L&G Cyber Security UCITS ETF

Fund structure

	Authorised contractual scheme (ACS)	Open-ended investment company (OEIC)	Unit trust	The Irish Collective Asset-management Vehicle (ICAV)	Société d'Investissement à Capital Variable (SICAV)	EU liquidity	Exchange Traded Fund (ETF)
Who's the main target audience of the fund?	Institutional investors	Retail investors	Retail investors	Institutional investors	Retail and institutional investors	Institutional investors	Retail and institutional investors
What's the main objective of the fund?	To provide a flexible and tax-efficient investment structure for investors.	To provide a collective investment scheme that allows investors to pool their money and invest in a diversified portfolio of assets, such as stocks, bonds, and other securities.	To provide investors with a collective investment scheme that allows them to pool their money together to invest in a diversified portfolio of assets, such as stocks, bonds, and other securities.	To provide a flexible and efficient investment vehicle for both Irish and non-Irish investors to invest in a diverse range of assets, such as stocks, bonds, and other securities.	To provide a collective investment scheme that allows investors to pool their money and invest in a diversified portfolio of assets, such as stocks, bonds, and other securities.	To provide a flexible and efficient investment vehicle for both institutional and retail investors to invest in short-term money market instruments and other highly liquid assets.	To provide investors with a convenient and cost-effective way to invest in a diversified portfolio of assets, such as stocks, bonds, and other securities.
Is the fund an collective investment scheme (CIS)?	Yes	Yes	Yes	Yes	Yes	Yes	Yes
In which country is the fund domiciled?	United Kingdom	United Kingdom	United Kingdom	Ireland	European Union		N/A
Which is the main law that governs the fund?			Trustee Act 2000	The Irish Collective Asset-management Vehicles Act 2015
Which is the main regulation that regulates the fund?	The Financial Services and Markets Act 2000 (Collective Investment Schemes) Regulations 2011	Open-Ended Investment Companies Regulations 2001	The Financial Conduct Authority (FCA) Handbook, specifically the Collective Investment Schemes sourcebook (COLL)	The Irish Collective Asset-management Vehicles Act 2015
Is the fund open-ended?		Yes			Yes

Appendix

What's an UCITS investment fund?

UCITS stands for "Undertakings for Collective Investment in Transferable Securities". It is a regulatory framework that governs the management and sale of investment funds in the European Union.

UCITS investment funds are mutual funds or exchange-traded funds (ETFs) that comply with the UCITS regulations. These funds are designed to be marketed to investors throughout the European Union and offer a high level of investor protection.

To qualify as a UCITS, a fund must meet certain requirements, including diversification, liquidity, and transparency. UCITS funds are required to invest in transferable securities, such as stocks and bonds, and may also invest in money market instruments and other eligible assets.

UCITS funds are popular among retail investors in Europe because they offer a high degree of regulatory oversight and investor protection, and they can be easily bought and sold. They are also recognized in many other countries outside the EU, making them a popular investment vehicle for international investors.

What's a mutual fund?

A mutual fund is a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Mutual funds are managed by professional fund managers who make investment decisions on behalf of the investors in the fund.

When an investor buys shares in a mutual fund, they are buying a portion of the overall portfolio of the fund. The value of the investor's shares in the mutual fund will go up or down as the value of the underlying securities in the portfolio changes.

Mutual funds are designed to offer investors a convenient and affordable way to invest in a diversified portfolio of securities. They offer many benefits, including:

1. Professional management: Mutual funds are managed by experienced investment professionals who have the expertise and resources to research and select the best securities for the fund's portfolio.
2. Diversification: Mutual funds invest in a wide range of securities, which helps to spread risk and reduce the impact of any one investment on the overall performance of the fund.
3. Liquidity: Mutual fund shares can be easily bought and sold, providing investors with liquidity and flexibility.
4. Affordability: Mutual funds allow investors to access a diversified portfolio of securities with a relatively small amount of money.

Mutual funds come in many different types, including equity funds, bond funds, money market funds, and balanced funds. Investors can choose a mutual fund that aligns with their investment goals, risk tolerance, and investment horizon.

What's an ETF?

An ETF stands for "Exchange-Traded Fund". It is a type of investment fund that is traded on stock exchanges like individual stocks. ETFs are designed to track the performance of a particular index, such as the S&P 500 or the NASDAQ-100.

