UK - Morgan Stanley Investment Management has entered the liability driven investment market, targeting pension funds concerned about their asset liability mismatch.
The initial offering of two “Alpha Plus” funds includes a 10-year product maturing in 2016 and a 25-year product maturing in 2031.
Morgan Stanley joins Barclays Global Investors, F&C, PIMCO, Fortis, ABN AMRO, Aberdeen, Threadneedle and SSgA, who have already launched products in the LDI space.
The firm offers a long-dated fixed rate return linked to UK interest rates and inflation. The fixed rate return is layered on top of the underlying performance of a fund of hedge funds, with an additional swaption feature to protect against a sharp rise in interest rates.
Justin Simpson, senior portfolio manager and head of structured products and derivatives in MSIM’s alternatives division, said the solution combined a swaps programme to neutralise interest rate and inflation risk, with the uncorrelated returns from an alpha engine purpose-built for institutions.
By entering into interest rate and inflation swaps, each fund will provide an inflation-linked return, similar to that on a zero-coupon UK index-linked bond and a UK gilt.
MSIM acknowledged that some investors may be discouraged from investing in a liability matching structure at this point in time because they did not wish to lock into current low interest rates.
To address this concern, it said the new funds would have the flexibility to purchase an interest rate swaption which would protect against sharp increases in interest rates.
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