Russell Investments and Barclays have created a new set of investable liability-driven investment (LDI) fixed income benchmarks for US corporate pension funds.
The Barclays-Russell LDI Index Series combines the unique capabilities of two leading organisations to offer pension fund investors a standard set of rules-based and transparent fixed income benchmarks which are designed to offer better liability tracking properties than traditional benchmarks currently in use.
Pension fund investing in the US has evolved in recent years toward a liability-driven investing approach. With more stringent pension funding rules, tighter accounting standards and a challenging investment landscape, more pension funds in the US are de-risking and have taken initial steps into LDI by extending the duration of their fixed income portfolios with standard long-duration bond index products. While Barclays, a leader in fixed income benchmarks, and Russell, a recognised expert in LDI and a leader in multi-asset investment solutions agree that existing benchmarks for LDI portfolios have been sound, they have not been designed to closely match interest rate, credit, and yield curve risks of specific pension plan obligations. This has driven a market need for a better set of benchmarks, which the two companies have worked together to address.
"In speaking with clients through LDI consulting and asset management conversations, it became clear that plan sponsors needed a way to more accurately hedge their liabilities, but they also still wanted a transparent and investable index set to benchmark their fixed income managers against. Currently available fixed income index products were not fully addressing those needs," says Martin Jaugietis, CFA and Director of LDI Solutions at Russell Investments. "By collaborating with a leading fixed income index provider like Barclays, we are able to fill this gap."
The Barclays-Russell LDI Index Series is available for a wide range of investors, including defined benefit pension plans, dedicated fixed income asset managers looking to broaden their LDI product suite, and plan sponsors with more than half of total pension assets in LDI fixed income that want a more appropriate measure of liability returns. The Series consists of six high quality, mostly corporate-bond-based, benchmarks with target durations of 6, 8, 10, 12, 14, and 16 years. Each LDI index is reconstituted annually back to the targeted maturity minimum range to reflect changes in market yields while minimising turnover, and rebalanced monthly to remove bonds falling below the maturity threshold or quality standard and add newly issued bonds that qualify. Issuer concentration is reduced through a 2% issuer cap. When using the Series, investors will be able to select a single LDI index or a combination to most accurately reflect their specific liabilities.
"By better matching the risk and return characteristics of typical liability streams with a smart cash bond-selection strategy, the Barclays-Russell LDI Index Series is a useful performance target for investment portfolios designed to fund specific liabilities," says Brian Upbin, Head of Benchmark Index Research for Barclays. "This rules-based index series will give asset owners, asset managers and investment managers a new portfolio benchmarking tool."