Products November 2, 2012

Paper Addresses LDI Misconceptions

Misconceptions about liability-driven investing (LDI) prevent many investors from implementing this strategy. 
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According to a white paper by Standish Mellon Asset Management Company LLC, the fixed-income specialist for BNY Mellon, LDI strategies mitigate interest rate risk and it may be inadvisable for pension funds to wait for rates to rise before implementing the strategy. 

Ten common questions regarding pensions and LDI are addressed, including whether pensions should implement LDI in a low interest rate environment. Standish believes there are sensible ways to incorporate this interest rate uncertainty into LDI approaches, such as establishing a glide path in which interest rate risk is diminished over time. Regarding whether a plan that implements LDI should invest 100% of assets in fixed income, Standish said plan assets can be categorized as either return-seeking or hedging. The amount allocated to fixed income should be based on plan status, plan type, funded status, interest rate outlook, liability duration, plan objectives and the sponsor’s ability and willingness to take risk. 

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The paper also favored pensions selecting active management for long duration bonds despite the lower fees associated with an index fund. It said there are sufficient inefficiencies in the corporate bond market to warrant an active approach to selecting the appropriate long-duration exposure. Standish also addressed appropriate benchmarks for a plan’s fixed-income allocation in an LDI strategy, whether the pension should invest only in high-quality bonds to best match the discount curves, how it analyzes a plan’s liabilities, how a glide path is structured, and how it evaluates the level of interest rates and forecasts future direction. 

Standish contends that derivatives can play an important role in the management of an LDI strategy from both a strategic and tactical perspective, and outlines different options. Furthermore, the paper addresses the minimum level of tracking error that can be achieved in an LDI strategy.

The white paper, “The Case for LDI in Any Interest Rate Environment: Clarifying LDI Misconceptions,” is available here.

Products November 2, 2012

Calvert Rolls Out Emerging Markets Fund

The Calvert Emerging Markets Equity Fund is a sustainable and responsible investment (SRI) mutual fund.
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The fund joins Calvert Investments’ family of SRI funds called Calvert Solution Strategies, and is sub-advised by London’s Hermes Investment Management Limited.

Using an SRI screen for sustainability and corporate responsibility, the fund invests in companies in emerging markets that are sensitive to environmental, social and governance concerns. While the fund is free to invest in companies of any market capitalization, it will strive to invest in companies with market capitalization characteristics similar to the MSCI Emerging Markets Index.

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“We see a growing opportunity in emerging markets,” said Natalie Trunow, chief investment officer, equities, Calvert Investment Management. “Emerging markets remain the fastest growing segment of the global economy, responsible for 85% of all global growth since the beginning of 2008. While the pace has slowed, the estimated ranges of growth rates are still significantly greater than the estimated range of GDP growth rates in developed countries.”

With emerging markets undergoing rapid social, political and economic developments, this is creating inefficiencies in investing in emerging markets, added Gary Greenberg, lead portfolio manager and head of Hermes Emerging Markets. “The volatility caused by these changes means that, at times, quality companies in countries with conditions that are supportive to growth will trade at very attractive valuations, allowing us to profit from temporary bouts of adverse market sentiment,” Greenberg said.

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