Like mutual funds, ETFs offer investors a way to invest in a diversified portfolio of securities. However, unlike mutual funds, ETFs are traded on exchanges like individual stocks, which means that they can be bought and sold throughout the trading day at the current market price.

ETFs are popular among investors for several reasons. First, they offer a convenient and low-cost way to gain exposure to a particular market or sector. Second, they provide investors with the ability to trade throughout the day, which can be beneficial for those who want to take advantage of short-term market fluctuations. Third, ETFs are often more tax-efficient than mutual funds because they typically have lower capital gains distributions.

There are many different types of ETFs available, including equity ETFs, bond ETFs, commodity ETFs, and currency ETFs. Some ETFs are designed to track broad market indices, while others focus on specific sectors or industries. Investors can choose an ETF that aligns with their investment goals, risk tolerance, and investment horizon.

What's the main differences between a mutual fund and an ETF?

The main differences between mutual funds and ETFs are their trading mechanism, pricing, and fees:

1. Trading mechanism: Mutual funds are priced at the end of the trading day based on the net asset value (NAV) of the underlying securities in the fund's portfolio. ETFs, on the other hand, are traded on stock exchanges throughout the day at market prices.
2. Pricing: Mutual funds are priced based on the NAV of the fund, which is calculated at the end of the trading day. ETFs, on the other hand, are priced continuously throughout the trading day based on supply and demand in the market.
3. Fees: Mutual funds often have higher expense ratios than ETFs because they require more administrative and operational resources. ETFs generally have lower expense ratios because they are more automated and require less management.
4. Investment minimums: Mutual funds may have minimum investment requirements, while ETFs typically do not have minimum investment requirements.
5. Trading costs: Mutual fund trades typically do not have transaction costs, while ETF trades may incur brokerage commissions or bid-ask spreads.
6. Flexibility: ETFs offer more flexibility in trading, as they can be bought and sold throughout the day, while mutual funds can only be bought or sold at the end of the trading day.

In summary, mutual funds and ETFs are both investment vehicles that offer diversification and professional management. However, they differ in their trading mechanism, pricing, fees, investment minimums, trading costs, and flexibility. Investors should consider these factors when choosing between mutual funds and ETFs.

What is meant by a transferable security?

A transferable security, also known as a marketable security, is a financial instrument that can be bought and sold in financial markets. Transferable securities include stocks, bonds, and other types of securities that can be easily traded on exchanges or over-the-counter markets.

To be classified as a transferable security, the instrument must meet certain criteria, including:

1. It must be negotiable, meaning it can be transferred from one person to another.
2. It must be standardised, meaning it has a uniform structure and terms.
3. It must be traded on a regulated market or other organised trading platform.

Transferable securities are important for investors because they provide liquidity and flexibility. Investors can easily buy and sell transferable securities to adjust their portfolios or to take advantage of market opportunities. Transferable securities also provide issuers with a way to raise capital by selling securities to investors.

Examples of transferable securities include stocks, bonds, treasury bills, commercial paper, and certificates of deposit. Each of these securities has its own characteristics and risks, and investors should carefully consider their investment objectives and risk tolerance before investing in transferable securities.

What's a money market investment?

A money market investment is a type of investment that involves investing in short-term, low-risk debt securities, such as treasury bills, commercial paper, and certificates of deposit (CDs). Money market investments are considered relatively safe and are often used as a place to park cash that is not needed for immediate use. Money market investments are typically issued by governments, corporations, and financial institutions, and they are generally considered to be highly liquid, meaning they can be easily bought and sold. They are also designed to have low levels of credit and interest rate risk, which makes them a popular choice for investors who want to preserve capital and earn a modest rate of return.

Money market investments can be purchased through mutual funds or ETFs that specialize in these types of securities. These funds typically have low expense ratios and provide investors with easy access to a diversified portfolio of money market securities.

Some advantages of money market investments include:

1. Safety: Money market securities are generally considered to be very safe investments because they are issued by highly creditworthy entities and have short maturities.
2. Liquidity: Money market securities are highly liquid, which means they can be easily bought and sold.
3. Low risk: Money market investments are designed to have low levels of credit and interest rate risk, which makes them a popular choice for investors who want to preserve capital.
4. Yield: While the yields on money market investments are generally lower than other types of investments, they can still provide a modest rate of return that can help to offset inflation.

What's meant by, "commercial paper"?

