investment banking pensions forum

Redington Investment Banking Pensions Forum

8 July 2014

Redington:Business Update

Our first client 7 years ago...

... our current list of clients.

21

55

98 100

185

225

250

300

335

0

50

100

150

200

250

300

350

400

2006 2007 2008 2009 2010 2011 2012 2013 Current

GB

P b

illio

ns

Assets Under Consulting: Evolution

Client size (assets)Trustee: Full

Advisor

Trustee:

ProjectSponsor

Non-

PensionTotal

> £10Bn 1 4 3 3 11

£5Bn - £10Bn 0 6 1 1 8

£1Bn - £5Bn 10 5 4 2 21

£500m - £1Bn 0 2 1 2 5

< £500m 4 1 1 3 9

Total 15 18 10 11 54

12 Full Time Equivalents doing Manager Research

LDI HUB

LIQUID MARKET STRATEGIES

LIQUID & SEMI-LIQUID CREDIT STRATEGIES

ILLIQUID CREDIT STRATEGIES

ILLIQUID MARKET STRATEGIES

REPORTING AND MONITORING

CLEAR GOALS AND OBJECTIVES

The 7 Steps to Full Funding

Investment Strategy

Multiple Investment Strategy Processes

Inconsistent

Poor Quality Possible

Time Consuming

One Investment

Strategy Process

Consistent

Quality Control

Efficient

Manager Research:Business Update

Investment

Strategy &

Research

Team

Risk Analysis and Modelling Asset Class and Manager Research

• Analysis and modelling of both

asset and liability side risks

across different key metrics

• Ongoing monitoring of Fund

progress against objectives and

risk constraints

• Design of strategic asset

allocations

• Disciplined framework for hiring

and terminating managers

• Team specialisations cover

entire universe of asset classes

through categorisation by

portfolio role

• Significant expertise in designing

and implementing investment

strategies

Focused ResearchRelevant AdvicePracticable Strategies

Integrated Investment Strategy and Manager Research

Comparison vs. ‘Traditional’ Investment Consultancy Model

Redington ‘Traditional’ Investment

Consultancy Model

Business Model Retained Fee Small Retainer and ‘Add-On’

Work

Research Team Smaller, Focused Larger, Maintenance Research

Manager Selection Included in Retainer Additional Fee Work

Manager Views Preferred Lists Ratings

Use of Managers High Conviction Many High-Rated Managers, Few

Win Capital

Philosophy Absolute Return, Risk-Allocation

Focused

Benchmark Focused

Client Decision-

Making Process

Flexible, Quick to Act Constrained, Slow

Preferred List Process

Advantages: Why?

High

Conviction

3 to 5 managers in each sub asset class, typically each will bring a

different approach to the strategy

Clarity for

clients

Clients on our retainer fee model will have access to all of our

preferred list recommendations and be able to see our views

Clarity for

managers

Feedback will be easier to deliver and clearer to understand

Governance Having existing preferred lists allows clients to allocate to an asset

class in a far more streamlined fashion

Alignment With our retainer fee model – we are no longer incentivised to

“churn” asset managers or drum up search business

Scalable We build up IP over time and much client work can be delivered from

existing resources

Flexible We continue to offer a bespoke search process if desired and for our

non-retained client base

LDI HUB

LIQUID MARKET STRATEGIES

LIQUID & SEMI-LIQUID CREDIT STRATEGIES

ILLIQUID CREDIT STRATEGIES

ILLIQUID MARKET STRATEGIES

REPORTING AND MONITORING

CLEAR GOALS AND OBJECTIVES

The 7 Steps to Full Funding

LDI Hub Liquid Markets Liquid Credit Illiquid Credit Illiquid Markets

Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance

Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity

Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure

Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate

CTA Emerging Market Debt Distressed Debt

Global Macro Absolute Return Bonds Senior CRE Debt

Equity Long-Short Multi-Class Credit

Credit Relative Value

Steps 2-6:

2

6

5

11

£4.0bn Allocated in 2013 (ex-LDI)* 25 Allocations Made in 2013:

Average Across Steps 3-6 = £176m

LDI Hub Liquid Credit

Liquid Markets Illiquid Credit

*£7.3bn inc. LDI

0.8

0.92.4

Manager Research Process

10 x 10 x 10Our approach to screening, selecting and monitoring managers

Universe

Meetings

Preferred

Sterling

Credit

DGF Infra-

structure

Debt

Senior

CRE

Debt

Absolute

Rtn.

