Russell: Insights & Research

Strategists' Outlook and Barometer - 2Q 2013

Our 12-month outlook is positive but with gains likely limited by a mature earnings cycle, reasonably full valuations and moderate economic growth.

2Q2013 Global economic outlook and market expectations

The global economic outlook and market expectations provides Russells perspectives on the direction of different asset classes and currencies in the U.S. and global economies.

Updated: Structuring a commodities portfolio

In the last decade, commodities investing has gone from niche to common, from being perceived as risky and high stakes to being counted as an important element of diversification in reducing one's portfolio level volatility. This paper includes a rationale for including commodities in a portfolio, analysis about active management potential and common strategies, and insights on model weights within the asset class.

Fixed income transitions come of age

Hiring a dedicated manager for the transition of equities portfolios is now considered best practice for pension plan sponsors and fiduciaries. Yet still today fixed income transitions are often left unmanaged. In this paper, we answer why it is important to hire a fixed income transition manager and discuss the similarities and differences between fixed income and equity transitions.

Start small, stay small: making the most of U.S. small cap equities

Russell believes there are compelling reasons to invest actively in U.S. small cap equity, but how and where investors allocate their capital matters. Since 1976, Russell has been scouring the U.S. small cap universe looking for the best investment managers for our clients' portfolios. This article outlines some of Russell's core beliefs on how to add value in U.S. small cap, and how these beliefs are implemented on an ongoing basis in our portfolios.

High-yield bonds have become a global opportunity

In this paper we set out our strategic perspective on U.S. and global high-yield bond market segments, as well as our observations of how the practices of high-yield bond managers are evolving. Russell believes a global approach to high-yield offers the potential for improved issuer and issue diversification and better access to a wider range of alpha sources, and hence it is our generally recommended approach.

Russell LDI Update - March 2013

This monthly piece features insights from some of Russell's LDI experts, along with the latest data relevant to our DB clients and prospects.

Rate rise and you lose, right?

This Russell Practice Note responds to potential problem with many defined benefit pension plan sponsors are concerned about the effects of increasing interest rates on their fixed income portfolios, and some are considering shortening the duration of those portfolios.

Fixed income in a QE world: The buffers compress, Russell adjusts

The environment for bonds has gone through significant changes in the last few years. Bond investors, passive or active, have all generally benefited from the Federal Reserve’s quantitative easing (QE) policies since the financial crisis. However, with yields now at historic lows and speculation that the Fed may reduce or reverse their support, the need to actively adjust portfolio exposures to adapt to the changing environment and avoid areas of the market at risk of significant loss is becoming more crucial.

This paper examines the risks and opportunities currently present in the fixed income portion of a multi-asset portfolio.

Q&A: Don't fight the Fed

With interest rates stagnant at historically low rates, institutional investors are starting to get concerned about where they will find yields in fixed income. In this paper we have put together Q&As providing Russell’s views on favoring a proactive strategy for non-profit investor’s fixed income allocation.

Financial Professional Outlook

What are advisors thinking? What are investors thinking? Have sentiments changed over time? Russell's Financial Professional Outlook survey is a quarterly snapshot of advisor sentiment that's intended to answer these questions and give advisors valuable perspective on the views and practices of their peers.

Measuring the success of a managed volatility investment strategy

A new breed of investment mandates is growing in popularity. In this paper, we focus on one: how to report investment results in a managed volatility investment strategy. We discuss the implications of this approach and that multiasset mandates need metrics that fit the specific objectives in mind, and that no single metric is necessarily sufficient to capture all of the goals of a multi-asset mandate.

Members of the $20 billion club take action to address growing funding deficits

The $20 billion club collectively represents about 40% of the pension assets and liabilities of all U.S.-listed corporations. In this paper, we concentrate on three key levers used by the members of the $20 billion club during 2012: Future contributions, Asset allocations, Risk transfer, plus assumption changes

Falling interest rates cause further damage to the pension world's $20 billion club in 2012

Two years ago, we introduced the $20 billion club, made up of the U.S.-listed corporations that have worldwide pension liabilities in excess of $20 billion. These corporations represent roughly 40% of the pension assets and liabilities of all U.S.-listed corporations, and give a window into the condition of the wider corporate pension plan universe. Despite strong asset performance, the funded status of these plans deteriorated in 2012: the combined net pension shortfall rising from $182 billion to $220 billion.

Greece: Re-emerged

Greece has been a world financial concern since at least 2009 when levels of public debt were revealed to be unsustainable. Since 2010, Greece has been on the three-year path specified by Russell's global indexes methodology towards possible reclassification as an emerging market. During our 2013 global market risk reviews, Greece failed our risk assessments as a developed market for a third consecutive year. Therefore, effective with June 2013 index reconstitution, Russell will reclassify Greece as an emerging market.

Russell Low Volatility Indexes: Helping moderate life's ups and downs

Investors concern about market volatility in recent years has spurred interest in index-based investment strategies focused on stocks that have exhibited lower volatility historically than their parent indexes. In this environment of heightened uncertainty, investors have turned to low volatility strategies as an efficient way to seek to manage portfolio volatility while maintaining equity market participation.

Gaining better market insight by combining Defensive/Dynamic with Growth/Value indexes

Because Russell's research indicates that many active equity managers demonstrate persistent preferences not only for growth or value stocks, but also for more stable (Defensive) or less stable (Dynamic) stocks, Russell now expands its style benchmark offerings with four indexes that combine the Russell Defensive and Dynamic style indexes with its Growth and Value style indexes. This paper discusses how these new benchmarks are constructed to meet the needs of active style managers following the four investing approaches, as well as the characteristics and performance of a combined style index.

