Implementing LDI with swaptions - Russell Investments

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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
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Implementing LDI with swaptions - Russell Investments

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