1. Private & Confidential Redington Ltd 29 August 2013
Press Breakfast
29 August 2013
1

2. Private & Confidential Redington Ltd 29 August 2013
Volatility Controlled
Investing For DB and DC
2
Dan Mikulskis
Co-Head of ALM & Investment Strategy

3. Private & Confidential Redington Ltd 29 August 2013
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
£mm
Assets Liabilities Assets realised
• Pension schemes manage a flight path to full funding, but are exposed to downside events
• Sponsors are concerned over pensions impact on wider business. Weaker funding positions have forced sponsors
to significantly increase deficit repair contributions.
Situation: Need to Earn the Required Return whilst Managing Risk
3
Unprotected against extreme downside event,
which would prevent scheme from meeting
Required Return objective

4. Private & Confidential Redington Ltd 29 August 2013
Commonly Heard Pension Problem – Downside Risk Concerns
• Trustee
“We have a low sponsor covenant that means we cannot rely on the company to plug the gap if our assets fall in value
... but we still need to generate returns to meet the scheme benefits”
4
• Corporate sponsor “We want to tell the markets that we have the Pensions issue under control because we have
implemented an investment strategy whereby the deficit position cannot worsen by more than £X* m in any given
year.”
• DC scheme
• “I know default funds often invest in equities, but they can lose a lot of money in a market crash like 2008, is there
a way we can protect our members’ savings more, is there a better approach than traditional Lifestyling ?”

5. Private & Confidential Redington Ltd 29 August 2013
Drive To The Conditions
5

6. Private & Confidential Redington Ltd 29 August 2013
How Volatility Control Works
• Vary exposure to the equity market in response to market conditions
• As equity volatility rises, we reduce exposure from equity toward cash, depending on the volatility target
• Here we illustrate the dynamic exposure of a volatility control approach targeting 10% volatility
6
Source: Bloomberg; Calculations: Redington

7. Private & Confidential Redington Ltd 29 August 2013
What Volatility Control is (and isn’t)
Volatility Control is ...
• An alternative approach to allocating capital;
• A technique for managing risk;
• A passive investment style;
• Implemented on a mandate level;
• Also known as Risk Control or Volatility Target.
7
Volatility Control is not ...
• A quantitative trading rule that tries to outperform
equities;
• A mechanism for trying to predict market crashes;
• A process for selecting low volatility stocks;
• A process for weighting individual stocks according to their
volatility;
• A guaranteed downside protection vehicle against
instantaneous crashes.

8. Private & Confidential Redington Ltd 29 August 2013
Case Study 1 : January 2008 – June 2009
8
Source: Bloomberg; Calculations: Redington

9. Private & Confidential Redington Ltd 29 August 2013
Case Study 2 : January 2011 – December 2012
9
• As the volatility of the FTSE 100 increased between August and September of 2011, the exposure of the volatility controlled
strategy decreased to around 40%.
-10%
10%
30%
50%
70%
90%
110%
130%
150%
0%
10%
20%
30%
40%
50%
60%
70%
AnnualizedVolatility(%)ofFTSE100
%Allocationofvolatilitycontrolledapproach
FTSE Allocation FTSE Rolling Volatility
Source: Bloomberg; Calculations: Redington

10. Private & Confidential Redington Ltd 29 August 2013
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
£mm
Assets Liabilities Assets protected level (90%)
DB Pension Funds : Need
10
Protected against extreme downside
events, more likely to meet Required
Return objective
Satisfies sponsor requirement for
market statement on downside
control
• Downside protection gives greater certainty that the scheme will be able to meet its flight plan

11. Private & Confidential Redington Ltd 29 August 2013
Volatility Control : Cost Effective Portfolio Downside Protection
11
1 Year Protection level
Current cost of protection
on Global Equity Index (%)
over 1 year
Stressed market conditions
cost of protection on Global
Equity Index (%) over 1 year
Cost to protect 10%
Volatility Control portfolio
(%) over 1 year
90% 3.5% 6.5% 0.9%
85% 1.6% 4.8% 0.4%
80% 1.3% 3.5% 0.2%
Source: Bloomberg, Investment Banks
Calculations: Redington
• Cost of downside protection on a volatility control equity benchmark can be less than half the cost of equivalent
protection on a passive equity investment