Speaking their language - Institutional Investors

Do investment management professionals bother to calculate a funded ratio that shows progress against real goals, such as the ability to enjoy retirement without having to work or to continue fulfilling a foundation's mission? For defined benefit pension plans, yes. For most other institutional investors - from defined contribution plans to endowments and health systems - the answer is not so much. Don Ezra, co-chairman global consulting for Russell Investments worldwide, explores what would happen if we changed the conversation. What if we started talking to foundations about their likely future lifespan? And to defined contribution sponsors about the personal funded ratio for each participant – the difference between the participant's desired retirement income and the retirement income expected from their current portfolio? Let's bring the conversation about investing, retirement and financial risk management to the client's ground. Let's stand with investors.

Speaking their language - Financial Professionals

Do financial advisors and asset managers bother to calculate progress against the real goals that matter to investors? For many, the answer is not so much. Mutual fund performance is not an outcome. Neither are things like asset allocation and volatility management. Don Ezra, co-chairman global consulting for Russell Investments worldwide, explores what would happen if we all changed the conversation. What if we focused on the client's personal funded ratio - how much income their portfolio is likely to deliver in retirement compared with what they want? Let's bring the conversation about investing, retirement and financial risk management to their ground. Let's stand with investors.

To fund now or to fund later? That is the question

MAP-21 Act gives pension plan sponsors greater flexibility in timing their contributions. This Russell Practice Note responds to the following questions: May it make sense for corporations to contribute more than the required minimum (i.e., to "fund now" ) If so, what are the options for financing those contributions? What factors should a sponsor consider in answering these questions?

Russell ARA: Aiming for the bull's eye

This paper introduces our approach to Russell Adaptive Retirement Accounts (ARA). Russell ARA adds customization found in managed accounts to the simplicity of Target Date funds. DC plan participants will have a clearer pircutre of whether they are on track to replace their salary in retirement and take steps to correct shortfalls.

Finding an appropriate savings rate for different DC plan participants

Many defined contribution (DC) plan sponsors understand that their participants are not saving enought. This paper reviews two hypothetical case studies of DC plan participants and illustrates how participants ought to have tailored guidance for updating their savings rate as their circumstances change.

The investment implications of MAP-21

Do the provisions of the MAP-21 Act change the corporate pension plan environment so significantly as to necessitate changes in plans’ investment policies, specifically those policies related to liability-driven investing (LDI) and overall de-risking? The Russell Practice Note responds to this question.

Russell LDI Update - January 2013

This monthly piece features insights from some of Russell's LDI experts, along with the latest data relevant to our DB clients and prospects.

Global size definition: How Korea matters

The conventional wisdom is that there is convergence in major index providers’ construction of their indexes - that they are all created roughly equal. Indeed, one has to assume that this belief played a role in the recent benchmark changes made by fund provider Vanguard. Those of us working for the various major index providers would tell you that this isn’t true - that in fact there are important differences worthy of deliberation. As a benefit to users of indexes, our industry is seeing these types of debates play out at a heightened pace due to the Vanguard changes. Moments like this can be tipping points within our industry, opportunities to challenge conventional wisdom regarding the importance of index construction. We present just such a challenge in the following analysis.

2012 Market Review

After a challenging 2011, the broad markets closed the year 2012 generating positive annual returns, providing a refreshing change of course despite looming macroeconomic issues in Europe, fiscal uncertainties in the U.S. and predictions of slower economic growth globally. This Market Review provides an analysis of 2012 global equity markets performance that covers regions, capitalization sizes and style components and includes comparisons to historical results. For the second year in a row, we also provide a performance analysis of the Russell Stability Indexes, which measure the defensive and dynamic aspects of markets.

Available Foreign Ownership: Exploring a Reconstitution 2012 methodology enhancement to the Russell Global Index series

While traditional float considerations such as strategic individual and government holdings continue to be the most significant limiting factors for investors, foreign investing introduces additional factors for consideration for index investability: foreign ownership limits and Available Foreign Ownership (AFO). When a company’s AFO is less than 5% it is now removed from the Russell Global Index. This paper presents the new rule and details its impact on specific Russell Indexes.

The Russell High Efficiency Defensive Index Series

Introducing the Russell High Efficiency Defensive Index™ (HEDI), a new index series Russell has developed in alliance with Westpeak Global Advisors. This index series leverages the underlying data used in constructing the stability probabilities of the capitalization-weighted Russell Defensive Index™ and selects and weights stocks so as to create a direct link between a security's stability input data and its active weight in the portfolio relative to a policy benchmark. This construction approach is in contrast to that of the capitalization-weighted defensive indexes, where stocks are also selected on the basis of the stability probability, but broadly weighted by their market capitalization.

1Q2013 Economic outlook and market expectations

The Economic outlook and market expectations provides Russell's perspectives on the direction of different asset classes and currencies in the U.S. and global economies.

T Standard implementation shortfall: Does it force trading faster than optimal?

This Russell Practice Note responds to the question: Does the T Standard truly reward a "fast" trading strategy?

The managed implementation advantage: Savings realized for investors in multi-asset portfolios

This paper provides an overview of the most common sources of implementation leakage, the typical magnitude of those leakages and the solutions available. In addition, the paper provides a more comprehensive picture, including more detail of the implementation and exposure management that Russell offers.

Unique considerations in evaluating liability-driven investment managers

The traditional skills are still needed and fundamental credit research capabilities take on greater importance in the context of LDI portfolios, but there are other nuances specific to selecting long-duration managers in a liability context, including: Implementation and actuarial capabilities, Non-corporate and out-of-index exposures, Systems infrastructure custom liability management and key rate duration matching, Derivatives comfort, sophistication and risks, and the usefulness of manager size diversification.

