Investment Banking Pensions Forum

Redington
Investment Banking
Pensions Forum
8 July 2014

Our first client 7 years ago...

... our current list of clients.

21
55
98 100
185
225
250
300
335
0
50
100
150
200
250
300
350
400
2006 2007 2008 2009 2010 2011 2012 2013 Current
GBPbillionsAssets Under Consulting: Evolution

Client size (assets)
Trustee: Full
Advisor
Trustee:
Project
Sponsor
Non-
Pension
Total
> £10Bn 1 4 3 3 11
£5Bn - £10Bn 0 6 1 1 8
£1Bn - £5Bn 10 5 4 2 21
£500m - £1Bn 0 2 1 2 5
< £500m 4 1 1 3 9
Total 15 18 10 11 54

12 Full Time Equivalents doing Manager Research

LDI HUB
LIQUID MARKET STRATEGIES
LIQUID & SEMI-LIQUID CREDIT STRATEGIES
ILLIQUID CREDIT STRATEGIES
ILLIQUID MARKET STRATEGIES
REPORTING AND MONITORING
CLEAR GOALS AND OBJECTIVES
The 7 Steps to Full Funding

Multiple Investment
Strategy Processes
Inconsistent
Poor Quality Possible
Time Consuming
One
Investment
Strategy
Process
Consistent
Quality Control
Efficient

Manager Research:
Business Update

Investment
Strategy &
Research
Team
Risk Analysis and Modelling Asset Class and Manager Research
• Analysis and modelling of both
asset and liability side risks
across different key metrics
• Ongoing monitoring of Fund
progress against objectives and
risk constraints
• Design of strategic asset
allocations
• Disciplined framework for hiring
and terminating managers
• Team specialisations cover
entire universe of asset classes
through categorisation by
portfolio role
• Significant expertise in designing
and implementing investment
strategies
Focused ResearchRelevant AdvicePracticable Strategies
Integrated Investment Strategy and Manager Research

Comparison vs. ‘Traditional’ Investment Consultancy Model
Redington ‘Traditional’ Investment
Consultancy Model
Business Model Retained Fee Small Retainer and ‘Add-On’
Work
Research Team Smaller, Focused Larger, Maintenance Research
Manager Selection Included in Retainer Additional Fee Work
Manager Views Preferred Lists Ratings
Use of Managers High Conviction Many High-Rated Managers, Few
Win Capital
Philosophy Absolute Return, Risk-Allocation
Focused
Benchmark Focused
Client Decision-
Making Process
Flexible, Quick to Act Constrained, Slow

Preferred List Process
Advantages: Why?
High
Conviction
3 to 5 managers in each sub asset class, typically each will bring a
different approach to the strategy
Clarity for
clients
Clients on our retainer fee model will have access to all of our
preferred list recommendations and be able to see our views
Clarity for
managers
Feedback will be easier to deliver and clearer to understand
Governance Having existing preferred lists allows clients to allocate to an asset
class in a far more streamlined fashion
Alignment With our retainer fee model – we are no longer incentivised to
“churn” asset managers or drum up search business
Scalable We build up IP over time and much client work can be delivered from
existing resources
Flexible We continue to offer a bespoke search process if desired and for our
non-retained client base

LDI Hub Liquid Markets Liquid Credit Illiquid Credit Illiquid Markets
Collateral Mgt. Equities (EM, DM) Sterling Credit (IG) Structured Finance Reinsurance
Pooled vs. Seg DGFs Global Credit (IG) Infrastructure Debt Private Equity
Leverage & Liquidity Style Premia HY/Loans Senior Direct Lending Infrastructure
Overlay Strategies Risk Parity ABS Mezzanine Finance Real Estate
CTA Emerging Market Debt Distressed Debt
Global Macro Absolute Return Bonds Senior CRE Debt
Equity Long-Short Multi-Class Credit
Credit Relative Value
Steps 2-6:

2
6
5
11
£4.0bn Allocated in 2013 (ex-LDI)* 25 Allocations Made in 2013:
Average Across Steps 3-6 = £176m
LDI Hub Liquid Credit
Liquid Markets Illiquid Credit
*£7.3bn inc. LDI
0.8
0.92.4