Commercial paper is a type of short-term, unsecured debt instrument that is issued by corporations, financial institutions, and other large borrowers to raise funds. Commercial paper typically matures in 1 to 270 days and is issued at a discount to face value. The difference between the discounted price and the face value represents the interest paid to the investor.

Commercial paper is considered a low-risk investment because it is typically issued by creditworthy borrowers and has a short maturity period. The credit quality of commercial paper is typically rated by independent credit rating agencies, such as Moody's and Standard & Poor's, based on the issuer's creditworthiness and ability to repay the debt.

Investors in commercial paper include money market funds, institutional investors, and individual investors who are looking for a relatively safe and liquid short-term investment. Commercial paper can be purchased directly from the issuer or through a broker.

One advantage of commercial paper is that it typically offers a higher yield than other types of short-term debt securities, such as treasury bills, due to the higher credit risk of the borrower. However, investors should carefully consider the creditworthiness of the issuer before investing in commercial paper, as defaults can occur.

What's meant by, "certificates of deposit"?

Certificates of deposit (CDs) are a type of savings account offered by banks and other financial institutions that allow individuals to earn a fixed rate of interest for a specified period of time. CDs are considered to be low-risk investments because they are FDIC-insured, which means that the money deposited in the CD is guaranteed by the government up to a certain amount.

When an individual purchases a CD, they agree to leave the money in the account for a set period of time, known as the CD's term. The term can range from a few months to several years, and the interest rate on the CD typically increases with the length of the term. At the end of the term, the individual can either withdraw the principal and interest or roll it over into a new CD.

One advantage of CDs is that they offer a fixed rate of return, which means that the interest rate is guaranteed for the entire term of the CD. This can be beneficial in a low-interest-rate environment because it allows individuals to lock in a higher rate of return than they might get on other types of savings accounts. CDs are also FDIC-insured, which makes them a safe investment option.

One disadvantage of CDs is that they are not very liquid, which means that the money is not easily accessible. If an individual needs to withdraw the money before the end of the CD's term, they may be subject to penalties or fees. Additionally, the interest rate on CDs is typically lower than the rate of return on other types of investments, such as stocks or mutual funds, which means that they may not be the best option for individuals who are looking for higher returns.

What is meant by an "ABS"?

An ABS, or asset-backed security, is a type of security that is backed by a pool of assets, such as auto loans, credit card debt, or mortgages. The cash flows from these assets are used to make interest and principal payments to investors in the ABS. ABS are typically issued by banks, financial institutions, or other entities that originate or purchase the underlying assets.

The value of an ABS is based on the cash flows generated by the underlying assets, which means that the credit quality of the assets is a key determinant of the value of the ABS. In order to assess the creditworthiness of the underlying assets, independent credit rating agencies, such as Moody's and Standard & Poor's, assign credit ratings to the ABS based on the credit quality of the assets.

ABS can be structured in different ways, depending on the type of assets that back the security and the desired cash flow characteristics. For example, some ABS may have a floating interest rate, which means that the interest rate paid to investors is adjusted periodically based on changes in a benchmark rate, such as LIBOR.

One advantage of ABS is that they provide diversification benefits because they are backed by a pool of assets. This means that the risk of default is spread across a large number of assets, which can help to reduce the overall risk of the investment. Additionally, ABS can provide a higher yield than other types of fixed-income securities, such as government bonds, due to the higher credit risk of the underlying assets.

One disadvantage of ABS is that they can be complex and difficult to value, especially if the underlying assets are difficult to assess or if the cash flow characteristics of the ABS are complex. Additionally, the credit quality of the underlying assets can change over time, which can impact the value of the ABS. Finally, the credit rating agencies that assign credit ratings to ABS have been criticized in the past for not accurately assessing the creditworthiness of these securities, which can lead to unexpected losses for investors.

What is meant by an "MBS"?

An MBS, or mortgage-backed security, is a type of security that is backed by a pool of residential or commercial mortgage loans. The cash flows from the mortgage loans are used to make interest and principal payments to investors in the MBS. MBS are typically issued by government-sponsored entities, such as Fannie Mae and Freddie Mac, or by private issuers.

The value of an MBS is based on the cash flows generated by the underlying mortgage loans, which means that the credit quality of the loans is a key determinant of the value of the MBS. In order to assess the creditworthiness of the underlying mortgage loans, independent credit rating agencies, such as Moody's and Standard & Poor's, assign credit ratings to the MBS based on the credit quality of the loans.