Russell LDI Update — December 2012

This monthly piece features insights from some of Russell’s LDI experts, along with the latest data relevant to our DB clients and prospects.

From buyer beware to buyer aware

This paper presents the guidance that plan sponsors can use to help overcome this selection ambiguity and move from buyer beware to buyer aware. We focus on how to quantify and compare alternative solutions in terms that matter to participants - income terms - in order to better align the selection process with what participants want.

Estimating the conditions for return equality between risk parity and a traditional 60/40 portfolio

This Russell Practice Note responds to the questions:

Where manager styles intersect

Russell has extended the granularity of its style indexes by creating sub-indexes that combine stability and valuation factors (defensive/dynamic and growth/value). As a result, Russell Indexes now offers Growth-Defensive, Value-Defensive, Growth-Dynamic, and Value-Dynamic indexes at global, regional, country and sector levels. This paper discusses the complementary nature of the stability and valuation factors as demonstrated in the combined style indexes, as well as how growth and value asset managers may gain global market insight by using the Russell Stability Index series.

Strategy primer: Private capital

In this primer we provide background for investors new to the private capital space and explore a number of unique characteristics and attributes. We review the landscape, the types of opportunities available to investors and the major risks involved; as well, we discuss the benefits of active management and how investors measure success, and offer some brief comments on implementation.

Small cap active managers and their benchmarks: The differences

Russell believes that U.S. small cap is one of the most fertile asset classes in its potential for generating excess returns. Whether they elect to work with individual or multiple managers, it is important that investors understand the typical factor and sector tilts small cap managers display vis-à-vis their benchmarks. Russell has been able to create a proprietary database of equity profile characteristics through time. Based on the stock-specific holdings of more than 300 small cap and SMID cap products, the database gives us the unique opportunity to evaluate managers' actual behavior and positioning relative to their relevant benchmarks. In this paper we will briefly review the differences between the Russell 2000 and Russell 2500 style indexes, and then analyze the positioning of average small cap growth, value and market-oriented managers by use of the quarterly holdings data of individual managers over the five-year period 2Q07 to 2Q12.

Seven attributes of an excellent defined contribution plan

This paper describes seven key attributes that we believe all excellent DC plans share and the actions you can take to help make sure your plan is positioned for excellence.

The frontier markets of Europe: update

The Russell Frontier Index (RFI) captures Europe's inherent geographic and economic diversity in companies from 12 countries, across all nine economic sectors and across capitalization size tiers. Despite the relatively large number of countries represented, in 2011 the frontier Europe region was the second-smallest in the RFI by market cap. At 13.0% of aggregate frontier markets, frontier Europe was smaller than frontier Africa. In this paper we revisit the Russell Frontier Europe Index as constituted as of September 30th, 2012 and examine the index's performance, constituent, size and sector characteristics relative to developed, emerging and aggregate frontier markets.

Product Insight: A tale of two Koreas?

Vanguard’s recent ETF benchmark changes have generated significant buzz in the industry. Any industry leader’s switch from one index to another naturally leads to questions about how those indexes differ, and one thread in the current discussion concerns country risk classification. This article evaluates the merits of the Russell Indexes classification process and how that process leads us to affirm that South Korea remains an emerging market.

Stability Is the Risk Dimension of Equity Style

This study tests the relative ability of the Russell Stability Style Indexes to identify company risk. Three forward-looking measures serve as risk proxies: I/B/E/S analyst earnings forecast dispersion, S&P company credit rating and company expected life - a model-based statistic developed by Northfield. These measures have low mutual correlation and appear to provide a robust representation of risk at the company level. The factor alternatives to stability tested include beta, volatility, valuation, momentum, size and quality. Low- and high-risk company samples are constructed for all measures. Forecast dispersion tests are based on differences in sample identification and misidentification rates. Credit rating and expected life tests are based on differences in sample averages. Stability is found to consistently do best at identifying company risk.

The Performance of Eurozone Stock Markets During the Great Recession

Periods of market upheaval and economic recession are typically characterized by investor flight to quality. In times of uncertainty and fear, many investors either reduce their exposures to equities overall, or sell off their "riskier" equity holdings, such as small cap or deep-value stocks. During the Great Recession, when was the best time for these investors to move back into equity strategies? In this paper we examine the performance of Eurozone equity markets during the Great Recession. We center our analysis at the trough of April 2009, which the Centre for Economic Policy Research (CEPR) has designated as the end of the Great Recession in the Eurozone.

The Russell Geographic Exposure™ Index Series

For companies that operate outside their home countries, revenues, profits and asset values are affected by the geographic distribution of their operations. Traditional means of classifying and analyzing a firm, based on the country of its headquarters or the exchange on which its stock is traded, may not fully capture this distribution. In response to this shift to multinational operations, we introduce the Russell Geographic Exposure™ ("GeoExposure") Indexes series, which identifies companies with significant exposure to targeted geographic regions or countries. Russell's first application of the geographic exposure concept has been in creating equity indexes comprised of developed market companies with a large amount of business stemming from emerging countries.

Product Insight: The Russell Top 50® Mega Cap Index

At a time when slow global economic growth and market volatility are a persistent and constant challenge, U.S. "mega cap" stocks have emerged as an attractive opportunity for investors seeking safety while maintaining participation in equity markets. "Mega cap", as defined by the Russell Top 50® Mega Cap Index, represents 50 of the largest U.S. securities. These stocks hold broad appeal to many investors in the current environment as they may provide a combination of attractive relative yield, low volatility and steady earnings growth. Due to their relative size and scale, mega cap companies may be more diversified, better capitalized and more able to endure economic shocks.

