Red Manager Forum 26 Feb 2014

Redington Manager Forum

26 February 2014

Redington: Business Update

Our first client 7 years ago...

... our current list of clients.

21

55

98 100

185

225

250

300

335

0

50

100

150

200

250

300

350

400

2006 2007 2008 2009 2010 2011 2012 2013 Current

GB

P b

illi

on

s

Assets Under Consulting: Evolution

Client size

(assets)

Trustee:

Full Advisor

Trustee:

Project Sponsor

Non-

Pension Total

> £10Bn 1 4 3 3 11

£5Bn - £10Bn 0 6 1 1 8

£1Bn - £5Bn 10 5 4 2 21

£500m - £1Bn 0 2 1 2 5

< £500m 4 1 1 3 9

Total 15 18 10 11 54

12 Full Time Equivalents doing Manager Research

Manager Research: Business Update

Our Manager Research Team 3 years ago...

... our Manager Research Team today.

Investment

Strategy &

Research

Team

Risk Analysis and Modelling Asset Class and Manager

Research • Analysis and modelling of both

asset and liability side risks

across different key metrics

• Ongoing monitoring of Fund

progress against objectives

and risk constraints

• Design of strategic asset

allocations

• Disciplined framework for hiring

and terminating managers

• Team specialisations cover

entire universe of asset classes

through categorisation by

portfolio role

• Significant expertise in

designing and implementing

investment strategies

Focused Research Relevant Advice Practicable

Strategies

Integrated Investment Strategy and Manager Research

Comparison vs. ‘Traditional’ Investment Consultancy Model

Redington ‘Traditional’ Investment

Consultancy Model

Business Model Retained Fee Small Retainer and ‘Add-On’

Work

Research Team Smaller, Focused Larger, Maintenance Research

Manager Selection Included in Retainer Additional Fee Work

Manager Views Preferred Lists Ratings

Use of Managers High Conviction Many High-Rated Managers,

Few Win Capital

Philosophy Absolute Return, Risk-

Allocation Focused

Benchmark Focused

Client Decision-

Making Process

Flexible, Quick to Act Constrained, Slow

Preferred List Process

Advantages: Why?

High

Conviction

3 to 5 managers in each sub asset class, typically each will bring

a different approach to the strategy

Clarity for

clients

Clients on our retainer fee model will have access to all of our

preferred list recommendations and be able to see our views

Clarity for

managers

Feedback will be easier to deliver and clearer to understand

Governance

Having existing preferred lists allows clients to allocate to an

asset class in a far more streamlined fashion

Alignment

With our retainer fee model – we are no longer incentivised to

“churn” asset managers or drum up search business

Scalable

We build up IP over time and much client work can be delivered

from existing resources

Flexible

We continue to offer a bespoke search process if desired and for

our non-retained client base

LDI HUB

LIQUID MARKET STRATEGIES

LIQUID & SEMI-LIQUID CREDIT STRATEGIES

ILLIQUID CREDIT STRATEGIES

ILLIQUID MARKET STRATEGIES

REPORTING AND MONITORING

CLEAR GOALS AND OBJECTIVES

The 7 Steps to Full Funding

LDI Hub Liquid Markets Liquid Credit Illiquid Credit Illiquid Markets

Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance

Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity

Leverage &

Liquidity Style Premia HY/Loans

Senior Direct

Lending Infrastructure

Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate

CTA Emerging Market

Debt Distressed Debt

Global Macro Absolute Return

Bonds Senior CRE Debt

Equity Long-Short Total Return Sub-IG

Credit Relative

Value

Steps 2-6:

2

6

5

11

£4.0bn Allocated in 2013 (ex-LDI)* 25 Allocations Made in 2013:

Average Across Steps 3-6 = £176m

LDI Hub Liquid Credit

Liquid Markets Illiquid Credit *£7.3bn inc. LDI

0.8

0.9 2.4

ALM / IC

Input

14

14

6

11

7

2

Total Manager Research Personnel (FTE): 12

Division of Team Responsibilities

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=_tnwar05CYm7AM&tbnid=4297jioaIvuRAM:&ved=0CAUQjRw&url=http://www.lapfinvestments.com/2011/11/evolution-or-revolution/&ei=6j1pUubmKMSI0AXF5YCQAw&bvm=bv.55123115,d.d2k&psig=AFQjCNFqikqtsUpTuEv7RyRXXfDjkFO4eA&ust=1382715013465835

