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Vehicles to use
Having established the allocation between the growth and protection assets portfolios, we then consider how the strategy can most appropriately be implemented. This will cover such issues as the exact structure of the protection and growth assets, which investment vehicles to use and which management styles to follow.
A review of the protection portfolio would cover:
- the split between inflation and fixed interest bonds, considering the liability exposure to each of these key financial elements;
- the most efficient structure (i.e. the balance between long, medium and short term bonds) for the bond holdings, considering the duration and other characteristics of the liabilities;
- the merits of interest and inflation swaps, considering the balance between reduction in funding volatility offset against the added complexity and cost;
- the inclusion of credit risk, through corporate bonds, within the protection strategy.
A review of the growth portfolio would cover:
- consideration of active versus passive asset management. This can include a review of the most recent and relevant academic research in this area to aid understanding of this emotive area;
- the allocation between UK and overseas equities, which can include consideration of currency hedging;
- the inclusion of alternative growth assets beyond solely equities, which can include whether these are managed by a single manager also making tactical asset allocation decisions, or by using specific managers for each alternative asset mandate, such as a property manager.