The Fundamental Index Series - An investment strategy

What is the size of a publicly traded company? The answer on Main Street will likely be different than on Wall Street. For most people on Main Street, the size of a company is defined by its sales revenue, or the number of its employees, or perhaps the value of its physical assets. But for investors on Wall Street, the size of company is its market capitalization: the current market price of a share of its stock times the number of shares outstanding. What if there are sometimes disconnects between the Main Street and Wall Street measures of company size? What if there were also a means for taking advantage of such disconnects? That is the intriguing premise behind Russell's Fundamental Indexes.

An introduction to the Russell Europe SMID 300 Index

The Russell Europe SMID 300 Index is designed to be a highly tradable representation of the small- and mid-cap (SMID-cap) opportunity set in developed European markets. To enable easy market access, the new index, constructed via Russell’s traditional rules-based, transparent methodology, comprises a limited number of highly liquid constituents. It is designed to be a more accurate, lower implementation-cost alternative to the existing indexes used as proxies for small- and mid-cap developed European markets, which Russell believes lack sufficient liquidity to be an ideal basis for investment vehicles.

Update: Are 5% distributions an achievable hurdle for foundations? Were they ever?

This current review finds that sustainably supporting charitable distributions continues to remain a difficult challenge. This paper may help you address questions like: What are the current spending rates for non-operating private foundations? Given market returns, do those spending levels appear sustainable? Does adding alternative investments to a portfolio markedly improve the likelihood that foundations could maintain current spending levels?

The evolution of listed real assets: A fresh look at a rediscovered asset class

This Russell Research paper addresses the following topics: Why real assets? Why real assets are an income and growth story: The real difference Why active management is important to real assets investing: The case for excess return

Volatility management

In this paper, we test three of what we believe to be the more promising approaches, exploring the underpinnings of each, and asking whether the recent effectiveness of the strategies - a combined 30% to 40% reduction in portfolio volatility, with no reduction in return - can be expected to persist.

3Q2012 Economic Outlook and Market Expectations

The Economic outlook and market expectations provides Russell's perspectives on the direction of different asset classes and currencies in the U.S. and global economies.

Correlations have fat tails, too (nonprofit)

This paper outlines why traditional modeling falls short and how investors may be relying too heavily on correlation statistics when developing allocation strategies and evaluating diversification opportunities.

Strategies for hedging interest rate risk in a cash balance plan

This Russell Practice Note addresses the plan design elements that most impact the effectiveness of various hedging strategies, as well as some of the investment strategies available for hedging interest rate risk.

Global equity markets at Russell Index Reconstitution June 2012

The annual Reconstitution of the Russell Indexes took effect on June 22, 2012. In this paper we take the opportunity to review market conditions and characteristics of the past year and to examine changes that occurred between Recon 2011 and Recon 2012 in global equity markets as represented by Russell Global Indexes. In our analysis of the major regions in those markets and of how their characteristics have changed since Recon 2011, we include frontier markets for the first time.

Does equity hedge spreads? If so, is it useful for LDI?

Many defined benefit pension plans are seeking to implement liability-driven investing (LDI) programs by matching the durations and credit exposures of their asset portfolios to the durations and credit exposures of their liabilities. Does equity exposure help to this end?

Currency exposure for nonprofits

International asset investment comes with a potentially evil twin: currency exposure. Views vary widely as to whether or not exposure to currency risk can provide a benefit; whether or not currency is an asset class; whether or not currency investment managers can add value; and which, if any, investment managers should be allowed to build views on currency risk into their portfolio.

Grexit: Response to the potential exit of Greece from the European Monetary Union

We are increasingly concerned about market conditions in Greece, which since 2001 has been designated a developed market within the Russell Global Index (RGI) country classification system. While recognizing Greece is a distressed market, at the time of this writing, we are not taking pre-emptive action to remove Greece from the RGI because we believe such action should not be based on subjective assessments. However, given the escalating market uncertainty in Greece and the difficulty of forecasting future political outcomes, this research note will seek to clarify some of the conditions under which we may implement Russell's financial crisis rule to remove Greece from the index.

Revisiting microcap: Challenges and opportunities

The Russell Microcap Index was created to give managers and other investors an objective benchmark that captures the very smallest investable companies in the U.S. equity market. Since then, equity markets have experienced historic bubbles and busts, and the Russell Microcap Index structure has adjusted in response to the changing market environment. This paper updates Steve Swartley's 2005 white paper, which introduced the index and profiled the asset class, and discusses the performance, risk, market capitalization levels and membership of the index. We also discuss the prospective need for a benchmark in the fledgling international microcap space, offering insight into the structure and characteristics such an index would have.

A tailored view of European markets through Russell Custom Indexes

Amidst the evolving global investment landscape, investors continually seek index solutions designed to meet their specific needs. Russell Custom Indexes represent an opportunity for investors to achieve individualized exposures corresponding to their objectives. The accuracy and flexibility of custom indexes enable their adaptation to investors' distinct strategies. In this report we showcase examples of Russell Custom Indexes in European markets to demonstrate the targeted exposures custom indexes can provide. In particular, we consider hypothetical custom indexes that incorporate sector, region and size constraints.

Strategy primer: Relative value

"Relative value" is an investment strategy that seeks to profit by identifying discrepancies in prices among securities that share similar economic or financial characteristics. The strategy is based on the premise that one or more of the related securities are mispriced, given that they have valuation factors in common – such as an interest rate, index, or sovereign or corporate issuer.

Risk transfer options for defined benefit plan sponsors

More than ever before, sponsors are training their focus on de-risking strategies, such as liability-driven investing (LDI), for their defined benefit (DB) pension plans. As they make progress in their de-risking practices, some sponsors may find that a risk transfer option is the next logical stepping-stone.