Investment Strategy

Multiple Investment Strategy Processes

Inconsistent

Poor Quality Possible

Time Consuming

One Investment

Strategy Process

Consistent

Quality Control

Efficient

Redington Investment Committee

Manager Research Process

10 x 10 x 10 Our approach to screening, selecting and monitoring managers

Universe

Meetings

Preferred

Sterling

Credit

DGF Infra-

structure

Debt

Senior

CRE

Debt

Absolute

Rtn.

Bonds

Oct

2013

Dec

2013

Dec

2013

Jan

2014

Jan

2014

43 33 25 30 86

9 15 8 7 20

3 3 2 3 4

Screening the Universe

Ones to watch

How we reduce the universe down to a manageable list

Qualitative / Judgemental Factual / Quantitative

Business alignment Capacity available

Commitment to product Fee level and structure

AUM Portfolio analysis

Team Performance & risk analysis

Transparency Product appropriateness

In our selection process, we are explicitly looking to

identify areas of competitive advantage.

We believe the very best managers differentiate

themselves in one of the following ways.

What are we looking for in preferred list managers?

1. Information Advantage

2. Screening Advantage

3. Decision-Making Advantage

4. Conviction Advantage

5. Self-Awareness Advantage

6. Teamwork Advantage

7. Risk Management Advantage

8. Execution Advantage

9. Strategic Advantage

10. Innovation Advantage

Competitive assessment - preferred list managers

Red Radar: Helping clients remain alert to what could go wrong

2. Client

Dependency

3. Leadership

Change

4. Culture

Change

5. Key

Person 6. Complexity

7. Process

Drift

8. Capacity

Management

9. Operational

Infrastructure

10. Risk

Culture

1. Business

Management

Our approach to research meetings – what we are looking for

Meetings by category within a short time period (allows comparison)

Information and presentation in advance (so we can come prepared)

Avoid turning pages (not assessing presentation skills)

Focus on portfolio positioning, changes and decisions

Meet different people at all levels

Informal interaction, floor walk, attend morning meetings

Detailed information and transparency (portfolio analysis)

Keep us updated (monitor decisions over time)

In return we waste less of your valuable time in meetings, we focus on what

matters, make decisions quicker and give you more open feedback.

Research Developments



Leverage &


Senior Direct



CTA Emerging Market





Credit Relative

Value

Our LDI Philosophy

1. LDI fits within the PRMF (Step 1) risk budget and objectives of each client.

2. LDI is part of the overall ALM framework. Rates and Inflation are merely the

largest components of risk.

3. Redington make LDI decisions based on Risk impact and Required Return

expectations.

4. LDI strategy is outcome-focused for each client.

5. Redington do not call markets. We prefer Funding Ratio Triggers and dislike

market-based hedging strategies.

LDI Implementation in Practice

Start

Structure

Risk

What resources does each client have?

• CIO Function

• Legal Resource

What structure is most appropriate given size,

resource and derivative usage?

• Pooled vs. seg mandate

• QIF

• Own docs vs. Agency

How best to manage and monitor risk?

• Risk policies

• IMA

• Reporting pack

LDI Implementation:

Areas of Expertise

Banking

Group

Liquidity &

Leverage

Regulation

Assess the size / quality of the banking group and

related Swap and Repo documentation

• Best Terms?

• Fairness and Consistency

Ensure client has enough collateral given OTC

usage and pension outflows

• Has the client got enough leverage given

required Portfolio returns?

What are the impacts of EMIR on pension

schemes?

• What are the implications of Banking regulation

on dealing costs and liquidity?

Review

As the hedge increases over time, how does the

risk profile of the portfolio change?

• When is it appropriate to change an LDI

mandate from Passive to Active?

Contractual

Non-contractual

Liquid Illiquid



Leverage &


Senior Direct



CTA Emerging Market





Credit Relative

Value

Done / In Progress

0%

10%

20%

30%

40%

50%

60%

70%

An

nu

ali

zed

Vo

lati

lity

(%

)

MSCI World Rolling Volatility Voatility Control Rolling Vol

One of the main advantages of liquid asset classes such as equities, sovereign

bonds and commodities is that they can be rebalanced using futures relatively

cheaply.

