Implementing LDI with swaptions - Russell Investments

Fourth Quarter 2011
Russell Communiqué
Current and emerging investment issues: Russell perspective
Implementing LDI with swaptions
Also in this issue:
8 Volatility-responsive asset allocation: The results in practice
11 Climate change and investments, or: “Why should I care?”
12 Q&A: The evolution of target date investing

EXECUTIVE VIEW
3 Dealing with change:
Applying the lessons of a thousand clichés
By: Bob Collie, FIA, Chief Research Strategist, Americas Institutional
INVESTMENT FOCUS
4 Implementing LDI with swaptions
By: Lisa Cavallari, Director, Fixed Income Derivatives, and
Martin Jaugietis, CFA, Head of LDI Solutions
As the popularity of liability-driven investing (LDI) continues to increase, so does
the number of ways to implement an LDI program. This article discusses one such
instrument: an option on interest rate swaps, generally referred to as a “swaption.”
It also describes how swaptions can fit especially well into a program designed to
reduce risk in accordance with a liability-responsive asset allocation (LRAA) schedule.
CLIENT FOCUS
8 Volatility-responsive asset allocation:
The results in practice
By: Bob Collie, FIA, Chief Research Strategist; Mike Sylvanus, Senior Investment Strategist; and
Michael Thomas, CFA, Head of Consulting and Chief Investment Officer
In last quarter’s Communiqué, Mike Thomas explained how volatility is itself variable
over time and how an investment policy that responds to those variations might
be designed. How would such policy perform? And what impact would following
a volatility-responsive asset allocation strategy have on risk and returns?
OPINION
11 Climate change and investments, or: “Why should I care?”
By: Greg Liddell, Managing Director, Consulting & Advisory Services—Australasia
Few issues have generated more skepticism than the subject of climate
change. In this article, Greg Liddell outlines why it matters to fiduciaries.
Q&A
12 The evolution of target date investing
With Josh Cohen, Defined Contribution Practice Leader
In this brief interview, Josh Cohen discusses developments and trends
in target date investing.
GREAT MOMENTS IN FINANCIAL HISTORY
14 The opening of the Lions Gate
By: Aran Murphy, Product Strategist
Russell Investments // Russell Communiqué p / 2

EXECUTIVE VIEW
Dealing with change: Applying
the lessons of a thousand clichés
Dear Readers,
Like it or loathe it, there’s no avoiding change. We are, of course, supposed to embrace it,
to never stop learning, and to apply lots of other advice that has unfortunately lost its luster
through overuse and passed into the realm of cliché—which doesn’t make it bad advice. So,
although it wins us no points for the originality of the theme, change is the thread that runs
through this issue of Communiqué.
Change comes in many forms. We are slowest to accept change when it challenges our old
way of seeing the world, when it calls into question long-held opinions or practices that have
become part of our fabric. For example, for many years institutional investors saw strategic
asset allocation as fixed asset allocation, but it doesn’t have to be. One of the biggest themes
in our work with institutional investors over the past couple of years has been a much more
dynamic approach to asset allocation—all the while retaining the discipline and long-term
perspective that distinguish the strategic from the tactical. The catalyst that made this change
possible was liability-responsive asset allocation: a dynamic—but strategic—approach that
opened the door to the possibility of other forms of dynamic strategic allocation.
In this issue, we pick up the theme of volatility-responsive asset allocation that was introduced
in last quarter’s Communiqué and look at the evidence that adjusting asset allocation in
response to market volatility can help in the management of risk. Lisa Cavallari and Marty
Jaugietis take a look at swaptions, an emerging tool for LDI managers, describing how these
instruments work and how they can help manage interest rate exposure for defined benefit
plans. Our Q&A column turns to the world of defined contribution and looks at how target
date funds (TDFs) are already changing as the first generation of TDF products is replaced
by a more flexible design approach. This quarter’s Opinion article looks at another type of
change—climate change—as Greg Liddell argues the case for why investors need to pay
more attention than they do.
Thank you for reading,
Bob Collie
Bob Collie,
Chief Research Strategist, Americas Institutional
p / 3

