Survey Shows Pensions Take More Tactical Approach to LDI Hedging

(November 11, 2010) — As risk management has begun to outpace investment returns as the premier focus for pension fund execs following the recent market downturn, a greater number of pensions are taking a tactical approach to liability-driven investment hedging, according to a recent survey by F&C.

“Often this means that they are switching between swaps, gilts and index-linked gilts to take advantage of value opportunities,” said F&C head of derivative fund management Alex Soulsby. He added that the cheapness of inflation has been implied by the index-linked gilt market this summer, reflecting opportunity for pensions.

According to the fund manager’s latest quarterly survey, inflation hedging has become increasingly prominent among pensions while interest rate hedging has declined in popularity compared to previous quarters. The firm stated in its results that exposure was attained through both physical and synthetic hedging instruments.

In related news, EDHEC Business School in London has recommended that money managers should hedge market risks from their businesses in order to protect their shareholders or other owners from investment volatility. According to the paper titled “Market Risks in Asset Management Companies,” such hedging would improve the relationship between compensation and adding value to shareholders.

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To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(November 10, 2010) — A survey by the law firm of Schulte Roth & Zabel and research firm mergermarket.com shows that hedge funds, and, to a slightly lesser extent, pension plans are expected to drive an increase in shareholder activism over the next 12 months.

The findings in the Shareholder Activism Insight survey reflect a rising level of confidence in shareholder activism since 2008, when the interviews were last conducted.

“Activists should have a good sense of the various investor groups likely to increase their activist activity, and if they’re right then corporate executives are in for a surprise as to the source of increased investor activism — investor groups that formerly were reluctant to utilize activists tools are losing that reluctance,” Marc Weingarten, partner at Schulte Roth & Zabel, said in the report.

The study found that a majority of the 25 senior executives and 25 activist investors interviewed expected that shareholder activism would increase in the next 12 months. Of those interviewed, 64% of corporate executives and 60% of shareholder activists anticipated an increase. Survey findings also indicated that ‘say on pay’ rules and the elimination of broker discretionary voting would impact shareholder activism in the future.

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Citing the Dodd-Frank Act, corporate respondents said the new regulation will not cause them to change their approach to executive pay structures, board composition, or public relations.

The sectors expected to experience the greatest increase in shareholder activism during the next year: financial services and energy. Additionally, the study showed that among the causes most likely to result in an increase in activism, 54% of corporate executives cited financial performance and 68% of shareholder activists cited excessive cash on balance sheets.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742