This allows for the possibility of volatility control.

MSCI World Rolling

Volatility

MSCI World Volatility Controlled Index

Strategic/Static

Allocation

Dynamic

Allocation

Total Return Absolute

Return Relative

Value

Systematic

Risk Parity

Active Risk

Parity

Relatively static

asset allocation

Long-only

Medium (30-

60%) equity

weighting

High correlation

to equity markets

Large expected

drawdowns

Dynamic asset

allocation

Mostly long-only

(can hold relative

value)

Medium (30-

60%) equity

weighting

High correlation

to equity markets

Medium

expected

drawdowns

Highly dynamic

asset allocation

Mostly long-only

(can hold relative

value)

Highly varying

(10-60%) equity

weighting

Varying

correlation to

equity markets

Medium

expected

drawdowns

Risk-based

allocation

Long/short

Low equity beta

Low correlation

to equity markets

Small expected

drawdowns

High use of

leverage

Risk-based

model-driven

allocation

Long-only

Low equity beta

Low correlation

to equity markets

Medium

expected

drawdowns

High use of

leverage

Risk-based

discretionary

allocation

Long-only

Low equity beta

Low correlation

to equity markets

Medium

expected

drawdowns

High use of

leverage

Breakdown of the Multi-Asset Universe

Current Focus Areas

Lower client demand /

lesser focus

Higher client demand /

greater focus

Alternative

Risk Premia

Risk Parity

CTAs

Global Macro Fundamental Long

/ Short Equity

Fundamental

Active Equity

Contractual

Non-contractual

Liquid Illiquid



Leverage &


Senior Direct



CTA Emerging Market





Credit Relative

Value

Done / In Progress

S eparation of interest rate risk and credit risk

I ntegration of interest rate duration into the LDI framework

M aking asset allocation according to the PRMF

P lacing managers according to their specialised areas

L eading discussions in mandate design

E stablishing a reviewing and monitoring framework

Our Philosophy:

“SIMPLE”

Historical Asset Allocation for 6 Largest Reporting Clients:

As of 30 September 2013

ARB/ Total

Return

Global IG

Global HY

Loans

ABS

EMD

Sterling IG

Absolute Return Strategies

Total Return Strategies

Credit Relative Value Strategies

Multi-Asset Credit Strategies (Sub IG)

…with a strong focus on generating

risk-adjusted returns

2014:

What are we looking for?

How we categorise strategies?

1

Absolute

Return

Macro

2

Absolute

Return

Diversifie

d

3 GFI

Dynamic

Allocatio

n

4 Credit

Total

Return

5 Multi-

Asset

Credit

6 Credit

Relative

Value

Correlation

with

bond/credit

market

Negligible

(<0.1)

Low (0.3)

Moderate

(0.6)

High (0.8) Moderate-

High

Low

Liquidity High/ Daily Moderate/

Daily

Moderate/

Weekly

Moderate/

Weekly

Low/

Monthly

Low/

Quarterly

Average

Credit Rating AA BBB BBB BBB Sub-IG Sub-IG

Investment

Target (Gross) Cash + 5% Cash +3% Cash + 3%

to 4%

Cash + 3%

to 4%

Cash + 5% 10-15%

Performance

Fee Sometimes No No Sometimes Yes Yes

Structure Typically

UCITS

Typically

UCITS

Typically

UCITS

Can be

UCITS

Non-UCITS Non-UCITS

Contractual

Non-contractual

Liquid Illiquid



Leverage &


Senior Direct



CTA Emerging Market





Credit Relative

Value

Done / In Progress

Pension funds have long dated non-transferable liabilities.

If there is such thing as an ‘illiquidity premium’, they are leaving return on the table

by not allocating to illiquids.

Assets which have a foot in both the hedging and growth camp can diversify a

client’s hedge, reduce reliance on derivatives, and reduce collateral requirements.