Active or passive management in defined contribution plans? It doesn't have to be either/or

Defined contribution plan sponsors are wondering which makes best sense for their plans - active management, or passive. In the absence of certainty, many are expressing a strong preference for the lower fees associated with passive management.

High dividend strategies: Reviving an old concept relevant for modern times

Russell launched the Russell High Dividend Yield Index series in March 2012. These indexes are based on an innovative methodology designed to provide exposure to high-dividend-paying stocks that not only generate high yields, but also exhibit financial strength. The Russell methodology employs specialty quality screens combined with modified market-cap weighting to limit company-specific and financial sector risks. In this paper we examine the Russell U.S. Large Cap High Dividend Yield Index (RHDY) to highlight how Russell's focus on maximizing yield, selecting high-quality companies and controlling risk provides better index construction and decreases susceptibility to common dividend-investing traps.

A history of interdependencies: Russell's five core competencies over the last four decades

Our five core competencies—capital markets insights, manager research, portfolio construction, portfolio implementation and indexes—are inextricably linked to one another.

Strategy primer: Equity hedge

"Equity hedge" is an investment strategy that utilizes long and short positions, primarily in equity and equity-related instruments.

Professor Portfolio - A Macro View of Global Markets. Part Two: What Could Go Right

Last month we discussed the major risks in global markets this year. Now it's time to look at the opportunities available to multi-asset class investors if things start going right.

A case for high-yield bonds

This Russell Research paper outlines the historically favorable returns for high yield along with the associated high risk; how high-yield bonds have offered equity-like returns, but with lower volatility; the disconnect between valuation and default risk; and high-yield bonds' low correlations with other assets.

Introducing a new standard in LDI benchmarking: The Barclays-Russell LDI Index Series

Learn how the Barclays-Russell LDI Index Series seeks to address the potential shortfalls of the indexes available today and to provide a natural next step for plans seeking to improve the hedging precision of their LDI portfolios.

Strategy primer: Event driven

"Event Driven" is an investment strategy based on potential gains from market movements in prices of financial instruments precipitated by specific corporate events. The Event Driven strategy may be broken out to sub-strategies in equities and in credit.

Real assets for the defined contribution menu

The impact of adding "real assets" to a DC plan menu - assets such as commodities, real estate and listed infrastructure - to help participants achieve their long-term goals.

The investment case for emerging market debt (EMD)

This paper addresses: rationale for investing in EMD, evolution of the EMD market, indeces and benchmarks, and key considerations for investors.

Duration drift for closed and frozen pension plans

The mechanics of duration for open, frozen, and closed pension plans adopting liability-driven investing and how an LDI portfolio should be designed to hedge the interest rate risk of the pension plan.

Strategy primer: Tactical trading

An overview of return sources and riskes associated with various tractical trading sub-strategies, tactical trading strategies used in hedge fund portfolios, and how these strategies can serve as a counterbalance to equity market movements during crisis periods.

Large U.S. corporations begin to favor LDI strategies

This Russell Research shows that on average, pension plan sponsors have begun to de-risk. The driving forces vary, but tend to fall in one of the following key points of interaction between the plan and the corporation: 1. Cash demands for contributions 2. Balance sheet impact 3. Income statement impact

The case for tactical trading for nonprofits

Use of tactical trading strategies can help offset vulnerabilities and risks in a portfolio's long investment exposures and in a portfolio's blend of traditional asset classes and hedge fund strategies.

The Russell Fundamental Index® Series: Innovative rebalancing provides better representation without impacting turnover

One of the hallmarks of a cap-weighted index is its "automatic rebalancing" characteristic, whereby the need for rebalancing does not arise from constituent price changes. Price changes do affect the structures of non-cap weighted indexes, however; thus, such indexes need more frequent reweighting to ensure their continuing representativeness. In this paper, we discuss rebalancing in the Russell Fundamental Index series, whose constituents are selected and weighted by fundamental measures of company size, not by market capitalization.

Market review: An analysis of the Russell Stability Indexes™ in European markets

Russell Stability Indexes incorporate quality metrics that measure stock-specific risks in addition to risks associated with price volatility. In this paper, we briefly discuss the methodology behind the Russell Stability Indexes. We follow with a comparison of the Russell Europe Defensive (EURDEF) and the Russell Europe Dynamic (EURDYN) indexes in terms of their regional breakdowns, country distributions and sector profiles. Finally, we examine the EURDEF's and the EURDYN's performances over time.

The making of a better benchmark

Our objective is to shed some light on what makes a good benchmark and to help investors assess arguments for change. We focus on the important role an index plays in the investment process as a benchmark, and identify the most important characteristics an index must have in order to play this role effectively. We explain some of the important trade-offs providers must address in the construction of better benchmarks and conclude with a brief discussion of the expansion of the definition of "index," given that indexes are moving beyond being market benchmarks and into the next generation of methodologies.

The SCG Standard Cashflow Generator: Parameterizing pension cash flow projections as the basis for LDI

This paper proposes a methodology for approximating the pension cash flow projections that actuaries make when valuing plan liabilities. This approximation could be used to standardize and simplify communication among plans, actuaries and investment managers and to aid in the management of liability-driven investment (LDI) portfolios.

Lending certainty to volatility: Russell's new Volatility Control Indexes

Russell's new Volatility Control Index series has been designed as an overlay methodology for any of Russell's other indexes. The indexes give the clients of structured-products providers the means to control the volatility of their market exposures in a highly customizable fashion. Investors can select a variety of volatilities, leverage amounts and rebalancing frequencies, all based on Russell Indexes research.

