Barclays Global Investors, San Francisco, is among those with new liability-driven investment funds for European clients, said Matthew Tucker, managing director and head of advanced fixed-income strategies. BGI recently launched a suite of 16 sterling- and euro-denominated funds. Clients can buy shares of the funds and, in exchange, BGI provides inflation and interest rate protection that matches the clients' liability streams. To date, the strategy has garnered £16 billion ($19.5 billion) in assets.
He wouldn't say when a similar strategy would be available here, but added: "We're always looking at new products to introduce in the U.S., and the liability-driven investment pool is one of them."
UBS Global Asset Management, Chicago, created a global asset allocation solutions group to work with domestic and international clients on aligning assets and liabilities, said Drew Carrington, executive director and senior U.S. fixed-income portfolio manager. "The U.K. is a great example of a lot of clients first extending duration," he said. "We are looking at some interesting strategies, one of which targets LIBOR or the Consumer Price Index plus some extra return."
Margo Cook, managing director, institutional fixed-income management at BNY Asset Management, New York, said the firm has done some work in liability-led strategies for clients she wouldn't name. "A client came to us recently and had us implement a strategy where 80% of the bond portfolio is tied to the Lehman Aggregate bond index, and 20% is tied to bonds with durations of 20 or more years. That's been a huge winner for us. Other clients have asked us to manage money in the intermediate-duration space in order to match part of their liabilities," Ms. Cook said.
Ryan ALM Inc., New York, has found success offering its portable alpha liability strategy. The firm will match a client's liabilities in a beta portfolio through the use of derivatives, while the alpha-generating portfolio adds incremental layers of returns on top of liabilities. "In the PALS strategy, bonds are used to match liabilities, and some non-fixed income strategy, such as an equity portfolio, is used to add returns on top of them." said Ron Ryan, president and founder of Ryan ALM. He said the firm has garnered a little more than $1 billion for the strategy during the past year or so.
Russell Kamp, managing director and head of the INVESCO structured products group, New York, said he has been talking to clients about a portable alpha product, similar to Ryan ALM's PALS, that uses derivatives to gain exposure to a basket of bonds whose durations match the liabilities of a client, and gains incremental returns in an alpha-generating, non-bond portfolio. "So far, interest has been extremely light, but there has been a lot of discussion on it," he said.
Among the European plans that have implemented liability-led investing strategies are Dutch giants the €157 billion ($202.9 billion) Stichting Pensioenfonds ABP, Heerlen; the €60 billion Stichting Pensioenfonds PGGM, Zeist; the €4.2 billion Hoogovens plan, Ijmuiden; and the €3.4 billion Stichting Pensioenfonds Akzo Nobel, Arnhem (Pensions & Investments, May 21).
One U.S. company looking at such strategies is International Paper Co., Stamford, Conn. IP executives are considering a swap overlay program to synthetically increase the duration of the bond portion of the $6.5 billion defined benefit plan.
"We've presented it to the board for approval, and we haven't gotten permission yet … Basically, we're looking at a swap overlay program that would synthetically increase the duration of our bond portfolio. With the way the equity markets are going, it's the prudent thing to do," said Robert Hunkeler, senior vice president of investments. He said IP executives are working with NISA Investment Advisors, St. Louis, on developing such a strategy.