12. Private & Confidential Redington Ltd 29 August 2013
0
50,000
100,000
150,000
200,000
250,000
300,000
Fund Value 100% Equity Floor Contributions Only DC Default Fund with Risk Control
• Delivering better risk and return outcomes for DC members than a passive equity fund
DC Pension Funds : Need
12
Protected against extreme downside
events, more likely to meet Required
Return objective
Participation in equity markets with
reduced downside

13. Private & Confidential Redington Ltd 29 August 2013 13
DC Pension Funds : Need
• Two layers of risk protection:
• Volatility control
• Downside protection
-87,120
-57,454
-25,016
242,635
207,845
230,714
-150,000 -100,000 -50,000 - 50,000 100,000 150,000 200,000 250,000 300,000
100% Equity
Lifestyling
DC Default Fund with Risk Control
Terminal Fund Value (£) Largest Drawdown in Fund Value (£)

14. Private & Confidential Redington Ltd 29 August 2013
Volatility Control – Client FAQs
• Are you saying Volatility Control is a free lunch?
• What about transaction costs?
• Are there any investable Volatility Control futures?
• Does it employ excessive leverage and is this a problem?
• Is it an algorithm?
• Does future performance depend on volatility increasing prior to a market crash?
• Could it be implemented in conjunction with the low volatility stocks approach?
14

15. Private & Confidential Redington Ltd 29 August 2013
Key Takeaways
• Risk control gives a smoother ride by driving to the conditions.
• Risk control allows scheme trustees and sponsors to lessen the impact of severe market crashed by implementing more
cost-effective downside protection.
• Analysis over long time periods and across markets shows that this approach can deliver better risk-adjusted return
outcomes than a fixed market exposure.
• Risk Control is easy and cost-effective to implement, being a semi-passive approach.
Further Reading -
The Actuary Magazine December 2012
http://www.theactuary.com/features/2012/12/volatility-control-taming-the-beast/
RedViews
http://redington.co.uk/getattachment/eea3dd74-37c8-446e-afa9-fd8d1973f295/Taming%20The%20Beast.aspx
RedBlogs
http://blog.redington.co.uk/Articles/Dan-Mikulskis/September-2012/VOLATILITY-CONTROL.aspx
http://blog.redington.co.uk/Articles/Dan-Mikulskis/December-2012/TAMING-THE-BEAST.aspx
The Journal of Indexes November / December 2012
http://www.indexuniverse.com/publications/journalofindexes/joi-articles/12932-optimal-design-of-risk-control-strategy-indexes.html
15

16. Private & Confidential Redington Ltd 29 August 2013
Volatility Control in the Media
16

17. Private & Confidential Redington Ltd 29 August 2013
Illiquid Credit
Opportunities
Pete Drewienkiewicz
Head of Manager Research
17

18. Private & Confidential Redington Ltd 29 August 2013
The Seven Steps to Full Funding TM
18
Design an efficient
investment strategy
Destination for agile
hedging strategy
Transparency to make
timely decisions
Articulate clear objectives
and constraints
Mission Statement
To help our clients achieve full-funding with the minimum level of risk
CLEAR GOALS &
OBJECTIVES
ACCESS TO LDI
HUB
LIQUID ACTIVE &
MARKET STRATEGIES
LIQUID & SEMI-LIQUID
CREDIT STRATEGIES
ILLIQUID CREDIT
STRATEGIES
ILLIQUID ACTIVE &
MARKET STRATEGIES
ONGOING
MONITORING

19. Private & Confidential Redington Ltd 29 August 2013
Spreads on Liquid Credit Have Compressed Across Market Sectors...
19
0
100
200
300
400
500
600
LiborSpread(bps)
Change in Libor Spread by Market Sector: GBP Liquid Credit
Cyclicals Non-Cyclicals Senior-Financials Telecoms-Utilities

20. Private & Confidential Redington Ltd 29 August 2013
...And Across The Ratings Spectrum
20
0
500
1,000
1,500
2,000
LiborSpread(Bps)
Change in Libor Spread by Rating: GBP Liquid Credit
AAA AA A BBB BB B

