EUROPE - State Street Global Advisors (SSgA) has expanded its fixed income and nominal bond offering with the launch of 10 single-stock physical gilt funds and 10 single-stock leveraged gilt funds, with the objective of creating a range flexible enough to enable smaller pension schemes to match their liabilities more closely with pooled products.
Ben Clissold, senior LDI portfolio manager, said: "The advantage is that this is very flexible. Combined with the existing set of physical bond strategies, you can choose from a large range of gilts which ones you want. We can lock-down 90% of your liability risk with this range.
"This means that what we have been doing for large, bespoke clients for five years or so we will now be able to do for much smaller clients."
The new range includes physical single-stock nominal gilt funds maturing in December 2049 and January 2060; physical single-stock inflation-linked gilt funds maturing in November of 2027, 2032, 2037, 2042, 2047, 2050, 2055 and 2062; leveraged single-stock nominal gilt funds maturing in 2020, 2030, 2040, 2049 and 2060; and leveraged single -stock inflation-linked gilt funds maturing in 2022, 2032, 2042, 2055 and 2062.
The leverage is through total return swaps or repo, depending on which is the most cost-effective at any one time (gilt futures do not provide sufficient liquidity across the curve).
The leveraged funds require different levels of cash invested, set at the inception of the fund to ensure a capital call will not be required, based on a one-year VAR95 measure.

For index-linked funds, 22% of the notional is required in cash at 11 years' maturity, for example; at 50 years' maturity, 67% of notional is required. For nominal funds, 18% is required at nine years' maturity and 40% at 48 years.
If a capital call is required to maintain sufficient leverage, the scheme will have 10 days in which to decide whether or not to post that extra cash.
"If real yields moved on the index-linked 2062 from 0% to 1%, for example, that would probably cause a capital call," said Clissold.

"But they would have to move from 1% to 2% before we burned through all the capital in the fund - so that's a large move, which would have to happen within 10 days, which makes us comfortable we have enough capital in these funds.
"We have a series of un-levered as well as levered funds, and we would hope and expect clients to use both together, moving money from the unlevered version into the levered version as and when cash is required - or vice versa if yields move sufficiently in favour of the scheme."
The idea is that smaller schemes will hedge what they can with standard, index-based physical bond funds, and 'pick-and-mix' from this additional range to match the liability risks uncovered by the standard products.
"The advantage of having a range of funds to choose from is that you can pick as much of each one as you need to hedge liabilities at each corresponding point," said Clissold.
He also noted that larger schemes with bespoke arrangements had enjoyed the advantage of being able to switch from gilts to swaps in their hedging portfolios, depending on which was offering the most beneficial rate at any point in time, or whether or not the trustees regarded the UK government as a credit risk that they wanted to take, or whether they wanted to hedge just inflation, rather than the real rate.
To bring that advantage to smaller schemes, later this year SSgA will launch a range of leveraged LDI swap funds: real rate swap funds maturing in 2020, 2025, 2030, 2035, 2040, 2045, 2050, 2055 and 2060; interest rate swap funds maturing in 2020, 2025, 2030, 2035, 2040, 2045, 2050, 2055 and 2060; and inflation rate swap funds maturing in 2025, 2035, 2045 and 2055.
Clissold said these funds would be suitable for £40m (€49m) schemes and upwards, but that there was no reason why larger schemes might not choose this kind of solution for its "simplicity and transparency".
The range is also set to expand for European clients, but SSgA is still considering which instruments should go into which funds in certain jurisdictions, where euro-based schemes can supplement their domestic bond and rate markets with other euro markets.
Raymond Haines, head of European LDI at SSgA, said: "That's something we are looking at so we can extend this product range for European clients, but we can't say exactly what the profile will be yet.

"And in the Netherlands specifically, FTK2 is still in the air, and we expect some clarity on that over the next 6-8 weeks."