MBS can be structured in different ways, depending on the type of mortgage loans that back the security and the desired cash flow characteristics. For example, some MBS may have a floating interest rate, which means that the interest rate paid to investors is adjusted periodically based on changes in a benchmark rate, such as LIBOR.

One advantage of MBS is that they provide diversification benefits because they are backed by a pool of mortgage loans. This means that the risk of default is spread across a large number of loans, which can help to reduce the overall risk of the investment. Additionally, MBS can provide a higher yield than other types of fixed-income securities, such as government bonds, due to the higher credit risk of the underlying mortgage loans.

One disadvantage of MBS is that they can be complex and difficult to value, especially if the underlying mortgage loans are difficult to assess or if the cash flow characteristics of the MBS are complex. Additionally, the credit quality of the underlying mortgage loans can change over time, which can impact the value of the MBS. Finally, the credit rating agencies that assign credit ratings to MBS have been criticized in the past for not accurately assessing the creditworthiness of these securities, which can lead to unexpected losses for investors.

What is meant by an "CDO"?

A CDO, or collateralized debt obligation, is a complex financial instrument that is structured to provide cash flows to investors through a pool of underlying assets, such as bonds, loans, or other debt securities. CDOs are typically created by banks or other financial institutions and are designed to transfer credit risk from the originator of the underlying assets to investors.

CDOs are structured into different tranches, or layers, of securities that have varying levels of credit risk and yield. The most senior tranche typically has the lowest credit risk and the lowest yield, while the most junior tranche has the highest credit risk and the highest yield. As cash flows are generated by the underlying assets, they are first used to pay interest and principal to the most senior tranche, with any remaining cash flows then flowing to the lower-rated tranches.

One of the key advantages of CDOs is that they can be customized to meet the needs of investors with different risk and return profiles. For example, an investor with a low risk tolerance may invest in the senior tranche of a CDO, while an investor with a higher risk tolerance may invest in the more junior tranches of the same CDO.

However, one of the key risks associated with CDOs is that they can be complex and difficult to value, especially if the underlying assets are difficult to assess or if the cash flow characteristics of the CDO are complex. Additionally, CDOs can be subject to so-called "liquidity risk," which means that if there are not enough buyers in the market for the lower-rated tranches of the CDO, it may be difficult to sell those securities in a timely manner. Finally, as with any structured product, CDOs can be subject to unexpected losses if the underlying assets do not perform as expected.

What's the main difference between an ABS and a CDO?

The main difference between an ABS (asset-backed security) and a CDO (collateralized debt obligation) is the type of underlying assets that back the securities. ABS are backed by a pool of various assets, such as credit card receivables, auto loans, or student loans, while CDOs are backed by a pool of debt securities, such as bonds or loans.

In an ABS, the cash flows generated by the underlying assets are used to make interest and principal payments to investors in the security. ABS are typically structured into different tranches, with each tranche having a different credit rating and yield. The senior tranche has the highest credit rating and the lowest yield, while the junior tranches have lower credit ratings and higher yields.

In a CDO, the underlying debt securities are also structured into different tranches, with each tranche having a different credit rating and yield. The cash flows generated by the underlying securities are first used to pay interest and principal to the most senior tranche of the CDO, with any remaining cash flows flowing to the lower-rated tranches.

While both ABS and CDOs are structured products that provide cash flows to investors based on the performance of underlying assets, there are several key differences between the two. ABS are typically backed by a wider variety of assets than CDOs and are often simpler to value and analyze. CDOs, on the other hand, can be more complex and difficult to value, especially if the underlying debt securities are difficult to assess or if the cash flow characteristics of the CDO are complex.

Additionally, ABS are typically used to finance the purchase of the underlying assets, while CDOs are typically used to transfer credit risk from the originator of the underlying securities to investors. Finally, the credit quality of the underlying assets in an ABS is a key determinant of the value of the security, while the credit quality of the underlying debt securities in a CDO is a key determinant of the value of the security.

What's beta?

In finance, beta is a measure of the volatility, or systematic risk, of an investment relative to the overall market. Specifically, beta measures the degree to which the price of a particular asset, such as a stock or mutual fund, tends to move in response to changes in the broader market. A beta of 1 indicates that the asset moves in line with the market, while a beta greater than 1 indicates that the asset is more volatile than the market, and a beta less than 1 indicates that the asset is less volatile than the market.