525

245

250

600

500

245

CRE Debt Distressed Debt

Illiquid Corporate Debt Infrastructure Debt

Total:

£2.4bn

Allocations to Illiquid Credit over 2013 (£m)

Contractual

Non-contractual

Liquid Illiquid



Leverage &


Senior Direct



CTA Emerging Market





Credit Relative

Value

Done / In Progress

Reinsurance

Long Lease Real Estate

Manager Monitoring

Quarterly Semi-Annually Annually

Desktop review, check

news updates vs.

RedRadar

As quarterly, including

face-to-face meeting /

call with ‘ones to watch’

Full review of Preferred

List, requiring IC sign-

off

Monitoring Preferred Manager Lists

People, business and strategy

changes

Prompt information about any material changes

(both positive and negative)

Quantitative reporting Monthly return data, net of fees, clearly labelled,

in Excel format

Bespoke position-based

monitoring

ISINs and notional values, clearly labelled, in

Excel format

Qualitative and Quantitative

reports

Bespoke analysis – e.g. return contribution,

portfolio breakdown. Face to face meeting with

investment team.

Ongoing monitoring of preferred

managers

Quarterly, semi-annual and annual reviews

• Standardised reporting processes

• Standardised preferred list maintenance and review process

• Data collection process enhancements – data feeds

• More efficient interaction with asset managers

• More predictable workload both for Redington and for asset managers

Conclusion

Done / In

Progress

DGF Sterling Credit (IG) Infrastructure Debt Real Estate (Long

Lease)

Risk Parity Absolute Return

Bonds

Senior CRE Debt Reinsurance

CTA Global Credit (IG) Distressed Debt

Style Premia Total Return Sub-IG Senior Direct Lending

Credit Relative Value

To Do: Q3 2014 Global Macro High Yield / Loans Infrastructure

Equity Long / Short Emerging Market Debt

To Do: Q4 2014 Segregated LDI DM Equity ABS Structured Finance Private Equity

Pooled LDI EM Equity Mezzanine

Our “Direction of Travel”:

Preferred List Prioritisation

How to Keep in Touch

Specific client reporting-related: [email protected]

Product information (not specifically client-related)

[email protected]

Dos and Don’ts

Do Don't

Be proactive Product push

Be selective Take a "Scatter gun" approach

Be innovative Be unrealistic

Be patient as we work through our

preferred lists in 2014

Be shy about letting us know if there are

products we should be making sure to

include in these processes

Read our website, blog & thought pieces

to understand our investment philosophy

Waste meeting time talking about why a

particular asset class or strategy makes

sense – we know!

Send us highlights and "executive

summaries" of new or innovative products

Fill our mailbox with unsolicited multi-

megabyte attachments

Let us know when relevant PMs and key

personnel are in town

Expect us to be able to take every single

meeting, especially at short notice

Keep us in the loop with product and

strategy ideas shared with our clients

Spring new ideas on clients at Investment

Committees without pre-warning us

How do We Stack Up?

http://snurl.com/28mcjay

©Redington Limited. All rights reserved.

This contains confidential and proprietary information of Redington Limited (“Redington”) and is intended for the exclusive use of the

party for whom it was produced by Redington. Redington accepts no responsibility for any consequences arising from any third party

relying on this document or the opinions we have expressed. This document is not intended by Redington to form a basis of any

decision of a third party to do or omit to do anything.

Its content may not be modified, sold, supplied or otherwise provided , in whole or in part, to any other person or entity without

Redington’s prior written permission.

Information contained herein has been obtained from a variety of sources. While the information is believed to be reliable, this

information carries no guarantee of accuracy or completeness and Redington makes no representations or warranties as to the

accuracy of the information presented and takes no responsibility or liability (including for direct, indirect, consequential or incidental

damages), for any error , omission or inaccuracy in the data supplied by any third party.

The findings, ratings and/or opinions expressed herein are the intellectual property of Redington and are subject to change without

notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or

capital markets discussed. Past performance does not guarantee future results.

This does not contain regulated investment advice in respect of actions you should take.

Registered Office: Austin Friars House, 2-6 Austin Friars, London EC2N 2HD.

Redington Limited (reg no 6660006) is registered in England and Wales.

Red Manager Forum 26 Feb 2014

Business

Transcript of Red Manager Forum 26 Feb 2014