switzerlandde
The investment objective as smart benchmark for the LDI portfolio

The investment objective as smart benchmark for the LDI portfolio

21-02-2018 | Einblicke

For an LDI portfolio, the investment objective is often a better benchmark than a standard index. A standard benchmark may be a good way for institutional investors to measure the performance of their active asset managers, but whether this actually contributes to achieving the investment objective is questionable.

  • Remmert Koekkoek
    Remmert
    Koekkoek
    Head of Insurance and Pension Solutions
  • Yvo Schoemaker
    Yvo
    Schoemaker
    Portfolio Manager

Speed read

  • A benchmark may have undesirable side effects
  • The investment objective of the portfolio is an alternative starting point
  • Matching effectiveness is a benchmark for evaluating the portfolio

A benchmark can be an effective and independent yardstick for professional investors to assess the performance of their asset managers. However, a standard benchmark may have a number of undesirable side effects. Some of the effects that can occur when using a standard benchmark for government bonds: 

  1. A market-capitalization weighted index is based on the amount of a country’s outstanding debt. The countries with the highest outstanding debt therefore have the largest weight. From a risk perspective, this is not exactly an appealing factor.
  2. An index may be dominated by a couple of countries. For instance, 70% of the Bloomberg Barclays Euro Govt AAA-AA index consists of bonds from Germany and France. This does not benefit the diversification of an LDI portfolio.
  3. If the creditworthiness of a country deteriorates, an investor does not want to wait until the rating agencies change the rating, as it can then already be too late. In some cases the investor may wish to retain the bonds despite the downgrade. In case of a low tracking error, you will be forced to sell them.
  4. You also have to purchase the highly illiquid bonds in the benchmark.
  5. If credit spreads tighten for a certain country, then the weight of that country in the benchmark increases. This means that an investor has to purchase more and more bonds from a single issuer at unattractive valuations.
  6. A low tracking error leads to many transactions – and high costs – in order to remain close to the benchmark allocation 

In addition to these inefficiencies, a benchmark can also distract from the real objective of the investments.

Zu den aktuellen Einblicken
Zu den aktuellen Einblicken
Anmelden

A custom benchmark as reference point

One good way to avoid the adverse effects is to put together a custom benchmark against which the asset manager's performance can be measured. At Robeco we construct this custom benchmark in consultation with the client, as far as possible in line with the investment objective. In this way we address at the very least points 1, 2, 3 and 5 as described above. This means that we limit most of the risk that the asset manager will become distracted from the ultimate investment objective of the portfolio due to following this custom benchmark.

The key principles when compiling the custom benchmark are the investment universe and the aim of the portfolio. Evaluating and modifying the investment universe is a continuous process that takes place in consultation between Robeco and the client. This process includes factoring in specific preferences, liquidity limitations, yield enhancement and diversification benefits.

We can also integrate any sustainability criteria at this stage. For example, we can increase the sustainability of a government bond portfolio using the RobecoSAM Country Sustainability Ranking.

The investment objective of the LDI portfolio as the starting point

One way of fully addressing all the benchmark inefficiencies is to take the long-term portfolio objective as the starting point. The goal of a pension fund is to be able to pay pensions to its members on a given date. This objective involves a profile of liabilities and expenditure and a required return to meet these obligations. Risk appetite is also a key factor here.

Figure 1 | Benchmark types

With such an approach, proper coordination with the client is essential to arrive at a custom solution. We begin by compiling the optimal and most practicable portfolio together with the client. For our pension fund clients, the liability profile and investment principles are often the key principles. Central to this approach is the optimization of the matching effectiveness: the tracking error of the portfolio relative to the liabilities. This is a benchmark that can be used to evaluate the strategic allocation.

In addition to the matching effectiveness, we also look at a portfolio that best reflects the client's investment principles in terms of liquidity, creditworthiness and yield.

Buy-and-maintain management of LDI investments

Buy-and-maintain management is very suited to portfolios that are more geared to the investment objective of the portfolio rather than on outperforming a (standard) benchmark. This form of management involves spending a great deal of time together with our clients in the initial purchase phase on putting together the most appropriate portfolio. We also discuss in this phase the different ways by which the client can assess Robeco’s performance.