Beta is calculated using a statistical measure called regression analysis, which compares the historical returns of the asset to the historical returns of the market. A beta of 1 means that the asset has the same level of volatility as the market, while a beta greater than 1 means that the asset is more volatile than the market, and a beta less than 1 means that the asset is less volatile than the market.

Investors use beta as a tool for measuring the risk of a particular investment. A high beta stock, for example, may be seen as riskier than a low beta stock, since it tends to move more in response to changes in the market. However, a high beta stock may also offer the potential for higher returns, since it has the potential to move more in response to favourable market conditions.

What's meant by a "fixed income" investment?

A fixed income investment refers to any investment that provides a fixed or predictable return on the money invested. These investments typically provide a regular income stream in the form of interest payments or dividends over a set period of time, such as a few months or several years.

Fixed income investments include bonds, certificates of deposit (CDs), Treasury bills, and other debt securities issued by governments, corporations, and other entities. These investments are generally considered less risky than stocks and other equity investments, since they offer a predictable income stream and are often backed by the creditworthiness of the issuer.

Investors who are seeking a stable income stream or who are looking to preserve capital may choose to invest in fixed income securities. The rate of return on these investments is typically lower than the potential returns offered by stocks and other equity investments, but they offer greater predictability and lower risk. Fixed income investments are also frequently used by retirees or others who are living on a fixed income and who cannot afford to take on the risks associated with more volatile investments.

What's the best way to value a fixed income investment?

The best way to value a fixed income investment depends on the specific type of investment. Generally, the value of a fixed income investment is based on the present value of the future cash flows that the investment is expected to generate. Here are some methods commonly used to value different types of fixed income investments:

1. Bonds: The value of a bond is based on its coupon rate, the number of years until maturity, and the prevailing interest rates in the market. The value can be calculated using a financial calculator or spreadsheet software that allows for present value calculations.
2. Treasury securities: Treasury securities, such as Treasury bills, notes, and bonds, are typically considered risk-free investments. The value of a Treasury security is based on its yield, which is set by the Federal Reserve. The yield can be found on financial news websites or through a brokerage firm.
3. Certificates of deposit (CDs): The value of a CD is based on its interest rate and the amount of time until maturity. The value can be calculated using a financial calculator or spreadsheet software that allows for present value calculations.
4. Money market investments: The value of money market investments, such as commercial paper and Treasury bills, is based on their yield, which is determined by prevailing interest rates in the market.

In general, the value of fixed income investments is based on the present value of the future cash flows that they are expected to generate. The specific method used to value a fixed income investment will depend on the type of investment and the prevailing market conditions.

What's the best way to value a Apple, Inc. fixed income investment?

Apple, Inc. has issued fixed income securities, such as bonds, in the past. The best way to value an Apple fixed income investment would be to use the present value calculation method. Here are the general steps to calculate the value of an Apple fixed income investment:

1. Determine the bond's face value (also known as par value), which is the amount that Apple will pay back to the bondholder when the bond matures.
2. Determine the bond's coupon rate, which is the fixed interest rate that Apple will pay to the bondholder on an annual basis. The coupon rate will be stated in the bond's prospectus or offering memorandum.
3. Determine the bond's maturity date, which is the date when Apple will pay back the face value of the bond to the bondholder.
4. Determine the prevailing interest rates in the market, which will be used to discount the bond's future cash flows to their present value. The prevailing interest rates can be found on financial news websites or through a brokerage firm.
5. Use a financial calculator or spreadsheet software that allows for present value calculations to calculate the value of the bond. The present value calculation takes into account the bond's coupon payments and the face value payment at maturity, discounted by the prevailing interest rates.

It is important to note that the value of an Apple fixed income investment can be affected by a range of factors, including changes in interest rates, credit risk, and market conditions. Investors should conduct thorough research on the bond and the issuer before making any investment decisions and consider seeking the advice of a qualified financial advisor.

What's meant by "Liability Driven Investing"?

Liability Driven Investing (LDI) is an investment strategy used by institutional investors, such as pension funds, insurance companies, and endowments, to better match the duration and cash flows of their assets with the expected liabilities.

