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Repo rates are expressed relative to SONIA, and the chart below displays the average repo rates that we have achieved over the past four quarters for three, six, nine and 12-month repos, shown as a spread to average SONIA levels at the time. The volatility and market uncertainty that resulted from the mini-Budget also weighed upon funding markets, particularly for shorter dated trades as can be seen from the achieved spreads below. Note that during the fourth quarter of 2022 no repos were traded with a 12m tenor so the chart reflects the previous quarter’s value.
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The secondary impact of the mini-Budget crisis centred around collateral and the velocity of movement; rather than a lack of balance sheet for repo funding (a la March 2020). Yet, the difficulties around collateral substitutions and settlements did in many cases prompt a review by individual banks’ credit officers, resulting in a temporary reduction or hiatus in repo balance sheet provision in some cases. Once these reviews were completed balance sheet availability opened up again – some with the addition of haircuts to provide additional protection to the bank. Of course, the momentous lack of certainty in the future path of interest rates also impacted the typical repo spread to SONIA as trading a fixed rate forced the banks to take a conservative view on where yields could reach.
All data and sources Columbia Threadneedle Management Limited, as at 30 June 2024 and Valid to: 30 September 2024
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This mini-series of short articles shines a light on often under-discussed but important factors to think about when structuring your LDI portfolio framework. Here we look at the benefits of employing an implementation manager.
Under such a solution, the large majority – if not all – of the scheme’s holdings move into the LDI portfolio/wrapper so that the LDI manager can implement the trustees’ investment strategy for them. Manager selection and strategic advice is still provided by the scheme’s investment adviser, and decision making continues to be owned by the trustees, but the LDI manager is then responsible for implementation within a rules-based framework.
The benefits
There are several benefits for pension schemes of having an implementation manager:
- Speed and efficiency of trading execution, maximising
opportunity and capture - Maximised likelihood of hedge retention (especially in
stressed market conditions) - Reduced governance burden and operational risk for trustees
Some of the actions an implementation manager can carry out for a pension scheme include: automatically de-risking in response to market level and/or funding ratio triggers; rebalancing to an agreed strategic asset allocation; supporting the drawdown and payback of cash to and from private market investments; and managing aggregate cashflows to facilitate benefit payments.
How does it work in practice?
These services can be delivered via a traditional segregated portfolio or via a fund-of-one. The latter approach is normally preferred if the scheme does not already have a custody account, as custody is provided by the fund wrapper
In the case of a fund-of-one it will be a daily priced/traded fund structure with no upfront set-up costs and full integration of all assets in the LDI hedge design. It is an open architecture structure that can hold a wide range of liquid and illiquid thirdparty funds, with full flexibility on investments and service options depending on requirements.
Whether a segregated account or fund-of-one is used, the key to delivering implementation manager services is the holding of third-party funds within the matching portfolio, as illustrated by the chart below.
Closing thoughts
So, there are multiple merits to having an LDI manager that can additionally act as an implementation manager. Such a setup allows trustees to retain full control over their investment strategy, while significantly simplifying governance and reducing operational risk.
In conjunction with our ability to integrate third-party funds, this is another example of how we have developed a flexible, effective and tailored LDI offering that is adapted to a constantly moving marketplace. In the next paper of this mini-series we will explore the benefits to pension schemes of holding their investment grade credit allocation with their LDI manager.
LDI differentiator: the implementation manager role
