Sun, sea and seamless collateral management

17 Aug 2022

The summer sun is particularly welcome this year, giving us all a lift after a momentous few months. When sunny optimism cheers all but the most hardened cynic, everything seems a bit brighter in the summer. As well as basking in the rays, we’ve taken the opportunity to reflect on the year to date, taking stock of the big stories in the world of fiduciary management. War and soaring energy prices have captured the headlines, but the knock-on effect of inflation on yields and liability-driven investments (LDI) is a phenomenon also worth exploring.  

Collateral – who you gonna call?

Indeed, rising yields have been the big pensions story of 2022 to date, spawned by rising inflation. Predictably, this had a knock-on impact on LDI and collateral management. As we’d expect, given the ‘one-stop shop’ nature of a fiduciary arrangement, fiduciary managers dealt with increased requests for cash reasonably well, meaning that lots of trading went on seamlessly ‘under the bonnet’ without trustees having to get involved. 

We saw high demand for collateral calls to support protection assets, meaning a lot of money had to be sourced from other parts of portfolios. 

What we found particularly interesting is where fiduciary managers chose to source this from – some used conventional ‘low volatility’ funds (eg, low-risk credit, absolute return bonds etc); some converted physical equity and credit to their synthetic versions to free up collateral, while others even sold physical equity holdings. 

The timing of these rebalancing movements is important. Obviously, clients want to avoid selling assets at highly depressed prices. That said, with many schemes basking in the glow of funding-level gains, selling growth assets on the cheap can still be an appropriate way to de-risk. What’s really important is that trustees are monitoring their fiduciary managers to make sure that decisions remain consistent with their strategy and beliefs, as well as reviewing the quality of execution.

Are fiduciary managers as dynamic as they claim?

While the collateral management story has been a ray of light, fiduciary managers can sometimes be slow to implement other changes. We have recently seen delays in implementing change arising from issues such as custodial arrangements to anti-money laundering paperwork, creating frustration for clients and market risk until implementation is complete. This shows that humdrum activities such as account set-up and anti-money laundering checks don’t vanish when trustees appoint a fiduciary manager – they just disappear from view. Trustees need to be monitoring these activities and make sure that their fiduciary managers stay on track.

We see this as a timely reminder for trustees not to forget about issues just because they’re out of sight. Even if you can’t see clouds on the horizon, it doesn’t mean that the sunny days will last forever. It might pay to dig out the wet-weather gear and give it a once-over to ensure you’re not caught out further down the line.

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