Liability driven investing conference 2011 movies
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So far, the results have demonstrated that a KRD approach to hedging liabilities produced excellent results in terms of risk management and that a reliance on equities to close this gap, even combined with a hedging strategy and with support from the plan sponsor, could still leave the plan underfunded after 10 years.
By diversifying across a range of asset classes, any shock to one of the components, such as the equity holding, might have less of an impact if other return-seeking asset classes are imperfectly correlated with the performance of the equity market. This is the benefit of diversification. Achieving this diversification by investing in alternative and real asset classes such as infrastructure, commercial property, timber, and agriculture—which we refer to as Plus assets for LDI portfolios—has the added benefit of bringing the risk characteristics of the growth portfolio more in line with the risk characteristics of the liabilities.
By investing in Plus assets, pension plans are essentially killing two birds with one stone. To investigate the value of integrating Plus assets into the growth portfolio, the plan can also allocate its funds to the following real assets represented by the related total return financial market indexes:. For investors such as pension plans, with very long-dated financial commitments, this illiquidity represents less of a drawback and more of an opportunity.
This is because investors in these asset classes can expect to earn a liquidity premium; that is, an addition to return in compensation for assuming this illiquidity. In Panel A, we see that the 5 th percentile for the strategy that incorporates Plus assets is lower than the comparable simulation without Plus assets.
We see that the probability is lower at all points over the period with the inclusion of the Plus assets. This leads us naturally to another important conclusion: While rebalancing liquid asset classes such as government bond portfolios and equity portfolios, investors should not attempt to manage illiquid asset classes in the same way; instead, a more strategic, dynamic approach to the problem is needed. In summary, we can say that including Plus assets into the growth portfolio requires a more dynamic approach to the management of the return-seeking assets than can be achieved through straightforward annual rebalancing.
In this section of the paper, we introduce dynamic decision-making. We do this by using cutting-edge simulation technology known as multistage stochastic programming MSP , 3 which is widely used in operations research. MSP allows for more sophisticated financial market models and realistic constraints, such as constraints on assets, transaction costs, and taxes, compared with more conventional simulation methods.
It also allows us to introduce specific objectives for the plan over the year simulation period, objectives that could be thought of as representing a strategy implemented by its managers. Objective 2—We assume that the plan wishes to maximise the funding ratio over the year planning ratio. These are realistic objectives for any real-world pension plan.
We can also calculate the median funding level of the plan and the 5 th percentile of the funding ratio distribution at 10 years, which we present in Figure 5. Panels A and B of Figure 5 present the results of our optimised approach; they show a dramatic improvement in the funding ratio position compared with the equivalent nondynamic simulation, adding Plus assets, the results of which we include in the figure for purposes of comparison.
In practice, of course, a plan with very strong funding would likely seek a buyout; in other words, the sponsor and plan managers would be unlikely to have such a high funding ratio as an objective. With regard to this dynamic approach, in Figure 6 we present the median asset allocation of the representative plan over this year period; we can think of this as being the optimal asset allocation of the plan. In summary, these results show the important and dynamic role that can be played by Plus assets in a derisking journey as plans seek to achieve their funding objectives.
We live in a world of uncertainty. From the impacts of climate change, global pandemics, and increasing longevity to potential changes in the very nature of financial markets, all or any of these factors can bear on the ability of pension plans to become fully funded down the road.
Rather than hoping for the best, plan sponsors must consider the worst scenario they can sustain. They must identify the risks, determine whether their current strategy allows them to sustain this uncertainty going forward, and use that as their basis for making strategic decisions for the future. Today, pension plans large and small have access to custom approaches using a mix of LDI funds designed to closely match liabilities and calibrate their credit exposure.
The school is an integral part of City, University of London, and is consistently ranked amongst the best business schools and programmes in the world. A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance.
For example, the novel coronavirus disease COVID has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social and economic risks. Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments.
These risks are magnified for investments made in emerging markets. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person, plan sponsor, or plan. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
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All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Readers should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice.
This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management.
Past performance does not guarantee future results. Building better pension plans with liability-driven investing. In this paper, Manulife Investment Management's Liability-Driven Investments team worked with a leading business school to develop a model representative pension plan and, using the latest simulation and modeling building technology, we aim to show the clear benefits of adopting LDI as a way of improving retirement outcomes.
So what makes LDI so special? If interest-rate and inflation risks are unrewarded, why bear them? An alternative approach to LDI The traditional growth asset class is publicly traded equities; however, this asset class can fall in value dramatically. Putting our theory to the test To help demonstrate the benefits of a multicomponent LDI approach to pension plan management and to test the extent to which LDI can help improve the likelihood of meeting all retirement obligations in full and on time, we commissioned Professor Andrew Clare of Bayes Business School 1 to construct a model based on the latest academic research.
An investment strategy that relies too heavily on the performance of equity markets, all else equal, will have a high probability of failing. Is it theoretically proven? Fund managers and traders look to add value over short time scales Numerous active participants limit opportunities to add value over short term time horizons DMRA is about exploiting medium term opportunities 3 to 5 year time horizon Look to take as many diverse views as possible to exploit benchmark risk Strategies to provide downside protection versus liabilities Exploiting an uncrowded area.
All data should be identical if markets are IID Clearly this is not the case, but how significant is this? Previous work has found difficulty with lack of data: we have a new technique Compare to 40 random scrambled data series.
This on average destroys any time series coherence, and allows us to assess significance. Harder to determine the relationship, if any, between relative variations of two or more series. Related measures of Correlation and Covariance are used to quantify this behaviour. Elements along the leading diagonal are unity. It is calculated as where Cov is the covariance matrix and B is the vector of bets away from a neutral benchmark position i. The sum of bets across all asset classes is 0.
Extension to TE versus liabilities is achieved by treating liabilities, represented by a replicating portfolio, as a separate asset class. Covariance is calculated in the usual way. If the trajectory actually falls outside the UB, then the process actually operating was NOT that proposed, to UB level of certainty 1.
A range of strategies and novel processes That are evolving in response to the problems pension schemes are facing Mark — to market Visibility in accounts Making optimum use of available risk budgets Specifically, avoiding unmanaged and unrewarded risk Employing those closest to the market to Perform against liabilities Over timescales that are now appropriate.
Revised: November, New England Pension Consultants. What will happen to one variable if another is. Asset Liability Management is a procedure which allows us to gain an understanding whether the companys assets would be sufficient to meet the companys. Similar presentations. Upload Log in. My presentations Profile Feedback Log out.