Determining the required portfolio is strategic, but not static. In the management of the portfolio, we are constantly aware of downside risk and how the portfolio is performing relative to the investment objective. In terms of major changes, such as new legislation, the outbreak of a crisis, or a change in the payment profile of a pension fund, we can modify the portfolio accordingly. Continual coordination with the client is essential here, and our clients are in direct contact with our portfolio managers regarding the developments in the portfolio. Such a buy-and-maintain approach with the investment objective as the benchmark is more efficient than a passive approach. In terms of pricing, this form of management is also very competitive, especially if you consider that this approach involves a much lower turnover than a passive strategy.

Logo

Zugangsbeschränkung / Haftungsausschluss

Die auf diesen Seiten enthaltenen Informationen dienen Marketingzwecken und sind ausschliesslich für (i) qualifizierte Anleger gemäss dem Schweizer Bundesgesetz über die kollektiven Kapitalanlagen vom 23. Juni 2006 („KAG“), (ii) Professionelle Kunden gemäss Anhang II der Richtlinie über Märkte für Finanzinstrumente (2014/65/EU; „MiFID II“) mit Sitz in der Europäischen Union oder im Europäischen Wirtschaftsraum mit einer entsprechenden Lizenz zur Erbringung von Vertriebs- / Angebotshandlungen im Zusammenhang mit Finanzinstrumenten oder für (iii) solche, die hiermit aus eigener Initiative entsprechende Informationen zu spezifischen Finanzinstrumenten erfragen und als professionelle Kunden qualifizieren.

Die Fonds haben ihren Sitz in Luxemburg oder den Niederlanden. Die ACOLIN Fund Services AG, Postanschrift: Affolternstrasse 56, 8050 Zürich, agiert als Schweizer Vertreter der Fonds. UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich, Postanschrift: Europastrasse 2, P.O. Box, CH-8152 Opfikon, fungiert als Schweizer Zahlstelle. Der Prospekt, die Key Investor Information Documents (KIIDs), die Satzung, die Jahres- und Halbjahresberichte der Fonds sind auf einfache Anfrage hin und kostenlos im beim Schweizer Vertreter ACOLIN Fund Services AG erhältlich. Die Prospekte sind auch über die Website www.robeco.ch verfügbar.

Einige Fonds, über die Informationen auf dieser Website angezeigt werden, fallen möglicherweise nicht in den Geltungsbereich des KAG und müssen daher nicht über eine entsprechende Genehmigung durch die Eidgenössische Finanzmarktaufsicht FINMA verfügen. Einige Fonds sind in Ihrem Wohnsitz- / Sitzstaat möglicherweise nicht verfügbar. Bitte überprüfen Sie den Registrierungsstatus in Ihrem jeweiligen Wohnsitz- / Sitzstaat. Um die in Ihrem Land registrierten Produkte anzuzeigen, gehen Sie bitte zur jeweiligen Länderauswahl, die auf dieser Website zu finden ist, und wählen Sie Ihr Wohnsitz- / Sitzstaat aus.

Weder Informationen noch Meinungen auf dieser Website stellen eine Aufforderung, ein Angebot oder eine Empfehlung zum Kauf, Verkauf oder einer anderweitigen Verfügung eines Finanzinstrumentes dar. Die Informationen auf dieser Webseite stellen keine Anlageberatung oder anderweitige Dienstleistung der Robeco Switzerland Ltd dar. Eine Investition in ein Produkt von Robeco Switzerland Ltd sollte erst erfolgen, nachdem die entsprechenden rechtlichen Dokumente wie Verwaltungsvorschriften, Prospekt, Jahres- und Halbjahresberichte konsultiert wurden.

Durch Klicken auf "Ich stimme zu" bestätigen Sie, dass Sie resp. die von Ihnen vertretene juristische Person eine der oben genannten Kategorien von Adressaten fallen und dass Sie die Nutzungsbedingungen für diese Website gelesen, verstanden und akzeptiert haben.

Nicht Zustimmen