The strategy involves identifying the future obligations or liabilities of the institution, such as pension payments, insurance claims, or endowment spending requirements, and constructing an investment portfolio that can meet those obligations. This typically involves investing in a mix of fixed-income securities, such as bonds, and derivatives, such as interest rate swaps, to manage interest rate and inflation risk.

The main goal of LDI is to reduce the risk of the investor falling short of its funding requirements due to market fluctuations or other factors. By better matching the duration and cash flows of assets with liabilities, LDI can help to reduce the impact of interest rate movements and market volatility on an investor's ability to meet its future obligations.

LDI is particularly important for institutional investors with long-term liabilities, such as pension funds, which may have to make payments to retirees for several decades. By using LDI, these investors can better manage their funding risk and improve their ability to meet their obligations over the long term.

How does interest rates and inflation impact the Liability Driven Investing strategy?

Liability-driven investing (LDI) is an investment strategy designed to manage the risks associated with meeting future financial obligations or liabilities, such as pension payments or insurance claims. The strategy involves matching the duration and cash flows of the assets in a portfolio with the duration and cash flows of the liabilities.

Interest rates and inflation are two key factors that can have a significant impact on the LDI strategy:

1. Interest rates: Interest rates affect the value of fixed-income securities, which are often used to fund liabilities in an LDI portfolio. When interest rates rise, the value of fixed-income securities decreases, which can result in a shortfall in the value of the assets needed to meet future liabilities. Conversely, when interest rates fall, the value of fixed-income securities increases, which can result in a surplus of assets beyond the value of future liabilities.
2. Inflation: Inflation is another factor that can impact LDI strategy, particularly for portfolios that hold long-term liabilities. If inflation rises, the future value of the liabilities will increase, which means that the portfolio will need to generate higher returns to meet those liabilities. This may require an adjustment to the asset allocation to include inflation-linked securities or other assets that are likely to outpace inflation.

To manage the impact of interest rates and inflation, LDI strategies typically involve a combination of asset allocation, hedging, and monitoring. For example, the portfolio may include a mix of fixed-income securities, inflation-linked bonds, and other assets that can provide a hedge against interest rate and inflation risks. Additionally, ongoing monitoring of interest rate and inflation trends can help inform adjustments to the asset allocation and hedging strategy as needed.

What's liability-driven investment?

Liability-driven investment (LDI) is an investment strategy used primarily by pension funds and other institutional investors to match their assets with their future liabilities. The goal of LDI is to invest in a way that will provide enough cash flow to cover future pension payments or other financial obligations.

In an LDI strategy, the investment portfolio is constructed to match the expected future cash flows required to meet future liabilities. This typically involves investing in fixed-income securities, such as government bonds and high-quality corporate bonds, which provide predictable cash flows to meet future obligations. The maturity and duration of these investments are typically matched to the timing and duration of the future liabilities.

LDI strategies can also involve using interest rate and inflation hedging techniques, such as interest rate swaps and inflation swaps, to further match the cash flows of assets with the liabilities. These techniques can help mitigate the risk of interest rate and inflation changes, which can have a significant impact on the ability of pension funds and other investors to meet their future obligations.

Overall, LDI is a strategy designed to provide investors with greater certainty and control over their future liabilities by matching their investment portfolio with their expected future cash flows.

What's meant by a "defined benefit (DB) scheme"?

A defined benefit (DB) scheme is a type of pension plan in which an employer promises to pay a specific, predetermined benefit to a retired employee for the rest of their life. The benefit amount is usually based on factors such as the employee's years of service and salary history, and is often expressed as a percentage of the employee's final salary.

With a DB scheme, the employer bears the investment risk and is responsible for ensuring that there are sufficient assets in the pension fund to meet the promised benefits. This means that if the pension fund does not generate enough returns to meet its obligations, the employer must make up the difference.

In contrast to a defined benefit scheme, a defined contribution (DC) scheme is a type of pension plan in which the employer and/or employee make contributions to a retirement account, which is then invested. The retirement benefit is not predetermined, but rather is determined by the amount of contributions made and the investment returns earned on those contributions.

DB schemes were once more common, particularly in the public sector, but have become less popular in recent years due to the rising costs and risks associated with managing them. Many employers have shifted to DC schemes or hybrid plans that combine elements of both DB and DC schemes.

What's a buy and maintain (B&M) credit strategy?