STRATEGY TIMING IMPLEMENTATION
INVESTMENT FOCUS
Implementing LDI
with swaptions
By: Lisa Cavallari, Director, Fixed Income Derivatives, and Martin Jaugietis, CFA, Head of LDI Solutions
Lisa Cavallari
Martin Jaugietis
1
For more details of the
swaption market, see
Tom Fletcher (2011),
“Conditional interest
rate trades when the
yield curve is steep:
development of the
case for swaption use,”
Russell Investments.
With the increased adoption of liability-driven investing (LDI) by corporate
defined benefit (DB) pension plans, the range of instruments available to
help implement LDI programs has widened. One of these instruments is an
option on interest rate swaps, generally referred to as a “swaption,” which
can fit especially well into a program designed to reduce risk in accordance
with a liability-responsive asset allocation (LRAA) schedule.
Available instruments for implementation of an LDI program include Treasury bonds;
corporate and other non-government bonds; exchange-traded derivatives, such as interest
rate futures and options; and over-the-counter (OTC) instruments, such as swaps and options
on swaps. It is the OTC market and, in particular, options on interest rate swaps (“swaptions”)
that we will examine in this article.
What is a swaption?
An interest rate swap is, as the name suggests, an exchange of one interest rate for another.
For example, one investor might agree to pay another a fixed rate for 10 years (the fixed rate
being determined by the current market level of interest rates) and in return receive a floating
rate (the floating rate being determined by a market rate such as the London Interbank Offer
Rate, or LIBOR). The effect is similar to that of an investor’s selling a 10-year bond and holding
cash. Because the terms of the swap are based on current market rates, no money needs to
change hands at the outset; the value of the obligation to pay one interest rate and the right
to receive the other are equal at the outset, although that will change once the terms are
established and as market prices then move over time.
A swaption is an option to enter into a swap trade. 1 A “3y10y” swaption is the right to enter into
a 10-year swap trade in three years, based on terms that are set today. An example: suppose
you buy a receiver swaption, i.e., an option to receive a fixed rate and pay a floating rate for
10 years starting in three years. Fast-forward three years: if the terms that are available on the
10-year swap at that time are better than those in the swaption, then you will not exercise the
option. If the terms in the swaption are better, then you will exercise it. As with all options, you
are in a good position if you are the holder of the option; if you like the deal at the exercise date,
you win—if you don’t like the deal, you don’t lose. And, as with all options, that good position
comes at a price: a premium has to be paid at the outset to buy the option.
Swaptions and LRAA
What makes swaptions intriguing in an LDI context is their conditionality, as well as their
potential interaction with an LRAA schedule.
Russell Investments // Russell Communiqué p / 4

RUSSELL INVESTMENTS
In today’s low interest rate environment,
many plan sponsors have been reluctant
to fully eliminate the interest rate risk
in their plans but have preferred a more
incremental approach to LDI. In this sense,
one application of LRAA is to increase
the duration of a plan’s fixed income
investments incrementally as the allocation
to fixed income increases overall. 2 While this
approach has some merit, the unfortunate
outcome for most plans in the very early
stages of their LRAA and/or LDI programs
has been that they remain in very shortduration
positions vis-à-vis liabilities, and
funding levels have suffered in the recent
declining interest rate environment.
The ultimate goal in an LDI portfolio is to
increase the duration exposure of fixed
income investments, and we know that
plan sponsors want protection against
declining interest rates. One version of a
swaption trade—the “zero-cost collar,”
discussed below—provides this type of
exposure by offering protection against
declining interest rates in exchange for the
promise to enter a swap at a certain interest
rate above current rates. While there are
many moving parts in this version, these
higher rates can potentially be aligned at
levels along the LRAA schedule, where
the plan sponsor would be increasing the
duration exposure of the fixed income
portfolio in any case.
An example of a swaption trade:
the zero-cost collar
The swaption trade we describe below is
based on buying a receiver swaption at a
low interest rate (to offer the protection
we’d like to have, should rates fall) matched
by selling a payer swaption 3 at a higher
rate (the rate at which we are likely to be
seeking longer-duration exposure anyway).
For convenience, the terms of the two deals
can be chosen such that the premium paid
for buying the protection of the receiver
swaption is equal to the premium collected
for selling the payer swaption.
Exhibit 1: Rates
Swap curve date 8/30/2011
10y (spot) 2.36
3y10y (forward) 3.41
Source: Bloomberg
Exhibit 2: Strategies
Strategy
Zero-cost
swaption
collar
Payer
strike
Receiver
strike
A 3y10y+50 3.91 3.04
B 3y10y+100 4.41 2.70
C 3y10y+150 4.91 2.38
D 3y10y+200 5.41 2.10
Source: Bloomberg
The interest rates associated with such
a trade, as of August 30, 2011, are shown
in Exhibit 1. At that date, the at-themoney-forward
(ATMF) rate was 3.41% 4 .
In Exhibit 2, the payer swaption strikes
at 50-basis-points-higher increments are
3.91%, 4.41%, 4.91% and 5.41%. The
strike shown for the receiver swaption is
in each case the strike that results in an
equal premium for the two swaptions (i.e.
creating a zero-cost collar).
In Exhibit 3, we illustrate the effect of
these strategies by looking at the impact
of interest rate shock at option expiration
on an example plan that is 80% funded.
The first thing we note is that all of the
swaption strategies reduce the impact of
interest rate variation on the funded status
of the plan. This should not be a surprise:
in each example strategy there is a built-in
exposure to interest rates, so it becomes a
de-risking strategy for any DB plan whose
liabilities are driven by interest rates.
2
For a description of this
strategy, see Jim Gannon
& Bob Collie (2009),
“Liability-Responsive
Asset Allocation,” Russell
Viewpoint.
3
A payer swaption being
the right to pay the fixed
rate and receive the
floating.
4
This can be thought of
as the 10-year swap rate
which current pricing
implies the market expects
in three years’ time.
p / 5

