5.00% maturing in five years. Regardless of the direction of rates, the
guaranteed value is achieved.
Client 2: The defined benefit pension plan for this client has an economic surplus of zero.
In order to meet the liabilities for this plan, I will construct the portfolio duration
to be equal to that of the liabilities. In addition, I will have the portfolio
payments be less dispersed in time than the liabilities.
Client 3: This client’s long-term medical benefits plan has known outflows over 10 years.
Because perfect matching is not possible, I propose a minimum immunization
risk approach, which is superior to the sophisticated linear program model used
in the current cash flow matching strategy.
Norris asks Whitney what steps he takes to reestablish the dollar duration of a portfolio to the
desired level in an asset/liability matching application. Whitney responds: “First, I calculate a
new dollar duration for the portfolio after moving forward in time and shifting the yield curve.
Second, I calculate the rebalancing ratio by dividing the original dollar duration by the new
dollar duration and subtracting one to get a percentage change. Third, I multiply the new market
value of the portfolio by the desired percentage change from step two.”
Norris then asks Whitney, “What sectors are you currently recommending for client portfolios?”
Whitney responds: “I recommend investing 25% of the portfolio in mortgage-backed securities
because they are trading at attractive valuations. I would not, however, buy floating-rate
securities because these do not hedge liabilities appropriately.”
Norris asks how changing market conditions lead to secondary market trading in Granite’s client
portfolios. Whitney responds: “Our research teams run models to assess relative value across
fixed-income sectors, which, combined with our economic outlook, leads to trade ideas. For
example, our macroeconomic team currently is concerned about the situations in several
sovereign nations and the spillover effect to capital markets. These issues range from
geopolitical risks that will likely increase the price of oil to outright sovereign defaults or
restructuring.”
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