Equity holdings switch to bonds

Situation

The client wanted to reduce the liability risk within the scheme whilst maintaining the current level of investment return but were not comfortable using swaps, particularly since swaps yielded around 0.5% less than gilts.

What we did

We advised the trustees to implement a change whereby a proportion of the scheme's equity holdings were switched to index-linked gilts, with an equity futures overlay on top. This allowed the trustees to reduce inflation and interest rate risk (through the investment in index-linked gilts) but retain the target return through use of the equity future overlay.

Client benefits

The client was able to reduce liability risks at significantly more attractive levels than using a swaps based solution, which has benefitted the client since when real yields fell leading to increases in the value placed on the liabilities. In addition, the solution was less complex than a swaps solution and lower risk since the equity futures are exchange traded unlike swaps which are traded "over the counter" with an investment bank counterparty.

We believe this example demonstrates our ability to deliver investment advice and solutions which are consistent with our clients objectives and requirements and also takes into account prevailing market conditions. We think this shows it is important to look "outside the box" and not just use market standard approaches such as swaps-based LDI.