ldi swap funds and gilt funds - global · 2019-07-04 · our leveraged gilt funds there are two...

Continued

PAGE 1

Background to Liability Driven Investment

Liability Driven Investment (LDI) is about understanding the risks inherent in the liabilities of a pension scheme and providing asset solutions which reduce unrewarded risks. The value placed on the liabilities will move as interest rate and inflation expectations change over time. However, assets of the scheme may not show a similar change in value and therefore the scheme is exposed to the risk of asset and liability values not moving in line with each other. For many years, LDI has proved itself to be an invaluable tool in helping pension funds to manage such risks better.

LDI structures enhance flexibility for pension funds with the inclusion of leverage. By leverage, we simply mean that we require less than £100 of assets invested in LDI to hedge £100 of liabilities. This allows the scheme to reduce risks whilst still being able to invest in “growth” assets such as equities.

What is the key difference between a fully funded and partially funded strategy? Our LDI funds are partially funded or, put another way, they are leveraged. An LDI fund that is three times leveraged means that £1 invested in the fund will hedge £3 of liabilities. Pension schemes would like to match their liabilities by holding fixed income assets. At the same time many schemes also want to hold equities or other growth assets to generate return and perhaps to help repair any deficit that might exist. Leveraged LDI funds could be a solution to this dilemma. For example,

BMO Global Asset Management is a leading provider of Liability Driven Investment (LDI) solutions in the UK marketplace with a reputation for innovation and client-focused solutions.

Our LDI Swap Funds and Gilt Funds offer clients access to effective and capital efficient LDI solutions, tailored to each client’s unique hedging requirements.

Contact usInstitutional business:

+44 (0)20 7011 4444

institutional.enquiries@ bmogam.com

bmogam.com

LDI Swap Funds and Gilt Funds

“Our LDI Funds allow a pension scheme to hedge its interest

rate and inflation risks without the need to eliminate its

exposure to growth assets such as equities.”

Alex Soulsby, Head of Liability Driven Investment

LDI Solutions

For professional investors only

Continued

PAGE 2

if a pension scheme wants to hedge £100m of liabilities using bonds then that scheme will need to invest £100m in bonds. However, if the scheme elects to hedge £100m of liabilities using a three times leveraged LDI fund, the scheme will only need to invest £33m in the LDI fund leaving £66m to invest elsewhere.

Example showing a funded vs partially funded strategy:

Fully funded LDI strategy Partially funded LDI strategy

£100m assets in LDI unleveraged strategy

Provides a liability hedge of c. £100m

£33m assets in LDI leveraged strategy (i.e. 3 times leverage)

£66m in growth assets

Provides a liability hedge of c. £100m

Our LDI Swap Funds

Each fund consists of investments in two types of instruments:

a) Interest rate and / or inflation swapsb) Collateral assets invested in a conservative money market strategy

Each fund provides interest rate and / or inflation swaps in a five-year bucket which pension funds can combine to match their unique liability profile. Exposure in each bucket is achieved by means of swaps. The collateral assets of each fund are invested in short-term money market instruments. The benchmark for the collateral assets is the 7-day GBP LIBID.

The leverage in each sub-fund varies with the shorter-dated sub-funds being more leveraged. In general, the fund targets an average leverage of three times.

There are three series for hedging different types of liability risks:

a) Nominal – for hedging nominal interest rate riskb) Real – for hedging real interest rate risk (nominal and inflation risks)c) Inflation only – for hedging inflation risk only

Our Leveraged Gilt Funds

There are two series for hedging nominal and real liabilities. Each sub-fund provides exposure to a named gilt, on a leveraged basis. Leverage is generated through gilt repo or gilt total return swaps. The shorter-dated sub-funds are more leveraged but, on average, the leverage is about three times. The amount of exposure to the underlying gilt does not vary over time, at a unit level, meaning that pension schemes can accurately hedge their projected cash flows.

Low cost and flexible hedging solutions

Nominal interest rate, real interest rate or inflation* risks can be hedged separately *swaps only

Continued

PAGE 3

LDI Swap Fund Range

Maturity Common sterling liquidity fund

2017-2021 LDI Nominal 1 LDI Real 1 LDI Inflation 1










Average 4x leverage

Leveraged Gilt Fund Range

Maturity: out to 50+ years

Nominal Gilt 2022 Index-linked Gilt 2022










Average 3x leverage

LDI funds – How are the investments in each fund determined?

We can determine the sensitivity of a pension fund’s liabilities to both inflation and interest rates. The sensitivities of the liabilities and existing fixed income assets are then aggregated into five-year maturity buckets that correspond with the LDI funds, as demonstrated below.

