Hedging your equity exposure – bit tricky?

As defined benefit (DB) schemes hone in on their end game, many schemes have reduced their equity exposure with what they see as less volatile asset classes and products.

These appear to have had mixed levels of success and it begs the question - is there still a prominent place for equities given their inherent volatility? A hedged equity ‘shape’ can of course reduce the inherent volatility of equities whilst still giving an equity-like return.

Structured Equity is becoming increasingly popular with trustees as a way to capture these returns. It allows trustees to structure a growth asset which is individually tailored to meet their scheme’s desired return profile - while managing equity risk exposures.

Until now, the ‘catch’ with structured equity has been the expense and complexity of setting up an arrangement. Generally this is not an issue for large pension schemes with extensive governance and resources, but for smaller schemes the legal and governance costs, drain on management resources and minimum fees have put barriers in the way of them benefiting from structured equity.

Well, now that’s all changed. At Mobius Life, we’ve partnered with River and Mercantile (R&M) to make their structured equity solution available to schemes of all sizes.

R&M’s solution allows individual pension schemes to structure an asset to meet a defined return profile. It is an approach that can be used to dynamically manage equity risk exposure through different stages of the market cycle and increase the certainty of outcomes. Typical approaches include equity protection when markets fall, defined upside to meet target returns or leveraged equity exposure.

Unlike traditional investments, the underlying instruments are a set of contracts which define the investment return payoff for a given level of the equity market at maturity.

By manufacturing the structured equity solution on the Mobius Life platform we’ve stripped-out the cost and complexity, and made it available for schemes of all sizes. All of the infrastructure requirements, such as legal, governance, investment manager, custodial, collateral management and counterparty arrangements are already in place within our unit-linked life company.

Using our platform, schemes simply need to work with their consultants to define the exact shape of returns they require from equities to meet their funding requirements. We then set up and administer an individually tailored portfolio for each scheme on the Mobius Life platform.

Our approach to manufacturing funds is making more sophisticated and effective investment strategies available to all schemes. To date, we have created solutions to give schemes access to commercial property, multi asset, zero-fee true index and private asset strategies and there’s more to come It’s yet another example of the benefits to schemes of holding their assets on the Mobius Life platform.