Bonds

Oct

2013

Dec

2013

Dec

2013

Jan

2014

Jan

2014

43 33 25 30 86

9 15 8 7 20

3 3 2 3 4

Screening the Universe

Ones to watch

How we reduce the universe down to a manageable list

Qualitative / Judgemental Factual / Quantitative

Business alignment Capacity available

Commitment to product Fee level and structure

AUM Portfolio analysis

Team Performance & risk analysis

Transparency Product appropriateness

In our selection process, we are explicitly looking to

identify areas of competitive advantage.

We believe the very best managers differentiate

themselves in one of the following ways.

What are we looking for in preferred list managers?

1. Information Advantage

2. Screening Advantage

3. Decision-Making Advantage

4. Conviction Advantage

5. Self-Awareness Advantage

6. Teamwork Advantage

7. Risk Management Advantage

8. Execution Advantage

9. Strategic Advantage

10. Innovation Advantage

Competitive assessment - preferred list managers

Red Radar: Helping clients remain alert to what could go wrong

2. Client

Dependency

3. Leadership

Change

4. Culture

Change

5. Key

Person6. Complexity

7. Process

Drift

8. Capacity

Management

9. Operational

Infrastructure

10. Risk

Culture

1. Business

Management

Our approach to research meetings – what we are looking for

Meetings by category within a short time period (allows comparison)

Information and presentation in advance (so we can come prepared)

Avoid turning pages (not assessing presentation skills)

Focus on portfolio positioning, changes and decisions

Meet different people at all levels

Informal interaction, floor walk, attend morning meetings

Detailed information and transparency (portfolio analysis)

Keep us updated (monitor decisions over time)

In return we waste less of your valuable time in meetings, we focus on what matters,

make decisions quicker and give you more open feedback.

A Stroll Through our Investment Universe

Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance

Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity

Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure

Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate

CTA Emerging Market Debt Distressed Debt

Global Macro Absolute Return Bonds Senior CRE Debt

Equity Long-Short Multi-Class Credit

Credit Relative Value

Our LDI Philosophy

1. LDI fits within the PRMF (Step 1) risk budget and objectives of each client.

2. LDI is part of the overall ALM framework. Rates and Inflation are merely the largest

components of risk.

3. Redington make LDI decisions based on Risk impact and Required Return

expectations.

4. LDI strategy is outcome-focused for each client.

5. Redington do not call markets. We prefer Funding Ratio Triggers and dislike market-

based hedging strategies.

LDI Implementation in Practice

Start

Structure

Risk

What resources does each client have?

• CIO Function

• Legal Resource

What structure is most appropriate given size,

resource and derivative usage?

• Pooled vs. seg mandate

• QIF

• Own docs vs. Agency

How best to manage and monitor risk?

• Risk policies

• IMA

• Reporting pack

LDI Implementation:

Areas of Expertise

Banking

Group

Liquidity &

Leverage

Regulation

Assess the size / quality of the banking group and

related Swap and Repo documentation

• Best Terms?

• Fairness and Consistency

Ensure client has enough collateral given OTC usage

and pension outflows

• Has the client got enough leverage given required

Portfolio returns?

What are the impacts of EMIR on pension schemes?

• What are the implications of Banking regulation

on dealing costs and liquidity?

Review

As the hedge increases over time, how does the risk

profile of the portfolio change?

• When is it appropriate to change an LDI mandate

from Passive to Active?

Contractual

Non-contractual

LiquidIlliquid

Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance

Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity

Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure

Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate

CTA Emerging Market Debt Distressed Debt

Global Macro Absolute Return Bonds Senior CRE Debt

Equity Long-Short Multi-Class Credit

Credit Relative Value

Done / In Progress

Current Focus Areas

Lower client demand /

lesser focus

Higher client demand /

greater focus

Alternative Risk

Premia

Risk Parity

CTAs

Global MacroFundamental Long /

Short Equity

Fundamental Active

Equity

Contractual

Non-contractual

LiquidIlliquid

Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance

Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity

Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure

Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate

CTA Emerging Market Debt Distressed Debt

Global Macro Absolute Return Bonds Senior CRE Debt

Equity Long-Short Multi-Class Credit

Credit Relative Value

Done / In Progress

Contractual

Non-contractual

LiquidIlliquid

Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance

Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity

Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure

Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate

CTA Emerging Market Debt Distressed Debt

Global Macro Absolute Return Bonds Senior CRE Debt

Equity Long-Short Multi-Class Credit

Credit Relative Value

Done / In Progress

525

245

250

600

500

245

CRE Debt Distressed Debt Illiquid Corporate Debt

Infrastructure Debt Private Placements Senior Direct Lending

Total: £2.4bn

Allocations to Illiquid Credit over 2013 (£m)

Interacting With Us

Who ?

