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Rene Martel, Vijendra Nambiar
The LDI completion manager structure may help alleviate many of these drawbacks. Under this framework, one of the LDI managers is chosen to “quarterback” the program. The other fixed income managers are asked to run their portfolios against standard or plain vanilla fixed income benchmarks (long-term government/credit, long-term credit, etc.). The completion manager is the only one managing against a (highly) customized benchmark that is structured such that the overall fixed income target exposure is achieved given the mandates run by the other managers. The scope of LDI completion manager assignments can vary considerably. In its simplest form, the completion manager role revolves around glide path monitoring support and regular fixed income portfolio adjustments in an effort to ensure that overall fixed income target exposures are achieved – especially when the plan hits a glide path trigger and assets flow from the return-seeking portfolio to the LDI portfolio. In more comprehensive assignments, LDI completion managers can also implement overlays to achieve synthetic exposures either to interest rate markets – to fine-tune the liability hedge – or to return-seeking markets like equities. The implementation of a synthetic equity overlay (equity futures or swaps) can significantly improve the efficiency of glide path transitions. Indeed, once a trigger is met, the reallocation from equities to bonds can be achieved by simply dialing down the size of the synthetic equity exposure instead of trading physical bonds and equities. In some cases, completion managers may even be asked to implement a portion of the return-seeking mandate (equities or alternatives, for example). This approach makes the transition from return-seeking assets to the LDI portfolio even more straightforward when funding ratio triggers are met.
Past performance is not a guarantee or a reliable indicator of future results. Investing in the bond market is subject to certain risks, including market, interest rate, issuer, credit and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Swaps are a type of derivative; swaps are increasingly subject to central clearing and exchange-trading. Swaps that are not centrally cleared and exchange-traded may be less liquid than exchange-traded instruments. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2013, PIMCO.
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