10 x 10 x 10
Our approach to screening, selecting and monitoring managers

Universe
Meetings
Preferred
Sterling
Credit
DGF Infra-
structure
Debt
Senior
CRE
Debt
Absolute
Rtn.
Bonds
Oct
2013
Dec
2013
Dec
2013
Jan
2014
Jan
2014
43 33 25 30 86
9 15 8 7 20
3 3 2 3 4
Screening the Universe
Ones to watch

How we reduce the universe down to a manageable list
Qualitative / Judgemental Factual / Quantitative
Business alignment Capacity available
Commitment to product Fee level and structure
AUM Portfolio analysis
Team Performance & risk analysis
Transparency Product appropriateness

In our selection process, we are explicitly looking to
identify areas of competitive advantage.
We believe the very best managers differentiate
themselves in one of the following ways.
What are we looking for in preferred list managers?

1. Information Advantage
2. Screening Advantage
3. Decision-Making Advantage
4. Conviction Advantage
5. Self-Awareness Advantage
6. Teamwork Advantage
7. Risk Management Advantage
8. Execution Advantage
9. Strategic Advantage
10. Innovation Advantage
Competitive assessment - preferred list managers

Red Radar: Helping clients remain alert to what could go wrong
2. Client
Dependency
3. Leadership
Change
4. Culture
Change
5. Key
Person
6. Complexity
7. Process
Drift
8. Capacity
Management
9. Operational
Infrastructure
10. Risk
Culture
1. Business
Management

Our approach to research meetings – what we are looking for
Meetings by category within a short time period (allows comparison)
Information and presentation in advance (so we can come prepared)
Avoid turning pages (not assessing presentation skills)
Focus on portfolio positioning, changes and decisions
Meet different people at all levels
Informal interaction, floor walk, attend morning meetings
Detailed information and transparency (portfolio analysis)
Keep us updated (monitor decisions over time)
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In return we waste less of your valuable time in meetings, we focus on what matters,
make decisions quicker and give you more open feedback.

A Stroll Through our
Investment Universe

Our LDI Philosophy
1. LDI fits within the PRMF (Step 1) risk budget and objectives of each client.
2. LDI is part of the overall ALM framework. Rates and Inflation are merely the largest
components of risk.
3. Redington make LDI decisions based on Risk impact and Required Return
expectations.
4. LDI strategy is outcome-focused for each client.
5. Redington do not call markets. We prefer Funding Ratio Triggers and dislike market-
based hedging strategies.

LDI Implementation in Practice
Start
Structure
Risk
What resources does each client have?
• CIO Function
• Legal Resource
What structure is most appropriate given size,
resource and derivative usage?
• Pooled vs. seg mandate
• QIF
• Own docs vs. Agency
How best to manage and monitor risk?
• Risk policies
• IMA
• Reporting pack

LDI Implementation:
Areas of Expertise
Banking
Group
Liquidity &
Leverage
Regulation
Assess the size / quality of the banking group and
related Swap and Repo documentation
• Best Terms?
• Fairness and Consistency
Ensure client has enough collateral given OTC usage
and pension outflows
• Has the client got enough leverage given required
Portfolio returns?
What are the impacts of EMIR on pension schemes?
• What are the implications of Banking regulation
on dealing costs and liquidity?
Review
As the hedge increases over time, how does the risk
profile of the portfolio change?
• When is it appropriate to change an LDI mandate
from Passive to Active?

Contractual
Non-contractual
LiquidIlliquid

Done / In Progress

Current Focus Areas
Lower client demand /
lesser focus
Higher client demand /
greater focus
Alternative Risk
Premia
Risk Parity
CTAs
Global Macro
Fundamental Long /
Short Equity
Fundamental Active
Equity

525
245
250
600
500
245
CRE Debt Distressed Debt Illiquid Corporate Debt
Infrastructure Debt Private Placements Senior Direct Lending
Total: £2.4bn
Allocations to Illiquid Credit over 2013 (£m)

Dan Mikulskis
Co-head ALM & Investment Strategy, IC Member
Phil Rose
CIO Investment & Risk, IC Member
Pete Drewienkiewicz
Head of MRT, IC Member
Kenny Nicoll
MRT, responsible for LDI implementation
Aniket Das
MRT, responsible for liquid & multi-asset strategies
David Bennett
Head of Investment Consulting, IC Member