Dan MikulskisCo-head ALM & Investment Strategy, IC Member

Phil RoseCIO Investment & Risk, IC Member

Pete DrewienkiewiczHead of MRT, IC Member

Kenny NicollMRT, responsible for LDI implementation

Aniket DasMRT, responsible for liquid & multi-asset strategies

David BennettHead of Investment Consulting, IC Member

What ?

What’s most interesting for us, to hear from you, and why …

46

We like to hear about

Examples Why?

Market colour

Data on Z-spread, Inflation, Iota, LPI, Swaptions. Highlight significant moves in longer term context. Realised vol vs long term

Many of us have been practitioners, but we no-longer sit in front of Bloomberg or in the hub of a trading floor. Access & knowledge of this information is a key differentiator of us vs competitors

Comment around market events

Is it market moving ?Could it affect the attractiveness of certain strategies ?Would our clients be hearing about it ?

ThemesREPO market usage, central clearing, gilt issuance

We want to stay ahead of any themes that could influence the use of derivatives in our clients’ investment strategies so we don’t get caught out

Emerging risks

LIBOR/SONIA, CSA dirty to clean We’ve been ahead of our competitors in addressing these issues and adding constraints in LDI mandates. We’d like to stay that way

Asset Managers

Who do you see often, in which areas, execution strengths

We consider our ability to get colour on asset managers from the sell side an important differentiator from our competitors when it comes to manager research

1. LDI

What’s most interesting for us, to hear from you, and why …

47

We like to hear about

Examples Why?

What’s possible Implementing investment strategies synthetically allows clients to make better use of their physical asset collateral and adds another “lever” to their strategic asset allocation. It’s a significant differentiator of our process which we believe adds value, so its important for us to stay on top of developments

Liquidity Growth in liquidity of EM equity future

Costs Roll costs, funding costs We need to be on top of any changes in the costs associated with a derivative strategy so we can give comfort to our clients

Asset manager expertise

Who do you see often, in which areas, executionstrengths

We consider our ability to get colour on asset managers from the sell side an important differentiator from our competitors when it comes to manager research

2. Synthetic Asset Exposures

What’s most interesting for us, to hear from you, and why …

48

We like to hear about

Examples Why?

Colour on forthcoming deals

Deals, pipeline, structures, expected spreads

We’ve been advocates of allocation to illiquid assets where these can help our clients meet their required returns. Liquidity freed up from using synthetic exposures can be employed to earn an illiquidity premium

Clients by now expect us to have good visibility of deal pipeline and help them (via fund managers) to get access to the deals

Being involved early we can shape key terms etc to make most attractive to pension funds and hence increase chance of deal being done

3. Illiquid asset origination

What’s in it for you

What’s in it for you ?

50

We are advocatesof

…and this means Benefit to you

LDI, and managing riskthrough interest rate hedging (among other tools)

Appoint LDI manager if none existsIncrease LDI manager’s flexibility over instrument usage Widen counterparty bank panelIncrease interest rate & inflation hedge ratioConsider synthetic equity exposures

Indirect through LDI franchise, sales to asset managers

Derivative Based Strategies

We’ve allocated significant capital to the following strategies, with more to come

• Multi asset relative value

• Absolute return bonds

• Style risk premia

Indirect through derivative franchises, sales to asset managers

Risk Control & Explicit Downside protection

Design and implementation of strategies involving synthetic exposures, risk control & downside protection

• Vol control equity + put

Indirect through risk control franchise & structuring

What’s in it for you ?

51

We … …and this means Benefit to you

Have influence with asset managers

We can widen investment restrictions, add to fund manager discretion and suggest banks to add to counterparty panels.

Potentially increased opportunity for asset managers to implement rvideas (where there is a good case for it)

Are always keen to talk about the strategic direction of pension funds

Strategic insight into what we think pensions schemes will be interested in doing

Ability to position wrt products or asset manager coverage

Conclusion

Dos and Don’ts

Do Don't

Be selective

Be focused - Send us highlights and

"executive summaries" of research &

market colour

Read our website, blog & thought

pieces to understand our investment

philosophy, and what matters to us

Understand that individual trade ideas

probably aren’t for us

Try and keep in mind how things fit into

our strategic view of the world

Highlight opportunities for us to meet

directly with relevant traders who have

interesting insight

Keep us in the loop with product and

strategy ideas shared with our clients,

or prospects

Product push

Take a "Scatter gun" approach

Be unrealistic

View us as an outlet for a particular axe

or position

Waste meeting time talking about why a

particular asset or strategy makes

sense – we know!

Push for meetings more frequently than

is really necessary

Assume we are looking for opportunities

to move toward asset management