Alternatives to Long Corporates for LDI Plans

05/03/2019

This brochure features fixed income analysis which we think demonstrates that there is scope for including alternative strategies as a component of liability-hedging portfolios – either strategically over a credit cycle or opportunistically when there is a negative outlook for credit spreads. Furthermore there is a wide range from which to choose among diff erent short-duration spread products. Similar to the decision to employ an alternative strategy, this can be made strategically or tactically. As we will demonstrate, a manager could also be engaged to allocate tactically between different spread products.

Our research shows that:

• Over the long term, short credit along with Treasury futures strategies generally would have outperformed the Bloomberg Barclays Long Corporate A or better Index (“the Long Index”)
• Liability-tracking error of such strategies would have been approximately double that of the Long Index
• Combining (up to around 40% of) an alternative strategy with the Long Index would have reduced long-term, liability tracking error with a minimum tracking error allocation of approximately 20% Alternative / 80% Long Index
• Funded status volatility of a portfolio with considerable equity exposure would generally have been lower with the fixed income allocation in the alternative strategies (than in the Long Index)
• Relative performance between these alternative strategies and the Long Index is highly dependent on changes in long corporate spreads
• There was a significant difference in returns among alternative strategies over most periods; however the post-crisis liability tracking errors were within 1% of each other

Author:

Jeffrey Connor

Senior Investment Risk Strategist

To find out more, download our full paper below:

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.