Fixed income fund managers expect their pension fund clients to start using more derivatives, such as interest rate swaps, over the coming year. Pension funds are getting involved with derivatives on various levels, according to Joe McDevitt, head of PIMCO Europe in London.
The first way pension funds are starting to use derivatives is by allowing their fund managers to use the instruments when managing segregated mandates, or by investing in funds that use them. Some pension funds have gone further and incorporated derivatives into the mandate terms or benchmark. For example, PIMCO has a mandate to outperform a long-term swaps index because this matches the client's liabilities better than market indices, explained McDevitt, declining to name the client.
Another trend that will lead to more use of derivatives is a tighter focus on liability matching. "The use of derivatives in bond mandates for liability matching purposes first received attention last year," said Andrew Dyson, head of institutional business at Merrill Lynch Investment Managers.
Nick Fitzpatrick, head of global investment at Hewitt Bacon & Woodrow in London, agrees that this trend has started, but, he added, pension funds have yet to move to liability-driven benchmarks in their droves.