UK - Asset managers are developing structured funds that will enable small schemes to eliminate risk from their bond portfolios.
Schroder Investment Management has offered schemes access to structured products which use derivatives and swaps to match their liabilities. These, though, are used primarily by large schemes.
But now Aegon Asset Management and Standard Life Investments are bucking the trend by developing similar products aimed at small schemes.
The move follows warnings from PricewaterhouseCoopers investment practice senior manager Paul Sweeting that schemes were still carrying huge investment risks, despite their increased bond allocations.
He explained that because the average duration of a bond portfolio was 12 to 13 years, if interest rates fell, the value of their liabilities would go up by a greater amount than the increase in their assets.
But Aegon and SLI aim to counter this by developing pooled bond funds that use derivatives and swaps to extend the duration of the bonds in their portfolios to specifically match their liabilities.
SLI head of UK institutional business Stephen Acheson said:“Liability-driven investments is a topical issue being considered by many people.
“Not only is SLI able to provide these solutions for large segregated funds, but we are currently investigating how these solutions can be provided to small pension funds through some form of pooled arrangement.”
Buck Consultants senior investment consultant John Walbaum welcomed the development.
He said: “This is going to be a bigger area in the future. It is one we’re looking at very closely in terms of what we might do for clients.
“For many smaller clients, only a pooled vehicle makes sense financially.”
Schroders director, strategic solutions, Diane Knowles agreed and pointed out that the firm had already taken on 40 such portfolios from its clients worth a combined £2.6bn.
She predicted: “The use of structuring tools will become much more common. Three or four years ago, this was viewed as – not quite experimentally – but in terms of ‘how far can you go?’ This year, it’s been on everyone’s agenda and it won’t go away.”
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