The noteworthy recent behavior of TIPS: Are TIPS (alone) a legitimate inflation hedge?

Since the onset of the global financial crisis, U.S. Treasury inflation-protected securities ("TIPS") have demonstrated a number of noteworthy behaviors. Specifically, TIPS have exhibited conspicuously strong performance during benign inflationary environments; have subjected investors to periods of dramatic price volatility; and have even been auctioned by the Treasury with negative real yields.

Professor Portfolio - A macro view of global markets. Part one: Risk factors

Dr. Wood discusses the major risks and opportunities that Russell's global investment strategy team has identified. In this issue, we'll start with the risk factors.

The frontier markets of the Middle East

The Middle East region is noted for the abundant oil reserves and petroleum production that have historically driven its economies. Despite ongoing political storms, new opportunities may arise for international investors as countries in the region undertake actions to open their markets and diversify their economies. In this analysis we revisit the index and report on its performance, constituent, size and sector characteristics.

The frontier markets of Asia-Pacific

Stretching from Europe to the Pacific, the geographically, socially and economically diverse Asia-Pacific region comprises a dynamic blend of developed, emerging and frontier markets. The Russell Frontier™ Index captures the frontier Asia-Pacific investable opportunity set with coverage across seven countries: Bangladesh, Kyrgyzstan, Kazakhstan, Sri Lanka, Papua New Guinea, Pakistan and Vietnam. This paper revisits frontier Asia-Pacific markets and reports on their recent performance.

The frontier markets of Africa

Known for its history of political instability and violent struggle, Africa is often characterized by a reputation for uneven levels of development, poor infrastructure and a dearth of technical skills. Yet successful initiatives to stabilize and strengthen African economies have helped make African equity markets not only viable investment opportunities but also a noteworthy segment of global frontier markets. In this paper we update our analysis of the frontier Africa region.

The frontier markets of the Americas

Latin America has been known for abundant natural resources, commodities-driven economic growth and poor infrastructure. Several decades of relative political calm in many countries, however, and strong recent commodity prices have begun to present new opportunities for international investors. In this analysis, we introduce the Russell Frontier Americas Index and examine its characteristics.

Shortfalls increase for the pension world's $20 billion club; cash contributions on the rise

One year ago, we introduced the $20 billion club—a group that represents almost 40% of the pension assets and liabilities of all U.S. listed corporations and is a key to understanding the impact of pensions on U.S. corporations as a whole. The financial statements of these 16 corporations reveal 2011 to have been a difficult year; even though asset returns were positive and corporate contributions were significant, liabilities still outpaced the growth in assets. The result was an increase in the combined net pension shortfall from $121 billion to $173 billion.

Recessions and the U.S. equity market: Update 2012

When we compare the performance of the U.S. equity market during the Great Recession to the average outcomes from the prior four recessionary periods, we see consistency in some outcomes but not in all. Our study demonstrates that each recession is unique; investors must bear that in mind when positioning portfolios around recessionary troughs.

Managing risk in investing with larger, brand-name investment managers

This paper discusses four myths and realities about due diligence as it concerns large investment managers. This is a first step toward developing a more comprehensive, consistent, systematic operational and compliance due diligence program to evaluate all of your investment managers.

Seven attributes of an excellent defined contribution (DC) plan

When trying to evaluate key characteristics of a retirement plan, it is common practice in the defined contribution (DC) industry to ask, "How does our plan compare to other plans?" Plan sponsors and their advisors then benchmark their plans versus industry averages to see how their plans measure up. Is that what we should be striving for? Should being average, or slightly better, be our goal?

The implications for bond prices of changes in interest rates

There is a direct relationship between interest rates (the yield curve) and bond prices. However, because a certain degree of interest rate change is already priced into the market, the relationship is not as simple as "if yields go up, bond prices fall, and vice versa". How should investors take account of this as they make investment decisions?

2011 Market Review - The year in review

The year 2011 presented investors with a host of challenges - including natural disasters in Asia, political upheaval in the Middle East and the carryover from 2010 of the euro zone debt crisis. This report provides an analysis of 2011 performance of global equity markets, covering major world regions, all three style components - size, valuation and stability - and comparisons to historical results.

Accounting for pension expense in corporate financial statements: An update

The International Accounting Standards Board (IASB) changes its calculation of pension expense on January 1, 2013. What are the implications for U.S. corporations?

Strategies for large pension plan contributions

Many pension plan sponsors will make larger contributions to their pension plans in 2012 than they have in previous years. Russell expects most sponsors to allocate their contributions in one of three ways. This paper includes a description of each allocation approach - including their respective advantages and disadvantages - and looks at contribution timing issues.

The role of floating-rate bank loans in institutional portfolios

Bank loans are among the few fixed income sub-asset classes to offer the potential for protection and positive returns in a rising interest rate environment, due to their floating rate characteristics. Historically, default rates for bank loans have been higher than those of high-quality corporate bonds but lower than those of high-yield bonds, and their recovery rates have tended to be stronger than those of high-yield bonds.

Management fee, carried interest and other economic terms of real estate funds

The jargon associated with investing in a private real estate fund is numerous. Given that an investor is signing a contract to invest in a fund, and the sponsor of the fund is promising to manage the fund in certain ways, it is not surprising that legalistic language has permeated the real estate industry.

Modeling illiquidity in a multi-period stochastic projection

When projecting portfolio values for the purposes of an asset allocation study or strategic review, the calculations become more complex if illiquidity is taken into account. How can illiquidity be modeled in this context?

Transition Management: Eight guidelines for choosing a trusted provider

Choosing a trusted transition management provider is a decision that can have significant financial consequences. There is no simple formula to steer this decision. However, in this paper, we have provided eight guidelines to help institutional investors improve governance of the process.

