GLOBAL - Demand for low-risk long-only mandates would see a "meaningful decline" if pension funds rushed into unconstrained an absolute return investments, according to Watson Wyatt.
Roger Urwin, global head of investment consulting at Watson Wyatt, explained that creating value through advanced investment strategies to reduce deficits and the implementation of sophisticated risk-management programmes were now "top priorities" for most pension funds.
"This has resulted in funds moving some of their assets away from benchmark-sensitive approaches to make meaningful allocations to alternative assets and absolute-return products," he said, and added that a growing number of pension funds had turned to the bond and derivatives markets to implement their LDI strategies.
In a publication - titled Flight Plan - the consultants also emphasised the need for pension funds to be clear about their governance resources before embarking on complex investment models involving significant asset diversity and skill-based strategies.
Effective LDI could play a key role in a pension fund’s investment strategy regardless of governance constraints, but active investment programmes did not suit all funds, warned Urwin.
“LDI is a major force and an effective tool by which investors can target any level of hedging to ensure that their fund’s liability exposures are carefully managed," he said. "As such, LDI has become a key part of many investment strategies, although implementation can be complex, particularly when using derivatives.”
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