UK - Trustees must cast aside any hesitations they have about using swaps and allow fund managers to use them to match scheme liabilities, Pimco claims.
The fixed income specialist said that despite being a new topic for trustees to try to digest, swaps were essential if fund managers were to run mandates geared to their clients’ liabilities, as well as useful tools that could boost returns and reduce risk.
Swaps are financial instruments that allow investors to exchange payment streams for their mutual benefit. Payments can be based on interest rates, currencies or equity returns and Pimco claims that swaps can be used to structure portfolios so they pay out the required cashflows a scheme needs for a predetermined period.
At the same time, swaps can be used actively as an overlay, to neutralise the downside risk in schemes’ active fixed income portfolios.
Additionally, swaps can provide fund managers and their clients with “useful” information about market expectations.
The price a counterparty is willing to pay for a swap indicates how people believe the market will play out, and investors can tailor their investment strategies accordingly to take advantage of them.
Pimco portfolio manager Mike Amey said: “There is a large, liquid, cost-effective market in swaps, which offers real opportunities for our clients.
“Any operational risks are more perceived than real, and they are minimal when compared to the advantages.
“Swaps offer genuine benefits in portfolio management.”
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