Ros Altmann, who managed institutional portfolios for 15 years, drew attention to the use of derivatives, now employed as second nature hedging instruments by finance departments of corporates, yet ignored by all but 14 per cent of pension schemes. Similarly, only 13 per cent of UK pension schemes use hedge funds, which account for 1 per cent of total assets.
“Professional investment has not yet gone beyond the ‘stick it in the stockmarket and hope for the best’ approach,” said Dr Altmann, who calls on plans to identify more sources of uncorrelated beta to match liabilities. Only 5 per cent of UK pension funds have a formalised liability driven investing (LDI) approach, with a “lemming-like rush into bonds,” often exacerbating the situation,
She has been working closely with leading hedge fund player Man Investments to develop an off the peg LDI product. This combines an inflation swap, a zero coupon bond and a hedge-style futures strategy managed by Man’s AHL unit. The three are wrapped together into a single structured product. According to Man, the worst outcome for any prospective pension scheme client is “money back plus inflation.”
Dr Altmann will be speaking on the use of derivatives by pension schemes at a forthcoming FT Mandate conference, Using Options in Fund Management, at Cass Business School in London on 1 March 2007.
James Bevan, chief investment officer at charities manager CCLA will address the conference on education and training of trustees. Howard Flight, the controversial Conservative politician and founder of bond house, Guinness Flight, more recently absorbed into Investec, will deliver the keynote speech.
Registration is complimentary for FT Mandate readers, who can contact: www.ftbusinessevents.com or +44 (0) 207 382 8184.