INVESTMENT FOCUS (continued)
Exhibit 3: Strategies’ impact on funded status
120%
115%
110%
105%
Funded status
100%
95%
90%
85%
80%
75%
70%
-200 0 100 200 300 400
Spot swap curve changes (basis points)
Original Strategy A Strategy B Strategy C Strategy D
5
For an expansion of
this point, see Michael
Thomas and Greg
Nordquist (2011),
“Interest rate swaptions—
downside protection you
can live with,” Russell
Research.
Next we note that in the event of a fall in
rates, we do get the downside protection we
would like. Indeed, because the yield curve
is currently steep, we get protection not just
against rates going down, but also against
rates not going up by as much as expected
due to some of the receiver strikes being
above the current 10-year spot rate. With so
much talk of downside protection strategies
being focused on falls in equity markets, it
is easy to forget that downside protection
on the liability side of a DB plan’s balance
sheet can offer better value than downside
protection on the asset side.
Over time, the impact of the strategies
becomes different. At the three-year horizon
(the point at which the options will either
be exercised or not exercised), rates might
be low enough that the receiver swaption is
exercised; they might be high enough that
the payer swaption is exercised; or they
might fall into the range between (in which
case, nothing happens).
As already mentioned, if rates are low, then
the strategy pays off, reducing the negative
effect that the fall in rates has on the plan’s
funded status. If rates are high, funded
status has improved, but the strategy
results in a loss (this is the price that is paid
for the downside protection). If either option
is exercised, then the plan finds itself with
an increased exposure to interest rates: this
is the previously mentioned tie-in to LRAA
in the case of a rise in rates.
Variation in attractiveness of pricing
In general, protection for investors is
expensive. The price that must be paid for
downside protection is often significant.
Pricing does, however, vary over time.
In the case of the interest rate swaption
Russell Investments // Russell Communiqué p / 6

