Implementing LDI with swaptions - Russell Investments

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
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