21. Private & Confidential Redington Ltd 29 August 2013
At the Same Time, Regulatory Change has Made Illiquid Asset Classes More Attractive
21
I
Capital and
Liquidity
1. Basel 3
II III
Risk Mgt.
and
Supervision
Market
Discipline
Narrower
range of
eligible
capital
Increased
capital reqs.
Capital Ratio
Dur AAA AA A BBB BB <B Unrated
ABS
1 Yr 7.0% 16.0% 19.0% 20.0% 82.0% 100.0% 100.0%
5 Yrs 35.0% 80.0% 76.0% 80.0% 82.0% 100.0% 100.0%
10 Yrs 42.0% 80.0% 76.0% 80.0% 82.0% 100.0% 100.0%
Covered
Bonds
1 Yr 0.7% 0.9% 1.4% 2.5% 4.5% 7.5% 7.5%
5 Yrs 3.5% 4.5% 7.0% 12.5% 22.5% 37.5% 37.5%
10 Yrs 6.0% 7.0% 10.5% 20.0% 35.0% 58.5% 58.5%
Corp
bonds/
loans
1 Yr 0.9% 1.1% 1.4% 2.5% 4.5% 7.5% 7.5%
5 Yrs 4.5% 5.5% 7.0% 12.5% 22.5% 37.5% 37.5%
10 Yrs 7.2% 8.4% 10.5% 20.0% 35.0% 58.5% 58.5%
2. Proposed Capital Weightings under Solvency II:
Result:
• Declining ABS issuance
• Banks less active in loan origination
• Banks withdrawing from holding longer-dated assets on
balance sheets
• Uneconomical for insurance companies to hold longer-
dated, lower rated assets
• Opportunity for pension schemes to fill funding gap

22. Private & Confidential Redington Ltd 29 August 2013
As Pension Schemes in General have a Defined Liability Profile, They Can Often Tolerate Illiquidity Risk
22
Corporate
Bonds
Direct
Lending
Corporate
Linkers
Infrastructure
Debt / Long
Leases
Ground Rents
Gilts
Cash

23. Private & Confidential Redington Ltd 29 August 2013
The Illiquid Investment Universe
23
Higher-Rated
Lower-Rated
“Shorter-Dated” “Liability Matching”
Infrastructure
CRE Debt
Ground Rents
Long Leases
Aircraft Finance
Direct Lending
Distressed Debt

24. Private & Confidential Redington Ltd 29 August 2013
Infrastructure Debt
24
Maturity Profile 15 years +
Liquid Alternative
Publicly-Traded Debt of
Utility Companies
Expected Spread / Rate 225-300bps
Approx. Premium over
Liquid Alternative
125-200bps
What is it?
• Can refer to:
• Privately-negotiated deals with infrastructure-
rich corporates, secured on specific assets
• Project finance-style lending to individual
infrastructure assets or clusters of assets
• Infrastructure debt managers can finance projects
during the construction phase to diversify return
sources
Why is it Interesting?
• Secured lending
• Long-dated cashflows
• Possibility to structure index-linked returns
• Government support for sector via PFI
• Many projects are likelier to experience lower return
volatility due to the natural bias towards essential
service sectors
Indicative risk breakdown:
• Education
• Rail
• Water
• Pipelines
• Airports
• Satellites

25. Private & Confidential Redington Ltd 29 August 2013
Commercial Real Estate Debt
25
What is it?
• Consists of loans made to owners of real estate assets
secured on underlying commercial property
• About 75% of property market finance in Europe
traditionally provided by banks, rest through covered
bonds and CMBS
• Risk / return profile can vary depending on level of
subordination: senior, ‘stretch senior’ & mezzanine
lending available
Why is it interesting?
• Bank deleveraging & drying up of CMBS market have
arguably created fundamental dislocation in asset
class
• Falls in LTVs provide a cushion to senior loan providers
from falling property values
• Security on underlying asset mitigates default risk
Maturity Profile 5-10 years (varies)
Liquid Alternative Sterling ABS
Expected Spread / Rate
225-350bps for Senior
Loans
Approx. Premium over
Liquid Alternative
75-200bps
Sponsor
(Property
Owner)
Lender
Commercial
Property
Tenants
The lender has a lien
on the underlying
property
Principal + Interest
Loan Advance

26. Private & Confidential Redington Ltd 29 August 2013
Direct Mid-Market Lending
26
Maturity Profile 24 – 72 Months
Liquid Alternative
BB/B Non-Distressed US
High Yield
Expected Spread / Rate
650bps prior to defaults,
450bps after defaults
Approx. Premium over
Liquid Alternative
250bps prior to defaults
What is it?
• Refers to asset managers taking the place of banks in
directly originating loans to primarily mid-market
borrowers
• Asset managers are not subject to the same
capital requirements as banks and can hence
lend money at more competitive levels
• Varying degrees of subordination can be targeted
Why is it interesting?
• Secured lending
• Attractive spreads available relative to other illiquid
opportunities
• Direct origination allows greater capture of loan
economics, as well as opportunity to tailor deals to suit
requirements (e.g. prepayment protection)
Corporate
(borrower)
Corporate
(borrower)
Bank
Asset
Manager
Bank
Asset Manager
Bank
Asset Manager
Bank
Typical syndication structure:
Typical direct lending structure:
Loan made Loan syndicated
Loan made Certain loans part-syndicated