RUSSELL INVESTMENTS
trade, there are times when market supply
and demand can act in favor of DB plans. 5
Versus historical levels, swaptions’ current
levels may be attractive enough to warrant
consideration. 6 Indeed, the consensus
(due to sovereign risk concerns, debt
downgrades, inflation concerns or other
reasons) has been that interest rates will
rise, so most investors have been seeking
protection against this scenario. Pension
plans, on the other hand, which seek
protection from falling interest rates, appear
very much in the minority on the demand
versus supply ledger. The purchase of such
protection is therefore currently (at time
of this writing) cheaper than it has been
historically. Investors should keep in mind
the variability of pricing over time—the
strategy we have described here makes a
lot more sense in certain circumstances than
it does in others.
Conclusion: another instrument
in the LDI toolbox
We have seen that swaptions can help
to reduce the exposure of a DB plan to
variations in interest rates and thus form
part of an LDI program, and that the
conditionality built into swaptions can
mirror the design of an LRAA strategy.
On the plus side, swaptions offer downside
protection in the case of declines in interest
rates, with the price being paid by a cap on
potential gains if rates rise significantly. That
price, however, appears consistent with the
directional trend to de-risk as a plan’s funded
status improves. Finally, the attractiveness
of the pricing of these instruments can vary
significantly over time, so there is always a
timing judgment that needs to be exercised
when choosing swaptions.
The authors wish
to thank Jim
Simonson for his
excellent research
assistance.
Additional research on liability-driven investing
You can access the following Russell research papers on Russell.com/institutional
or via ClientLINK at https://clientlink.russell.com:
››
“Positioning LDI portfolios in today’s volatile market conditions” by Martin
Jaugietis and Bob Collie
››
“Transitioning to LDI strategies” by Travis Bagley and Aran Murphy
››
“LDI’s role in pension plan strategy: Risk and return considerations” by Bob
Collie and John Osborn
››
“Liability-responsive asset allocation” by James Gannon and Bob Collie
››
“Does equity have duration? And if so, is it useful for LDI?” by James Gannon
6
Based on market prices as
of September 15, 2011.
p / 7

STRATEGY TIMING IMPLEMENTATION
CLIENT FOCUS
Volatility-responsive asset
allocation: The results in practice
By: Bob Collie, FIA, Chief Research Strategist, Mike Sylvanus, Senior Investment Strategist, and
Michael Thomas, CFA, Head of Consulting and Chief Investment Officer
Bob Collie
In last quarter’s issue of Communiqué, Mike Thomas explained how volatility
is itself variable over time and how an investment policy might be designed
that responds to those variations. This quarter we look at how such a policy
would have performed—at the impact on the risk and returns of following a
volatility-responsive strategy.
Mike Sylvanus
Michael Thomas
Reducing volatility and improving the risk/return trade-off
The principle that underpins volatility-responsive asset allocation is to reduce exposure to
risky assets when volatility is high, and to increase that exposure when volatility is low.
Volatility is an appealing foundation for a dynamic strategy because, unlike the outlook for
returns (which are notoriously difficult to forecast), we can be relatively confident in our
assessment of the volatility environment. One reason for this confidence is that changes in
volatility are more persistent than changes in returns: Even a simple look at recent returns
gives us useful insight about the immediate volatility environment. There are other ways to
gauge the volatility environment: the volatility implied by options prices, for example, or the
volatility of other markets.
The analysis that follows is based on two assets only: U.S equity and U.S. fixed income, as
represented by the Russell 3000 ® Index and the Barclays Capital U.S. Aggregate Bond Index
(see Exhibit 1 for reference). It covers the period April 1979–June 2011, the period for which
data on the Russell 3000 is available (the data starts at January 1979, and the strategy starts
once 60 days’ return data is available from which to calculate trailing volatility).
At the start of each month, the volatility of the daily equity market returns for the previous
60 trading days is calculated. If that volatility lies in the range 10.3%–16.9%, then a notrade
zone applies; this level of volatility is not regarded as being unusual enough to merit a
deviation from the default asset allocation of 50% equity/50% fixed income. (This range was
chosen so that the no-trade zone applies half of the time.)
As volatility rises beyond 16.9%, the allocation to risky assets is decreased. Conversely, as
volatility falls below 10.3%, the allocation to risky assets is increased. Note that the size of the
no-trade zone, the minimum and maximum allocations to risky assets and the rate at which
those minimum and maximum positions are achieved are parameters that can be customized
to the specific situation.
Our analysis confirms that this strategy does indeed produce lower volatility than the fixed
mix, and its volatility is more stable and predictable. However, this is only half of the story.
Russell Investments // Russell Communiqué p / 8