A buy and maintain (B&M) credit strategy is an investment approach that involves purchasing a diversified portfolio of fixed-income securities, such as corporate bonds, and holding them until maturity. The goal of a B&M credit strategy is to generate a stable and predictable stream of income over time, while minimizing transaction costs and maintaining a low portfolio turnover.

Unlike an actively managed investment strategy, which seeks to outperform a benchmark index through frequent buying and selling of securities, a B&M credit strategy seeks to replicate the return of a bond index or a specific subset of the bond market by purchasing a representative sample of bonds.

B&M credit strategies are often used by institutional investors, such as pension funds and insurance companies, who have long-term liabilities that require a stable and predictable stream of income. By holding bonds until maturity, investors in a B&M credit strategy are less exposed to the short-term fluctuations in bond prices that can result from changes in interest rates or market sentiment.

One potential disadvantage of a B&M credit strategy is that it may not capture the full upside potential of a market rally. However, by minimizing transaction costs and maintaining a low portfolio turnover, a B&M credit strategy can provide a cost-effective way to gain exposure to the fixed-income market over the long term.

What's meant by a "secure income asset"?

A secure income asset is a type of investment that provides a stable and predictable stream of income over a long period of time. These assets are typically low-risk and have a high degree of predictability, making them a popular choice for investors seeking a steady source of income.

Secure income assets can include a wide range of investment types, such as high-quality bonds, real estate investment trusts (REITs), dividend-paying stocks, and infrastructure investments, among others. The common characteristic of these assets is that they provide a stable and predictable income stream, often with a relatively low level of volatility.

Secure income assets are particularly attractive to investors who are looking for a reliable source of income to fund their retirement or other long-term financial goals. By investing in these assets, investors can generate a steady stream of income that can help them meet their ongoing expenses and maintain their standard of living.

In addition to providing a stable source of income, secure income assets can also offer some degree of protection against inflation and other economic risks. For example, infrastructure investments may provide a reliable source of income that is linked to inflation, while high-quality bonds may be less susceptible to market volatility than other types of investments.

Overall, secure income assets can play an important role in a well-diversified investment portfolio by providing a stable and reliable source of income over the long term.

What's meant by "hedge ratio"?

Hedge ratio is a term used in finance to describe the ratio of the value of a position held by an investor that is being hedged to the size of the hedge position. In other words, the hedge ratio is the ratio of the amount of the underlying asset that is being hedged to the size of the total hedge.

The hedge ratio is typically used in the context of risk management strategies such as hedging with futures contracts. When using futures contracts to hedge a position, the hedge ratio is the number of futures contracts required to offset the price risk associated with the underlying asset.

For example, if an investor holds a portfolio of stocks worth $1 million and wants to hedge against a potential decline in the stock market, they might use stock index futures to create a hedge. If the stock index futures contract has a multiplier of 500, the investor would need to buy 2 futures contracts to hedge the entire $1 million stock portfolio. In this case, the hedge ratio would be 2:1, or 2 contracts per $1 million of stocks.

The hedge ratio can also be used to calculate the optimal amount of a hedging instrument needed to minimize the risk associated with a given position. By using the hedge ratio to determine the appropriate amount of the hedging instrument, investors can reduce their exposure to market risk and protect their portfolio against potential losses.

What's meant by, "integrated portfolio management"?

Integrated portfolio management is an investment approach that involves managing all aspects of an investor's portfolio in a holistic and coordinated manner. This approach recognizes that a portfolio is more than just a collection of individual investments, but rather a complex system of assets that are interconnected and interdependent.

Integrated portfolio management typically involves a number of different activities, such as asset allocation, risk management, and performance monitoring, that are designed to work together to achieve a set of investment objectives. By taking a holistic view of the portfolio and its various components, investors can better understand how different investments and strategies are contributing to overall performance and can make more informed decisions about how to allocate their resources.

One key feature of integrated portfolio management is the use of advanced analytics and modelling tools to analyse the performance and risk characteristics of different investments and to identify opportunities for optimization. This can include using tools such as Monte Carlo simulations, stress testing, and scenario analysis to better understand how the portfolio might perform under different market conditions.

Integrated portfolio management is often used by institutional investors, such as pension funds and endowments, that have large and complex portfolios with a wide range of investments. However, the principles of integrated portfolio management can also be applied to individual investors, who can benefit from taking a holistic view of their investments and developing a coordinated strategy that aligns with their financial goals and risk tolerance.

