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Active LDI as a practical solution for Dutch pension funds BY IRENA KYUCHUKOVA, INVESTMENT DIRECTOR - FIXED INCOME, WELLINGTON MANAGEMENT
In uncertain markets, we believe Dutch pension funds can achieve more stable outcomes by increasing their hedge ratio and allocation to matching assets. These actions may result in an opportunity cost of a lower allocation to growth assets. However, an active LDI manager may potentially add value by managing country, duration and yield curve exposure and by instrument and sector selection. Active LDI Benefits We think the opportunity cost from a
lower growth assets allocation. • A thoughtful approach to the
lower growth assets allocation can be
matching allocation could mitigate
offset by making matching assets work
the impact of inaccurate hedging.
harder. Active LDI has three key benefits: With increasing uncertainty and cross• Increasing allocation to matching assets may improve stability across
market divergence, a range of potential opportunities and risks exist (Figure 1).
allocation reduces the impact of a
Country selection within European government bonds is central to capturing alpha and managing risk.
and improvement in Spain and Italy sovereigns. A passive approach would
market scenarios. • Capturing alpha within the matching
Tactical allocation to non-government sectors offers valuable income sources.
A Fundamental Approach to Country Selection
have absorbed the downgrades, even
Country selection within European
driven, passive approach would also
government bonds is central to
have excluded these opportunistic
capturing alpha and managing risk.
investments in 2012, even as spread
The slowness of ratings agencies to
tightening offered ~500 bps of upside.
as performance suffered. A ratings-
react to market stress in 2012
Tactical Duration Positioning
illustrates our point (Figure 2).
An active manager also uses research Well ahead of ratings agencies,
capabilities to identify opportunities as
markets anticipated the deterioration
over and underweight duration at
Figure 1: Active opportunities versus passive risks
Active: Opportunities
IRENA KYUCHUKOVA
38
FINANCIAL INVESTIGATOR
NUMMER 5 / 2019
Passive: Risks
Country selection
Country selection
Duration and curve management
Duration and curve management
Sector and instrument selection
Instrument selection
Source: Wellington Management | For illustrative purposes only.
