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White papers

The 2012 Cutwater Asset Management Defined Benefit Pension Plan Survey
Firm: Cutwater
Author: David R. Wilson, CFA and Kimberlee Lisella - Customized Strategies Group
Overview: The goal of this survey was to gain insights into the investment strategies, risk tolerances and intentions of pension plans as they face market uncertainty, low interest rates and low funded ratios. We also inquired about their willingness to adopt a liability driven investing approach and the thought process around implementing, waiting or shunning the strategy altogether.

Extending Fixed Income Duration - Which Strategy is For You?
Firm: Cutwater
Authors: David R. Wilson, CFA, Kimberlee Lisella - Customized Strategies Group and Jesse L. Fogarty, CFA - Portfolio Management
Overview: So, you're a defined benefit pension plan sponsor that has decided to take a step towards liability driven investing by extending the duration of your fixed income allocation to a long duration total return strategy. Assuming you are not ready to move to a fully customized asset allocation framework, a key question you need to ask is, should you invest in a strategy that is benchmarked off the Barclays Long Credit Index ("LC Index") or the Barclays Long Government/Credit Index ("LGC Index")? This paper explores the advantages and disadvantages of both strategies in an asset/liability context.

Managing Pension Assets in the Context of Risk Tolerance
Firm: Cutwater
Author: David R. Wilson, CFA and Kimberlee Lisella - Customized Strategies Group
Overview: Traditionally, defined benefit pension plans considered their asset allocation in the context of long-term expected returns, but it's the volatility of returns, relative to the liabilities, that have been causing the real pain for plan sponsors. Volatile investment returns, particularly those that are not significantly correlated to the discounting methodology of the liabilities, can cause an immense amount of funded ratio volatility, forcing a plan sponsor to make unanticipated, outsized contributions to its plan. It's not easy, however, to manage the volatility of the funded ratio and contributions: it requires an in-depth analysis of the asset allocation and the role it plays in creating risk within the plan. This paper seeks to present Cutwater's approach to managing volatility and developing de-risking solutions.

Pension Solutions Insights: Level 1 LDI: Selecting an appropriate benchmark
Firm: Legal & General Investment Management America
Author: Aaron Meder, FSA, CFA, EA, Head of Pension Solutions
Overview: We define Level 1 LDI implementation as implementation done without the use of derivatives. For Level 1 LDI plan sponsors, we find their biggest challenge is how to maximize the reward-to-risk efficiency of the capital that has been allocated to the liability hedging asset (LHA). We suggest that the answer to this challenge lies in getting the LHA benchmark right, both now and overtime as the plan de-risks from the Return-Seeking Asset (RSA) component to the LHA component.

Pension Solutions Insights: Level 2 LDI: Three key implementation considerations
Firm: Legal & General Investment Management America
Author: Aaron Meder, FSA, CFA, EA, Head of Pension Solutions
Overview: We define Level 2 LDI implementation as implementation done with an explicit liability benchmark and, often times, with the use of derivatives. We find that successful Level 2 LDI implementation is dependent on effectively determining (1) the appropriate levels of interest rate and credit spread hedging, (2) if the efficiencies gained via Level 2 LDI exceed the costs that come with it, and (3) if derivatives are needed, if synthetic equities or synthetic liabilities should be used to implement the desired exposures.

Pension Solutions Insights: Swaptions: A better way to express a short duration view
Firm: Legal & General Investment Management America
Author: Aaron Meder, FSA, CFA, EA, Head of Pension Solutions
Overview: Many pension plan sponsors have a view that interest rates will rise and express this view by having a duration of assets significantly shorter than the duration of liabilities. If interest rates do rise then many of these pension plan sponsors will likely happily add more long duration assets to the plan in order to reduce the duration mismatch between assets and liabilities. It is our view that for plan sponsors who are short duration today due to a view on rates but are committed to hedging more if and when rates rise, swaptions can be used to efficiently express this short duration "hedge later" mindset.

Liability-Driven Perspectives: Is it still a good time to extend long duration strategies
Firm: Prudential
Author: F. Gary Knapp, CFA, Managing Director and Head of LDI Strategies and Michael Collins, CFA, Senior Investment Officer and Credit Strategist
Overview: This paper takes a brief look at some of the risk/return trade-offs of extending duration under several different interest rate and yield curve scenarios. In particular, we look at how the current, historical steepness of the U.S. Treasury yield curve provides an attractive entry point into longer duration high quality bonds, including corporate bonds.

The Various Roles of Fixed Income in Pension Plans
Firm: Loomis, Sayles & Co.
Author: Loomis Sayles LDI Solutions Team
Overview:This paper takes a look at how fixed income can embody multiple roles within a pension plan: it can help reduce the overall plan volatility through its hedging and diversification capabilities; it can effectively fund the liabilities using lower-quality securities, downgrade tolerance and skill; and, finally, it can be used to close reasonable funding gaps by capitalizing on the risk premium of high yield.

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