RUSSELL INVESTMENTS
CLIENT FOCUS (continued)
Asset allocation is not about risk alone,
but about the trade-off between risk and
expected return. If the rewards for taking
risk are highest at the times of high market
volatility, then the reduction in volatility
shown above would come at too high a
price: a drop in returns that more than wipes
out the risk benefit. Here, too, the strategy
stands up well: there was no return penalty
over the period analyzed; the volatilityresponsive
strategy delivered an average 40
basis points higher return after accounting
for trading costs.
The full results are summarized in the table
below, which compares the return pattern of
the volatility-responsive strategy to that of a
fixed 50/50 mix.
Let us consider each of these statistics in turn.
Annualized return: Even allowing for the
cost of trading, the volatility-responsive
strategy delivered a return over the full
period that not only matched but beat that
of the fixed mix. Note, however, that this can
be episodic: there are periods of reduced
return as well as periods of enhanced return.
Annualized standard deviation: For
the reasons described in the previous
Communiqué article, we would expect the
volatility-responsive strategy to deliver a
more stable return stream than the fixed mix,
and this was indeed the case. Note that not
only is the standard deviation of returns over
the full period lower, but the variability of the
standard deviation over short periods is also
materially lower, as shown in Exhibit 2.
5%ile monthly return: Roughly one in
20 of the monthly returns were –3.05%
or worse under the volatility-responsive
strategy, while roughly one in 30 were
–3.41% or worse under the fixed mix. Thus,
using this as a definition of a bad-case
scenario, the volatility-responsive strategy
fares slightly better, mitigating downside risk.
Worst monthly return: A more extreme
bad-case scenario is provided by a look
at the lowest monthly return. For the
volatility-responsive strategy, this would
have occurred in October 1987, when the
portfolio value fell by 9.44%. (As a point
of comparison, in that month the fixed-mix
value fell by 9.43%.) The worst month for
the fixed mix was October 2008, when
it fell by 10.05%. (By comparison, the
volatility-responsive strategy fell by 5.44%
that month.)
Worst three-month return: For the
volatility-responsive strategy, this was a
September through November 1987 decline
of 12.16%. (As a point of comparison, over
that same period, the 50/50 fixed mix
declined by 14.37%.) The worst three-month
return for the fixed mix, a loss of 16.86%,
occurred in September through November
2008. (By comparison, the volatilityresponsive
strategy would have declined by
8.77% over that three-month period.)
In summary, then, each of the measures
points to the volatility-responsive strategy
Exhibit 1: Summary statistics of volatility-responsive strategy, April 1979–June 2011
Fixed mix (50% equity) Volatility-responsive strategy
Annualized return 10.28% 10.68%
Annualized standard deviation 8.99% 8.43%
5%ile monthly return –3.41% –3.05%
Worst monthly return –10.05% –9.44%
Worst three-month return –16.86% –12.16%
Indexes are unmanaged and cannot be invested in directly.
Past performance is not indicative of future results.
p / 9

Exhibit 2: Volatility of returns is more stable under the volatility-responsive strategy
Trailing 24-month standard deviation of returns, annualized
16%
12%
VRAA strategy
increases volatility
from low levels
8%
4%
0%
VRAA strategy reduces
volatility from high levels
Fixed 50/50
VRAA
Indexes are unmanaged and cannot be invested in directly.
Past performance is not indicative of future results.
This article is
an excerpt from
the authors’
Volatility-Responsive
Asset Allocation:
A stronger link
between asset
allocation policy
and the market
environment.
having been effective in reducing and
stabilizing risk, without incurring any overall
reduction in returns.
As mentioned above, however, these
benefits are somewhat episodic, especially
with regard to the effect on returns. Thus,
even though the volatility-responsive
strategy would have delivered a better risk/
return trade-off, it would also have created
tracking error relative to the fixed mix. So
if it is judged only on the basis of its impact
relative to the default strategy, there will
be times when it underperforms. Now, it
really makes no more sense to look at the
tracking error of the volatility-responsive
strategy compared to a fixed mix than it
would be to move from, say, a fixed 60/40
mix to a fixed 50/50 mix and then judge
the 50/50 mix on its tracking error relative
to the higher-risk strategy. It is, however, a
comparison that some will make, and it is
sensible to be prepared in advance for what
that comparison will show.
This highlights the difference between
judging a strategy in terms of its absolute
return (in which case the overall performance
is used to assess risk) and judging it in terms
of its relative return (in which case tracking
error is used to assess risk).
Conclusion
In summary, the use of fixed weights
in strategic asset allocation policy does
not result in a stable risk/return pattern
over time, but rather leads to greater risk
at times of high market volatility and to
lower risk in unusually stable markets. For
investors who are sensitive to volatility,
a more consistent outcome can be
achieved—both in terms of the volatility of
returns and in terms of how volatile that
volatility itself is—by adopting a dynamic,
or volatility-responsive, approach.
Russell Investments // Russell Communiqué p / 10

