investment banking pensions forum
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Redington's business update, investment strategy, and manager research process.TRANSCRIPT
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