What’s most interesting for us, to hear from you, and why …
4
We like to
hear about
Examples Why?
Market
colour
Data on Z-spread, Inflation,
Iota, LPI, Swaptions. Highlight
significant moves in longer term
context. Realised vol vs long
term
Many of us have been practitioners, but we no-longer
sit in front of Bloomberg or in the hub of a trading
floor. Access & knowledge of this information is a key
differentiator of us vs competitors
Comment around market
events
Is it market moving ?
Could it affect the attractiveness of certain strategies ?
Would our clients be hearing about it ?
Themes
REPO market usage, central
clearing, gilt issuance
We want to stay ahead of any themes that could
influence the use of derivatives in our clients’
investment strategies so we don’t get caught out
Emerging
risks
LIBOR/SONIA, CSA dirty to clean We’ve been ahead of our competitors in addressing
these issues and adding constraints in LDI mandates.
We’d like to stay that way
Asset
Managers
Who do you see often, in which
areas, execution strengths
We consider our ability to get colour on asset
managers from the sell side an important differentiator
from our competitors when it comes to manager
research
1. LDI

4
We like to hear
about
Examples Why?
What’s possible Implementing investment strategies synthetically allows
clients to make better use of their physical asset
collateral and adds another “lever” to their strategic
asset allocation. It’s a significant differentiator of our
process which we believe adds value, so its important
for us to stay on top of developments
Liquidity Growth in liquidity of EM
equity future
Costs Roll costs, funding costs We need to be on top of any changes in the costs
associated with a derivative strategy so we can give
comfort to our clients
Asset manager
expertise
Who do you see often, in
which areas, execution
strengths
We consider our ability to get colour on asset managers
from the sell side an important differentiator from our
competitors when it comes to manager research
2. Synthetic Asset Exposures

4
We like to hear
about
Examples Why?
Colour on
forthcoming deals
Deals, pipeline, structures,
expected spreads
We’ve been advocates of allocation to illiquid assets
where these can help our clients meet their required
returns. Liquidity freed up from using synthetic
exposures can be employed to earn an illiquidity
premium
Clients by now expect us to have good visibility of deal
pipeline and help them (via fund managers) to get
access to the deals
Being involved early we can shape key terms etc to
make most attractive to pension funds and hence
increase chance of deal being done
3. Illiquid asset origination

What’s in it for you ?
5
We are advocates
of
…and this means Benefit to you
LDI, and managing risk
through interest rate
hedging (among other
tools)
Appoint LDI manager if none exists
Increase LDI manager’s flexibility over
instrument usage
Widen counterparty bank panel
Increase interest rate & inflation hedge ratio
Consider synthetic equity exposures
Indirect through LDI
franchise, sales to asset
managers
Derivative Based
Strategies
We’ve allocated significant capital to the
following strategies, with more to come
• Multi asset relative value
• Absolute return bonds
• Style risk premia
Indirect through
derivative franchises,
sales to asset managers
Risk Control & Explicit
Downside protection
Design and implementation of strategies
involving synthetic exposures, risk control
& downside protection
• Vol control equity + put
Indirect through risk
control franchise &
structuring

What’s in it for you ?
5
We … …and this means Benefit to you
Have influence with
asset managers
We can widen investment restrictions, add
to fund manager discretion and suggest
banks to add to counterparty panels.
Potentially increased opportunity
for asset managers to implement rv
ideas (where there is a good case
for it)
Are always keen to talk
about the strategic
direction of pension
funds
Strategic insight into what we think
pensions schemes will be interested in
doing
Ability to position wrt products or
asset manager coverage

Dos and Don’ts
Do Don't
Be selective
Be focused - Send us highlights and
"executive summaries" of research &
market colour
Read our website, blog & thought
pieces to understand our investment
philosophy, and what matters to us
Understand that individual trade ideas
probably aren’t for us
Try and keep in mind how things fit into
our strategic view of the world
Highlight opportunities for us to meet
directly with relevant traders who have
interesting insight
Keep us in the loop with product and
strategy ideas shared with our clients,
or prospects
Product push
Take a "Scatter gun" approach
Be unrealistic
View us as an outlet for a particular axe
or position
Waste meeting time talking about why a
particular asset or strategy makes
sense – we know!
Push for meetings more frequently than
is really necessary
Assume we are looking for opportunities
to move toward asset management

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