STRATEGY TIMING IMPLEMENTATION
RUSSELL INVESTMENTS
OPINION
Climate change and investments,
or: “Why should I care?”
By: Greg Liddell, Managing Director, Consulting & Advisory Services—Australasia
Greg Liddell
1
Doran and Zimmerman,
University of Illinois,
Examining the Scientific
Consensus on Climate
Change, EOS Volume 90
Number 3, 20 January
2009.
2
US National Oceanic
and Atmospheric
Administration, National
Climate Date Centre
http://www.ncdc.noaa.
gov/indicators/
3
Stern Review on the
Economics of Climate
Change 2006.
Few issues have generated more skepticism than the subject of climate change. If 97% of the
world’s astronomers told us a large meteor would collide with the Earth on December 22, 2012
(the alleged last day of the Mayan calendar), we would not waste too much time arguing about
the veracity of their models. Rather, we would focus on building a rocket to destroy the meteor,
or at least to change its trajectory. However, when 97% of the world’s geoscientists 1 tell us that
anthropogenic (the politically correct term for “man-made”) carbon emissions are resulting
in 0.29ºF of global warming per decade, 2 with long-term but ultimately devastating impacts,
the consequence is a degree of skepticism that has led to years of procrastination. In my view,
fiduciaries do not have the luxury of procrastination.
So why should fiduciaries squeeze climate change considerations into governance budgets which
are already stretched? In my view, there are two answers to that question, one based on long-term
sustainable values and one based on responsibilities in relation to the management of risk.
Our current economy has a use-by date. Ultimately we will run out of fossil fuels and be forced to
transition to renewable sources of energy. Studies tell us that the longer we postpone the transition,
the more harm we will do to the planet, and the more costly and painful the transition will be. 3 Those
who adopt a broader view of fiduciary responsibility would argue that as effective owners of the
economy, fiduciaries should deploy capital not only to generate returns, but also to facilitate transition
to a sustainable economy and in doing so, protect and maintain the society and way of life of members.
On a shorter-term basis, fiduciaries should be aware of the risk to portfolios climate change poses.
Agencies such as the EPA can introduce regulations materially changing the economics of some
enterprises. State governments can introduce measures that effectively put a price on carbon,
and foreign governments can introduce measures impacting companies operating within their
jurisdictions—for example, U.S. airlines flying into Europe will need to purchase carbon credits from
January 2012. The physical risks associated with climate change should also not be ignored. Owners
of physical assets need to incorporate stress testing for climate-change scenarios in their due diligence
and ongoing management, or face potential losses and liability. Property must cope with rising
seawater and more violent storms, motorways must cope with heavier rainfall. The insurance industry
is already sending price signals in regard to climate change, increasing the price of insuring assets in
high-risk areas and increasing the number of areas deemed “uninsurable.”
An awareness of climate change does not mean fiduciaries should immediately invest large
proportions of their assets in wind farms and solar energy initiatives. Most climate funds lack
diversification and rely too heavily on government subsidies to generate returns. Climate change,
like economic cycles, interest rates and national debt, is a factor. Thought should be given to the
vulnerability of assets to either the financial or the physical risks associated with this factor, much
as fiduciaries consider the impact of increased interest rates on bond portfolios, or of decreased
consumer confidence on the stock prices of retail companies. The initial imperative for fiduciaries
is to educate themselves on the issues.
p / 11

