment schedule or they can use an “overlay” - a swap contract that can single-handedly modify the duration of the assets in order to match liabilities. But while the swap idea sounds enticing (it allows pensions to maintain their existing portfolios), it comes with a cost. In this article from P&I, Goldman Sachs’ Chris Sullivan says many of their clients use swaps to start with and then opt to rejig the portfolio itself in order to match liabilities. It turns out the swap requires a lot of collateral. Reports P&I:
SEI, however, seems to disagree. P&I reports that nearly all of its clients use swaps to match assets and liabilities. In fact, Jim Morris, senior vice president, global institutional solutions at SEI tells P&I:
Comments »LDI Sausage30 July 2007
Now Pensions & Investments reports that at least one LDI provider, ING, has offered to make the entire sausage itself. All the pension has to do is pull up a chair and enjoy those tasty links with their scrambled eggs. This development was inevitable. It seems to be the natural evolutionary path of various business services industries. Services firms who begin life as consultants gradually morph into full-fledged suppliers of core business functions. For example, in the 1990’s, it gradually dawned on the consulting industry that if it was so good at creating efficiencies, why should it not just assume responsibility for entire business processes on a contingency fee basis. That way, they could profit from their own ideas, rather than simply provide them by the hour. I recall my own employer, a Big 5 firm, pitching the US Government on the operation of entire military and government installations.
Comments »Conference proceedings amount to alpha-centric radar screen15 July 2007
P&I recently posted the conference proceedings and most of the slideware from the event on their website. Naturally, it’s hard to follow many of these presentations without the benefit of having heard them yourself. But for those of us who were busy those weeks, the presentation materials are still somewhat indicative of major trends and issues in alpha-centric investing. The agendas for both events were basically the same (with one notable exception - see below). Here is a listing of some of the more alpha-centric agenda items along with links to related AllAboutAlpha.com content:
Comments »Swaps: “The hand in the absolute return glove”3 May 2007
Unfortunately, pension sponsors have no control over the discount rates used for this calculation. When rates go up, the present value of future payments to pensioners goes down. When rates drop, the present value of those future payments rises.
Comments »LDI: Portable Alpha’s First Cousin27 March 2007
On Monday, Aon Consulting released its latest study of UK pensions and its findings match those of a similar study conducted by Greenwich Associates (covered last month). According to the Aon study, British pension schemes turned toward alpha-generating alternative investments such as real estate, hedge funds and global tactical allocation in 2006. (ed: The British term “scheme” always gets a chuckle in the US where it takes on more nefarious meaning - one that may ironically be more appropriate for pensions that actually have no way in hell of keeping their promises to growing legions of retirees).
Comments »Legal warning over “too safe” LDI21 November 2006By: Daniel Brooksbank, IPE.com Clients of Portable Alpha’s cousin Liability-Driven Investing (LDI), take note: According to UK law firm Reynolds Porter Chamberlain, trustees who embrace LDI can leave themselves exposed to negligence claims for being too conservative. According to IPE.com:
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Last week, 
Here is a sample of the news stories we didn’t get a chance to explore in detail this week. As usual, all of them can be found on the Alpha-ticker above or in the news items section of AllAboutAlpha.com (free registration may be required for a few of these).
As we discussed 
Let’s say you’re saving for retirement and you plan to live to the ripe old age of 85. You save accordingly by socking away a certain amount every year and banking on the market to provide you with a tail wind to help you built just the right sized nest egg. To your delight, your portfolio seems to be beating the S&P 500 year after year. Way to go, fella! 
There’s little question that portable alpha and liability-driven investing (LDI) have captured the attention of the world’s pensions over the past 5 years. But while pension funds are attracted to the results of such strategies, they can be turned off by their complexity (
In the spring, we told you about 
Liability Driven Investing (LDI) or Liability-Matching, as it is sometimes called, aims to produce a very specific amount of capital at a given point in the future. Not unlike an individual’s own retirement fund, an LDI strategy aims to cover the future costs of paying a group of pensioners a pre-defined amount of money. So even if a pension fund manages to beat the market, it might still fall short of its future commitments if, say, workers all live to 100. Conversely, it might under perform its peers and still meet its liabilities. To calculate a pension’s funding position, actuaries discount these future cash flows back to the present and compare them to the current value of the pension’s assets. As a result, the discount rate used can have a dramatic effect on the present value of these future cash payments. 
On the family tree of modern investment management “LDI” and “Portable Alpha” are first cousins. Unfortunately, familial affection doesn’t necessarily go both ways. Portable Alpha is beginning to play a critical role in LDI strategies. But LDI isn’t really a prerequisite for portable alpha. As a result, LDI is a topic that is often ignored by the financial media, or worse yet, obfuscated with actuarial mumbo jumbo.
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