FEATURE: INSTITUTIONAL INVESTING
an LDI approach has meant reducing risk, increasing
bond exposure and cutting equities. Th is has clearly
added value in the recent environment. In terms of
the Libor-plus element of the portfolio, however, the
results have generally been disappointing. Partly this
is because the relationship between Libor and base
rates has broken down; for the past 10 years,
one-month Libor has averaged only about 10 basis
points a year more than base rates, whilst recently it
has been over 100bp more. And, of course, return
seeking assets of any form have struggled to make
positive returns of late at all, let alone beat Libor.
NEW INNOVATIONS
Th ere are a number of other innovations that have
received a great deal of coverage on the conference
circuit, but, unlike LDI strategies, very little take-up,
at least in the UK. Examples are 130:30 or ‘short
extension’ funds, and portable alpha strategies.
Arguably some of the more esoteric alternatives also
come into this category. As a broad generalisation,
such approaches are often intellectually sound, but
tend to stumble at the hurdle of cost and practicality.
In any event, though we hear much about the
occasional successes, there is little to suggest that the
less sophisticated funds have really missed much
here. Interestingly, consultants have been wary of
these techniques, perhaps because implementation
issues are critical, and in most cases the consultant is
not in a position to control these suffi ciently.
Whether consultants have added value in the
crisis, however, depends not only on the quality of
the advice, but whether clients are organised to be
able to benefi t from it. Lest this sounds too much
like Alice in Wonderland, consider advice to reduce
equities, given at any point during 2007. As we
have seen, the extent of the subsequent falls in
equity markets suggests this advice would have
added value to almost any portfolio that
implemented such a strategy. If, however, the sales
were not made until well into 2008, the position is
much less clear. It is by no means unusual for a
major strategic shift to be discussed over many
trustee meetings before a decision is taken.
© AMIR BAHADORI
Unfortunately, too many investment committees
“Consultants must never forget that combining the role of
guard and guardian is fraught with confl ict and may even
compromise the security of the entity”
WWW.CFAUK.ORG PROFESSIONAL INVESTOR 33
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