STRATEGY TIMING IMPLEMENTATION
Q&A
The evolution of target
date investing
With Josh Cohen, Defined Contribution Practice Leader
Josh Cohen
Target date funds are relatively new. Is there evidence that they are
actually helping participants avoid some of the pitfalls of investing?
Yes. Before the creation of target date funds, many defined contribution (DC) plan
participants struggled with poor diversification—many invested too much in company
stock, for example. Participants also struggled with making investment choices
appropriate for their ages, such as not taking on enough investment risk in their
younger years. By their design, target date funds automatically resolve the issues of
age-appropriate investing and diversification.
Since the original creation of target date funds, what developments
have you seen in the marketplace?
Target date funds really started as turnkey solutions for DC plan sponsors looking for
diversified default options. After the Pension Protection Act of 2006, many plan sponsors
embraced target date funds as qualified default investment alternatives (QDIAs).
Plan sponsors and target date fund providers have recognized that specialization can
improve outcomes. One development is the rise of “open architecture” funds that
include a mix of best-in-class managers instead of a single proprietary manager. This
approach could also allow some large plan sponsors to take greater control and create
their own target date funds.
Another target date fund development is the desire for broader diversification, including
the addition of products most sponsors would not include as standalone DC plan
options—for example, alternative investments such as commodities or infrastructure
funds. Investors have felt the pain of market ups and downs. Research is showing that
such additional diversification can help lessen fund volatility.
If plans are big enough, we are seeing demand for high levels of target date fund
customization based on unique plan demographics.
What’s driving the continual evolution of target date funds?
Greater awareness that participants are increasingly relying upon DC plans, particularly
the plans’ QDIA, as their primary vehicle for retirement savings. In their desire to serve
as good fiduciaries, plan sponsors are really aiming to choose target date solutions
that fit the participants in their plans—and that desire is driving demand for open
architecture, increased diversification and higher levels of customization.
Russell Investments // Russell Communiqué p / 12

RUSSELL INVESTMENTS
Q&A (continued)
Exhibit 1: The evolution of target date investing
Early stage Current Future
Objective Turnkey solutions Increased
diversification and
customization
New asset classes
U.S. equity,
international
developed equity,
U.S. aggregate bonds
REITS, commodities,
TIPS, emerging
markets,
infrastructure, high
yield, tactical AA
Focus on participant
outcomes and
retirement income
Annuities, longduration
bonds
Managers Proprietary Open architecture Open architecture
Glide paths Off-the-shelf Customization at
plan level
Customization at
participant level
How do you think target date funds will evolve in the future?
I think everyone—plan sponsors, participants and fund providers—will be more focused
on retirement income. Right now, many participants are asking, “What level of assets
am I going to have in retirement?” However, as many of the baby boomers approach and
enter into retirement, they’re starting to ask, “What will my level of income be during
retirement?” It’s a different mind-set.
A focus on retirement income also has implications for product design. If retirees
are looking for regular income, purchasing life annuities could enhance their living
standards relative to a systematic withdrawal program. Alternatively, long-duration bonds
offer return potential similar to fixed annuities, but without the administrative complexity.
Are there other trends on the way?
Mass customization is also on the horizon. For example, two issues with target date funds
are that they give advice based only on the factor of age and they don’t adapt to shifts in the
markets. Using information in a recordkeeper database, providers could create custom target
date strategies for each participant based not only on age, but also on income level, current
savings rates, and coverage in other company-sponsored retirement plans. They could also
adapt asset-allocation strategies in response to market events and changes in contributions.
I believe these trends are ultimately focused on improving the financial security of retirees.
As more people rely on DC plans and default options as the main source of retirement
savings, creating solutions tailored to their needs becomes increasingly important.
p / 13

