Six reasons why Fiduciary Management is much more than “LDI+DGF” – part 1 of 6

December 9, 2013 Categories: Investment Strategy

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It is not uncommon to hear Fiduciary Management’s approach to investment for pension schemes abbreviated as “LDI+DGF”, that is Liability Driven Investment (LDI) plus a Diversified Growth Fund (DGF).

Undoubtedly an abbreviation but also an oversimplification that risks obscuring some of the most important issues to do with running a pension scheme.

A great DGF strategy is not always the same thing as a great pension scheme growth strategy, and if the LDI and the DGF are not properly integrated then the outcome will almost always be inferior. For a pension scheme investor the naive selection of DGFs, or the design of an LDI strategy in isolation can result in both sub-optimal portfolio construction, a lack of control over risk exposures as well as exactly the wrong dynamic investment decisions been made. Fiduciary management is much more than just the sum of its parts and from an investment perspective fiduciary management does have a lot more to offer than just LDI+DGF.

To try and make this clear and to spur discussion I have put together 6 short blogs which when added together provide a much more nuanced view of Fiduciary Management and investing for pension schemes in general than just “LDI+DGF” would suggest:

    1. Investment objective and investment horizon

The two most obvious differences between a DGF investor and pension scheme Asset and Liability (ALM) investor are the investment objective and investment horizon. A DGF investor will typically target a total return-esque like objective with a short-to-medium term investment horizon. On the other hand pension scheme investors are long-term investors (albeit with shorter-term risk tolerances). Their performance objective is usually in the form of a funding ratio objective, both risk and return. These differences can have a very real impact on the way the different investors go about their jobs. This is particularly the case when looking at the interactions between the growth and matching portfolio. This is a topic we will explore in more depth, particularly in parts 3→6

Coming soon

  1. Stability of beta exposures and the concentration of risk positions
  2. Integrated risk taking and solvency management
  3. Role of interest rate risk in the growth portfolio
  4. FX risk as the point of intersection between growth and matching
  5. Impact of interest rates vs equity correlation

Stay posted … and for those who can’t wait: here’s a hint of what comes next

 

Gwion Moore – Director, Client Strategy & Research, EMEA

 

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