The Russell World Cap Index: The benchmark for the institutional investor

We believe there will be a sea change in U.S. investors' use of benchmark indexes to measure their equity exposures. The popular practice of "mix-'n'-match" using one index provider's benchmark for domestic equity, and another's for international equity is based on a traditional strategic asset allocation split, between domestic and international equity exposure, which is out of date. This paper makes the case for using the Russell World Cap Index as an equity benchmark. It has the virtue of closely matching the segments in which many U.S. institutional investors are already invested. At the same time, it facilitates travel further down the road to a fully global perspective.

When duration calculation methodologies collide!

Russell has noticed that some fixed income and LDI managers are not using a consistent methodology for calculating effective duration across assets and liabilities.

The Russell World Cap Index as an equity benchmark

We believe there will be a sea change in U.S. investors' use of benchmark indexes to measure their equity exposures. The popular practice of "mix-'n'-match" - using one index provider's benchmark for domestic equity, and another's for international equity - is based on a traditional strategic asset allocation split, between domestic and international equity exposure, which is out of date.

A governance check up: How is your multi-employer plan doing?

Governance is key to establishing the framework that drives how decisions are made. It is the process you and your fellow multi-employer plan trustees follow to make decisions. Governance matters because a better process has a better chance at leading to a good outcome than a poorly designed process. The goal of a governance structure is to limit fiduciary and financial risk, which can be vital in helping to ensure positive results for plan participants.

Non-profit spending rules

As nonprofit organizations seek to balance the needs of their constituents with the desire to maintain and expand support for their communities in the future, spending policy plays a key role in managing current distributions and in planning for future ones. Spending rules are ultimately designed to advance the mission of an organization and its multiple goals. In addition to current and future beneficiaries who must share overall market uncertainty, boards, investment committees, managers and staff will also have an interest in maintaining sustainable and predictable payouts.

Long duration bond benchmarks for corporate pension plans

With the growth of liability-driven investing (LDI), many corporate pension plans are adopting long-duration indexes for the benchmarking of their fixed income portfolios, in place of traditional broad-market indexes. This Russell Practice Note explores the differences of three of most common long-duration indexes, including their major characteristics, sector allocation, credit quality, and liability cash flows versus index cash flow.

Investor Newsletter

Are you concerned about the state of the world today? Rest assured, you're not alone

Elements of a clearly designed investment policy statement for nonprofits

Central to the idea of good governance throughout a nonprofit's program is an investment policy statement (IPS). This paper summarizes what an IPS is, the elements it should include, and why it is important for a nonprofit to have a well-defined governing document.

Transitioning to LDI strategies

What are the transition management considerations when moving from an asset-focused, traditional portfolio strategy (e.g. 60% equities / 40% bonds) to a liability driven asset allocation? This paper provides perspective on the transition management aspects of liability-driven investing (LDI).

Interest rate swaptionsdownside protection you can live with

When it comes to downside risk, investors are generally concerned about the same market events. This creates a one-sided market (which helps explain why downside protection tends to be expensive when compared to alternatives, such as simply holding less of the risky asset). Fortunately, there are exceptions, especially when it comes to hedging liabilities.

LDI's role in pension plan strategy: Risk and return considerations

Liability-driven investing (LDI) has grown in popularity and is now widely recognized, from both the plan's viewpoint and that of the sponsoring corporation, as a way to reduce risk by aligning investment programs more closely with the liabilities they must eventually meet. In this paper, we look at the role played by LDI from a range of perspectives, both risk-focused and return-focused.

How defined benefit plan sponsors think about risk management

At the 2011 Russell Institutional Summit, participants were divided into four groups, roughly by size, and were given four questions to ponder. This paper provides an overview of their responses and insights from the authors.

A world tour of defined contribution

The speech was delivered at the annual investment conference of the National Association of Pension Funds (NAPF). In it Don explores the aspects of the defined contribution (DC) system that he considers best, wherever they are found: from the U.S. to Australia to Switzerland to the UK. As always with Don, it carries a positive message: that we all know what it takes to build an effective DC system, and we just need to go do it.

Retirement sustainability for defined contribution plan participants

Defined benefit pensions have largely been replaced by defined contribution (DC) plans. So, to a greater extent than their parents' generation, retiring baby boomers will need to turn their nest eggs into streams of income to support their retirement. In this paper, we look at how DC plan sponsors can help retiring participants get the most from their nest eggs and avoid the dreaded scenario of running out of money in retirement.

Benchmarking U.S. core real estate portfolios: In search of a better fit

Nearly thirty years after the creation of the NCREIF Property Index, the question remains whether it is an appropriate reference point for quantifying the performance of U.S. core portfolios. More recently, the National Council of Real Estate Investment Fiduciaries (NCREIF) began publishing a fund index, which is exclusively comprised of core strategy open-end private real estate funds.

The Impact of non-parallel yield shifts on defined benefit plan risk and LDI programs

The liabilities of corporate defined benefit pension plans as well as their fixed income assets are directly impacted by changes in interest rates. However, changes in short-term interest rates can differ from changes in long-term rates (known as a non-parallel yield shift)--and this is more likely to happen when the yield curve is unusually steep, as it is at present (March 2011). This research explains what the implications of this are for plans following liability-driven investing (LDI) programs.

Correlations have fat tails, too

You are probably familiar with the idea of fat tails - extreme outcomes can occur more frequently (i.e., tails are fatter) in practice than implied by a normal distribution. However, many investors haven't realized that volatility does not fully illustrate the uncertainty associated with asset returns - correlations have fat tails, too. This paper outlines why traditional modeling falls short and how investors may be relying too heavily on correlation statistics when making decisions about liability hedging and diversification.

