Pension schemes should consider combining liability benchmarking with diversified absolute return strategies to generate returns in excess of their liabilities.
That's according to Abdallah Nauphal, deputy chief executive and chief investment officer at Insight Investment.
"The first rule of investment is to never take any risks that you are not being rewarded for,' he says. 'Liability driven investment (LDI) is all about managing both sides of the balance sheet with the aim of removing unrewarded risks by placing a pension scheme's liabilities at the heart of the investment process. This prioritises the principal investment objective - which is the promise that schemes make to their members - whilst retaining the ability to add value.
"The second rule of investment is to diversify your sources of return. If a pension scheme is using an LDI approach then it can use absolute return strategies to diversify its sources of return and aim to generate alpha in times of market turbulence and calm. More importantly, well-constructed absolute return strategies can offer lower fees, greater capacity and more transparency than hedge funds. Absolute Insight, which is Insight's own absolute return solution, aims to do just this."
Absolute Insight was launched on 11 May 2005 to produce high risk-adjusted absolute returns on a consistent basis. It aims to deliver returns of 4% per annum over cash, net of fees.
The GBP 262 million (as at 12 May 2006) fund is invested across six uncorrelated constituent funds: Currency, Emerging Market Debt, European Equity Market Neutral, Tactical Asset Allocation, UK Equity Market Neutral and Bonds. Investors have the option of investing via the fund of funds, or investing directly in any of the underlying funds. Absolute Insight and its sub-funds are listed on the Irish Stock Exchange.
Background note: Insight Investment Management (Global) Limited is the asset manager of HBOS plc. The firm manages funds for institutional and retail clients across the full range of asset types - equities, bonds, property, derivatives and private equity. Insight's assets under management as at 31 March 2006 totalled GBP 95.5 billion.