Nominal Interest Inflation

Sens

itivi

ties*

(£ 0

00s)

40

30

20

10

0

-10

-20

-30

-40

Tenor

2016-2021

2021-2026

2026-2031

2031-2036

2036-2041

2041-2046

2046-2051

2051-2056

2056-2061

2061-2066

2066+

Sens

itivi

ties*

* (£

000

s)

40

30

20

10

0

-10

-20

-30

-40

Tenor

Sens

itivi

ties*

(£ 0

00s)

40

30

20

10

0

-10

-20

-30

-40

Tenor

Sens

itivi

ties*

* (£

000

s)

40

30

20

10

0

-10

-20

-30

-40

Tenor

Corporate bonds Funded liabilitiesUnhedged Corporate bonds Funded liabilitiesUnhedged

Corporate bonds Funded liabilitiesUnhedgedLDI Corporate bonds Funded liabilitiesUnhedgedLDI

2016-2021

2021-2026

2026-2031

2031-2036

2036-2041

2041-2046

2046-2051

2051-2056

2056-2061

2061-2066

2066+

2016-2021

2021-2026

2026-2031

2031-2036

2036-2041

2041-2046

2046-2051

2051-2056

2056-2061

2061-2066

2066+ 2016-2021

2021-2026

2026-2031

2031-2036

2036-2041

2041-2046

2046-2051

2051-2056

2056-2061

2061-2066

2066+

* Change is value for a 0.01% parallel shift in nominal interest rates ** Change is value for a 0.01% parallel shift in inflation rates

Source: BMO Global Asset Management, for illustrative purposes only.

Collateral assets

LDI is envisaged as a risk reduction strategy and therefore we use low risk assets as collateral. For our swap funds, we use our Sterling Liquidity Fund. The Sterling Liquidity Fund invests in a range of high-quality assets with low maturity limits, which means that the fund should demonstrate a high level of price stability, low credit risk and high liquidity. For our gilt funds, we use the gilt that the particular sub-fund invests in.

Leaders in LDI

Liability Driven Investment is one of our key strategic pillars and it is one of our most rapidly growing areas of business. To date the team has implemented over £209bn in notional derivatives overlay transactions. The scale and importance of this capability means that we are committed to the continued growth and reinforcement of the product platform.

Team and resources

Led by Alex Soulsby, the 18-strong team includes derivatives fund managers, quantitative analysts and investment specialists who are experts in derivatives, insurance, pensions, quantitative methods and fund management, with an average of 12 years in the industry. The team is well supported in its dealing activities by our client and business support functions. This includes a team of in-house lawyers, an independent risk oversight team, a large team of client directors supported by a client servicing team and a derivatives middle office team.

Glossary

Inflation swap:This is an agreement between two parties to exchange a series of inflation-linked cash flows in exchange for fixed cash flows. Pension schemes typically hedge their inflation-linked liabilities by receiving inflation-linked cashflows in exchange for fixed cash flows.

Interest rate swap:An interest rate swap is an agreement between two parties to exchange a series of cash flows. Typically a pension scheme would hedge its fixed liabilities by paying floating cash flows in exchange for fixed cash flows.

Sale and repurchase agreement (gilt repo):This is a method of generating leverage within a gilt portfolio.

LDI Provider of the Year 2012, 2013, 2014 and 2015

LDI Manager of the Year 2011, 2012 and 2013

Liability-drivenInvestment F&C Management

Continued

PAGE 4

Risk Management Provider of the Year 2015

This information is for existing or professional investors only and is not intended for distribution to any other persons. This document is provided for information only and is not to be construed as investment advice to a recipient on the merits of their subscribing for any investment in the units of the F&C LDI Fund (the “Fund”). This document does not constitute, or form part of, any solicitation of any offer to deal in the units of the Fund, nor shall it (or any part of it) or the fact of its distribution, form the basis of, or be relied on in connection with, any investment decision or any other purpose to invest in the same. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of any investment in the units of the Fund, and should consult its own legal counsel and financial, actuarial, accounting, regulatory and tax advisers to evaluate whether to make such an investment. No reliance may be placed for any purposes whatsoever on the contents of this document or on its completeness. All information herein regarding possible investment potential arising from the liability driven investment strategy for the Fund is indicative based on certain assumptions and current market conditions and is subject to change without notice. All other information (including market data and statistical information) has been obtained from various sources. With the exception of any information herein stated as being derived directly from the prospectus for the Fund, no representation or warranty, express or implied, is given and no responsibility or liability is or will be accepted by or on behalf of BMO Global Asset Management or by any of its subsidiaries, affiliates, employees, directors, officers or agents or any other person as to the accuracy, completeness or correctness of the information contained in this document or any other oral information made available and any such liability (whether in negligence or otherwise) is expressly disclaimed. Any analysis presented herein that indicates a range of outcomes that may result from changes in market parameters is not comprehensive, is not intended to suggest that outcome is more likely than another and may have been derived using BMO Global Asset Management proprietary models, historic data and subjective interpretation. The investments made by the Fund will include swap derivatives and therefore an investment in units in the Fund may give rise to substantial risk and will not be suitable for all investors. Transactions of the sort described in this presentation contain complex characteristics and risk factors. Past performance should not be seen as an indication of future performance. The value of investments and the income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. Information in this document is correct as at February 2016.

© 2016 BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority. CM07967 (02/16).

ldi swap funds and gilt funds - global · 2019-07-04 · our leveraged gilt funds there are two...

Documents