27. Private & Confidential Redington Ltd 29 August 2013
Redington Has Seen Substantial Client Demand For Manager Searches in Illiquid Credit
27
570
1,520
1,765
260
Liquid Non-Credit Liquid Credit Illiquid Credit Illiquid Non-Credit
Assets Allocated (ex-LDI), Jan 2012-Jun 2013, (£m)
0
2
4
6
8
10
12
Number of Searches Conducted, Jan 2012-Jun 2013
Asset Class Search Breakdown
LDI
Pooled LDI, Segregated LDI, Segregated LDI
within a multi-manager structure
Liquid Non-Credit
Diversified Growth Funds, CTA/Managed
Futures, Risk Parity, Emerging Market Equity,
Equity Income
Liquid Credit
ABS, Investment Grade Credit, Secured Loans,
Absolute Return Bond Funds
Illiquid Credit
CRE Debt, Distressed Debt, Infrastructure
Debt, Secured Leases, Direct Mid-Market
Lending
Illiquid Non-Credit Hedge Funds, Insurance-Linked Securities
Searches Conducted: Jan 2012-Jun 2013
• Since January 2012, Redington’s Manager Research Team
has conducted more searches for a higher value of assets in
illiquid credit than in any other asset class (for a full
breakdown, see the table below).
• Over the past six months we have conducted six manager
searches in illiquid credit for a combined value of assets of
c. £1.2bn.

28. Private & Confidential Redington Ltd 29 August 2013
13-15 Mallow Street London EC1Y 8RD
Telephone : +44 (0) 20 7250 3331
www.redington.co.ukContacts
Dawid Konotey-Ahulu
Co-Founder & Co-CEO
Direct Line: 020 3326 7101
dawid@redington.co.uk
28
Pete Drewienkiewicz
Head of Manager Research
Direct Line: 020 3326 7138
pete.drewienkiewicz@redington.co.uk
Disclaimer
For professional investors only. Not suitable for private
customers.
The information herein was obtained from various sources.
We do not guarantee every aspect of its accuracy. The
information is for your private information and is for
discussion purposes only. A variety of market factors and
assumptions may affect this analysis, and this analysis
does not reflect all possible loss scenarios. There is no
certainty that the parameters and assumptions used in this
analysis can be duplicated with actual trades. Any
historical exchange rates, interest rates or other reference
rates or prices which appear above are not necessarily
indicative of future exchange rates, interest rates, or other
reference rates or prices. Neither the information,
recommendations or opinions expressed herein constitutes
an offer to buy or sell any securities, futures, options, or
investment products on your behalf. Unless otherwise
stated, any pricing information in this message is indicative
only, is subject to change and is not an offer to transact.
Where relevant, the price quoted is exclusive of tax and
delivery costs. Any reference to the terms of executed
transactions should be treated as preliminary and subject
to further due diligence .
Please note, the accurate calculation of the liability profile
used as the basis for implementing any capital markets
transactions is the sole responsibility of the Trustees'
actuarial advisors. Redington Ltd will estimate the liabilities
if required but will not be held responsible for any loss or
damage howsoever sustained as a result of inaccuracies in
that estimation. Additionally, the client recognizes that
Redington Ltd does not owe any party a duty of care in this
respect.
Redington Ltd are investment consultants regulated by the
Financial Conduct Authority. We do not advise on all
implications of the transactions described herein. This
information is for discussion purposes and prior to
undertaking any trade, you should also discuss with your
professional tax, accounting and / or other relevant
advisers how such particular trade(s) affect you. All
analysis (whether in respect of tax, accounting, law or of
any other nature), should be treated as illustrative only and
not relied upon as accurate.
©Redington Limited 2013. All rights reserved. No
reproduction, copy, transmission or translation in whole or
in part of this presentation may be made without
permission. Application for permission should be made to
Redington Limited at the address below.
Redington Limited (6660006) is registered in England and
Wales. Registered office: 13-15 Mallow Street London
EC1Y 8RD
Dan Mikulskis
Co-Head of ALM & Investment Strategy
Direct Line: 020 3326 7129
dan.mikulskis@redington.co.uk