GREAT MOMENTS IN FINANCIAL HISTORY
The opening of the Lions Gate
By: Aran Murphy, Product Strategist
Aran Murphy
In debates about government power in the economic realm, two oft-used arguments are that,
absent the government, public goods such as roads and bridges will not be constructed; and
that only the government, not the private sector, is in the position to sponsor demand-sustaining
public works projects during recessions. Odd, then, that such an impossibility as the Lions Gate
Bridge exists.
Built in Vancouver, British Columbia during the Great Depression, the Lions Gate Bridge connects
the mostly water-locked downtown of Vancouver to the open land at its north. The bridge
was constructed with private funds, with the aim of private profits, and was one of the largest
construction projects in the city during that era. What follows is the story of how it came to be.
Vancouver is the primary seaport of Western Canada, economically vital as a gateway to Asia.
Like Manhattan Island in New York, Vancouver Island seats the downtown area and is the heart
of the city. Although not really an island (it is connected to the mainland in the east, and not to be
confused with the “real” Vancouver Island to its west), Vancouver was hemmed in by water. These
geographical boundaries limited the city’s growth and made downtown real estate expensive on a
relative level, even as the Great Depression dragged down overall economic activity.
1
All monetary figures
expressed are in
Canadian dollars.
2
Avison Young,
Commercial Report:
North Shore, BC; Fall/
Winter 2009
Sources:
“Legacies: A Brief History
of the Upper Lands,”
British Pacific Properties.
Online at http://www.
britishproperties.com/
about_us,legacies.
“Lions Gate Bridge,”
British Columbia
Networks Association.
Online at http://hp.bccna.
bc.ca/Library/WestVan/
history/Thumbnails/
lions_thumb.htm.
Across the Burrard Inlet to the north stretched an area of mostly forested and undeveloped land
many times larger than that of downtown. Situated along the southmost footprint of the Canadian
Rockies, the land sloped upward from Vancouver Bay to the two Lion Mountains, providing good
terrain and—in real estate developers’ eyes—terrific potential for unobstructed southerly views.
Some of this land was incorporated as the City of North Vancouver, which was then under threat of
bankruptcy, owing to the inability of many landowners to pay their property taxes.
Economic necessity mothered some innovative thinking. An engineer-cum-real-estate promoter,
A.J.T. Taylor, convinced the Guinness family of London to purchase 4,700 acres in the Upper Lands
area of North Vancouver in exchange for $1 million 1 in improvements over the next five years. For
4,000 of those acres $75,000 was exchanged, putting the cost per acre at $18.75. As an additional
condition of the sale, the family was to fund the construction of a bridge to the north shore from
Vancouver’s Stanley Park. It was to be the Lions Gate Bridge.
After a year and a half of construction and just under $6 million, the Lions Gate Bridge was
completed in 1938. Although tolls of $0.25 per car were charged, it was not the tolls but the rapid
increase in land values on the other side that justified the Guinness family investment. Having
realized their real-estate investment aims, the Guinness family sold the bridge in 1955 to the
province of British Columbia—for just under $6 million, less than half of its appraised value.
Today 60,000 to 70,000 cars move daily across the 5,000-foot span of the Lions Gate, uniting
mainly residential North Shore with Vancouver’s bustling downtown. One relatively recent
commercial real estate report 2 puts North Shore industrial land prices at an average of $2 million
per acre.
In today’s era of collapsing public finances, high unemployment rates and the growing necessity
for infrastructure investments, we can look back to the Lions Gate Bridge opening as having been
truly a great moment.
Russell Investments // Russell Communiqué p / 14

RUSSELL INVESTMENTS
Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the
appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be
acted upon without obtaining specific legal, tax and investment advice from a licensed professional.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the beginning of
the document.
Where noted, the opinions expressed in this material are not necessarily those held by Russell Investment Group, its affiliates or
subsidiaries. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. The information, analysis and
opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any
individual or entity.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically
grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk
and increase return could, at certain times, unintentionally reduce returns. Although steps can be taken to help reduce risk it cannot be
completely removed.
Diversification does not assure a profit and does not protect against loss in declining markets.
Target date funds are not intended to be a complete solution to investors retirement income needs. Investors must weigh many factors
when considering to invest in these funds, including how much an investor will need, how long will the investor need it for, what other
sources the investor will have and, if the investor is purchasing shares in an IRA account, whether the fund’s target distributions will
meet IRS minimum distribution requirements once age 70 1/2 is reached. Indexes are unmanaged and cannot be invested in directly.
Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment.
The trademarks, service marks and copyrights related to the Russell indexes and other materials as noted are the property of their
respective owners.
Copyright © Russell Investments 2011. All rights reserved. This material is proprietary and may not be reproduced, transferred or
distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.
Russell Investment Group is a Washington USA corporation which operates through subsidiaries worldwide, including Russell
Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.
The Russell logo and Conscious Currency are trademarks and service marks of Russell Investments.
Date of first use: October 2011
p / 15

Russell Communiqué
www.russell.com/institutional
www.russell.com/ca/institutional
U.S. West Coast contact
U.S. East Coast contact
David Rothenberg
Managing Director
U.S. Institutional—Large Market
800-455-3782
drothenberg@russell.com
To learn more about
our services for
institutional investors
or topics in this issue
of Communiqué,
contact your Russell
representative or one
of these associates.
Gerard W. Lillis
Director, Relationship Management
Americas Institutional
800-541-0556
glillis@russell.com
Canadian contact
Dexton Blackstock
Head of Institutional Business Development
Institutional Investment Solutions
416-640-6202
dblackstock@russell.com
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