Sharp Increases in both assets and liabilities for the pension world's $20 billion club

Assets and liabilities grew dramatically in 2010 for the sixteen publicly listed U.S. corporations with pension liabilities over $20 billion. These corporations - which this Russell research labels the "$20 billion club" - now have a combined $740 billion of pension liabilities on their balance sheets, up from $700 billion last year. The value of their assets rose from $578 billion to $619 billion over the same time in 2010.

Understanding Opportunities in China's investable growth.

Following the global financial crisis, institutional investors ranging from pension funds to non-profit organizations continue to grapple with an evolving risk paradigm that impacts the long-term sustainability of their portfolio values. In this, the first in a series of research papers we will produce regarding China, we begin the discussion with an overview of the broad classes of investment opportunities in China that are currently or starting to become available to foreign investors. We focus on how each asset class provides exposure to the growth dynamics within a restructuring China.

Going Long: Should the DC industry reconsider participants' bond portfolios?

In recent years, the defined contribution (DC) retirement plan industry has begun to focus on lifetime income, as opposed to lump-sum distributions, for participants. In light of this trend, should we reconsider the composition of participants' bond portfolios?

Dynamic LDI with a view: Market timing is too risky. Right?

For the defined benefit plan sponsor who accepts the tenets of liability-driven investing (LDI) but continues to wait for the right time for implementation or wants to reverse positions already in place, we describe a very simple, dynamic strategy that adapts the liability hedge ratio to a view on interest rates. Our intent is not to recommend this particular strategy but rather to explore its potential attractiveness relative to more traditional approaches.

Don't marry a model

In few disciplines are good models so important as in the field of investment. But a model that is useful for one purpose can be misleading or dangerous when used in a different context or for another purpose. This research focuses on the use of models for strategic asset allocation. In particular, this paper discusses the challenges of diversification and timing that are especially prominent at present.

How Washington is addressing defined contribution shortcomings

With the passage of the Pension Protection Act of 2006 (PPA), the economic downturn in 2008 and increased governmental and legal scrutiny, the defined contribution (DC) retirement plan landscape has undergone a sea of change in terms of its structure, form and focus. The year 2010 saw significant regulatory activity. The Department of Labor (DOL) and the Securities and Exchange Commission (SEC) have attempted to shape the DC industry through regulation that clearly defines the duties of plan sponsors and the vendors that serve them. Although it often seems that Washington and the general public are at odds, and while the additional regulation can be burdensome, the actions seem to be aimed at shoring up the current system as opposed to tearing it down.

A framework for making interest rate bets

Many plan sponsors now believe we are entering a rising interest rate environment. This may cause them to delay extending the duration of their fixed income portfolios or to wind back liability-matched long-duration positions. Calling the future path of interest rates is notoriously difficult and should be undertaken only with due caution. This research explains how in the face of a widespread view that the balance of probabilities points to an increase in rates, Russell has established a framework that enables plans to act on this view if they so choose, while scaling this bet at an appropriate level and retaining a plan to get back to a neutral position.

Quantitative Equity Management

Quantitative investment techniques have been an increasingly hot topic over the past few years. In the early part of the past decade, quantitative strategies performed very well, but in recent years the returns realized by quantitative managers have materially lagged those of managers following traditional strategies. This research paper reviews both the history and the prospects for quantitative equity products relative to those of traditional products and suggests that despite the recent lag, quants provide diversification and alpha opportunities for investors.

Integrating Environmental, Social and Governance (ESG) issues: Russell's manager research and sustainable financial value

Investors are showing an increasing interest in ESG issues. That interest varies by country and by type of investor, both in its intensity and in the way the interest is expressed. In response to this interest, Russell became a signatory of the United Nations Principles for Responsible Investment in September 2009, committing to "incorporate ESG issues into investment analysis and decision-making processes".

Informed De-Risking

Many corporate pension plans have decided to de-risk their investment portfolios as their funded status improves. Whether you like it or not, any change to the fund's asset allocation involves a market-timing decision. With interest rates at historically low levels and equities rebounding in today's market, is there a way to strategically de-risk a portfolio without ignoring market conditions? This paper outlines how the Pension Protection Act impacts contributions and time horizons, why real world challenges, such as interest rate lows and equity market extremes, impact de-risking, and three practical steps for pension plan sponsors who want to de-risk their portfolios, while balancing timing factors.

Stable Values: Still relevant in DC plans

Stable-value products, a mainstay of 401(k) plans, have historically presented an attractive alternative to money market and short-duration bond funds. While recent industry developments have decreased the appeal of stable value, its value proposition remains largely intact.

The Third Dimension of Style™: Introducing the Russell Stability Indexes

In addition to market capitalization and (growth/value) style, Russell is now including a third dimension, called "stability," in its benchmarks. Stability is based on a powerful set of descriptive variables that, in certain market environments, do more to explain money manager performance than traditional style measures do. One end of the stability dimension is labeled "defensive" and the other is labeled "dynamic."

The Third Dimension of Style™: Introducing the Russell Stability Indexes

Conscious Currency

Most institutional investors have significant exposure to international assets: few institutional investors hedge the currency exposure that this entails. While institutional investors typically believe that this currency exposure has little long-term effect, the reality is that it can be seen as a significant concentrated bet on the behavior of their domestic currency. In fact, for many institutional investors, this single bet on the relative strength of their domestic currency can be seen as the single largest unmanaged bet in their portfolio.

Beat the odds by staying invested

Difficult times in the market can make it tempting to take one's losses and cash out, but is that the best option?