What is meant by, "fall due"?

"Fall due" is a financial term that refers to the point in time when a payment or obligation is required to be made. In other words, it is the date on which a payment is due or becomes payable.

For example, if a bond is issued with a maturity date of 10 years and a coupon payment is made annually, the bondholder will receive coupon payments each year until the bond matures. Each of these coupon payments "fall due" on a specific date, typically the anniversary of the bond's issuance.

Similarly, if a borrower takes out a loan with monthly payments, each payment will "fall due" on a specific date each month, such as the 15th of the month.

The concept of "fall due" is important in finance because it helps investors and borrowers to manage their cash flows and plan for future payments. By understanding when payments are due, investors and borrowers can ensure that they have sufficient funds available to meet their obligations and avoid default.

What's meant by "credit repo?"

Credit repo is a financial transaction in which one party sells securities to another party with a commitment to repurchase the securities at a future date. The transaction is structured as a repurchase agreement, or "repo," in which the seller of the securities agrees to repurchase them at a specified price and date.

Credit repos are typically used in the context of short-term borrowing and lending of securities, and are commonly used in the bond and money markets. In a credit repo transaction, the seller of the securities (known as the "borrower") receives cash from the buyer (known as the "lender") and agrees to repurchase the securities at a later date, typically within a few days or weeks. The lender earns interest on the transaction, which is effectively the cost of borrowing the securities.

Credit repos are a popular financing tool for a number of reasons. First, they allow borrowers to raise cash quickly and efficiently, without having to sell securities outright. Second, they are typically secured transactions, with the securities serving as collateral for the loan. This makes them relatively low-risk for lenders, who can sell the securities in the event of a default.

Credit repos can be structured in a number of different ways, depending on the type of securities being used as collateral and the specific terms of the transaction. For example, a borrower might use a portfolio of bonds as collateral for a credit repo, or might use a single, highly-rated bond. Similarly, the interest rate on the loan might be fixed or variable, and the terms of the repurchase agreement might allow for early termination or renewal.

What is the LDI crises?

The liability-driven investment (LDI) crises is a time period (around 22nd September 2022) in which certain pension funds lost a lot of money mainly because of their adoption of the liability-driven investment strategy, a type of strategy whose main aim is match the assets of the funds with the liabilities of the funds, such as pension payments.

What caused the LDI crises?

Short response

Ultimately, it's caused by poor investment decisions, primarily decisions related to a lack of asset diversifications and too much leverage.

Long response

In some cases, pension funds may use collateral (i.e. cash) to secure certain investments (i.e. such as UK bonds). If the value of the investments (and/or collateral) decreases beyond a certain amount, then the fund will need to add additional collateral (i.e. cash) and/or liquidate some or all of its investments (i.e. such as UK bonds).

On 22nd September 2022, the UK government announced a mini-budget, in which government spending will increase and taxes will reduce (i.e. an expansionary fiscal policy).

Such an action was viewed by the markets as negative for the UK economy, resulting in the credit risk of the UK economy to increase and, therefore, the value of the UK bonds to decrease (and the yield of the bonds to increase).

The decrease in the bonds’ value resulted in the leverage level of the pension funds to increase high enough to trigger a margin call, in which money needed to be added and/or investments (such as UK gilts) needed to be sold. The selling of the gilts resulted in a further decrease in the value of the UK gilts (because of supply and demand), further increasing the leverage level.

The solution (short time)

Bank of England bought UK gilts, thereby increasing the value of the bond.

The UK government announced the reversal of the mini-budget.

What is the main reason for the recent LDI crises and what is the likely solution?

• The issue is caused by undiversified investments and leverage.
• The solution is diversifying the investment assets (away from gilts) and less leverage (or increasing the amount of collateral that's required to borrow the same amount of money).

What's meant by "absolute return bonds"?

Absolute return bonds, also known as "unconstrained bonds," are a type of fixed-income investment that seeks to provide positive returns regardless of market conditions. Unlike traditional bonds, which are typically designed to generate a steady stream of income through interest payments, absolute return bonds are designed to generate returns through a variety of strategies, including capital appreciation, currency trading, and interest rate management.

Absolute return bonds are managed by skilled investment managers who have the flexibility to invest in a wide range of fixed-income securities, including corporate bonds, government bonds, and high-yield bonds. The goal of an absolute return bond fund is to provide investors with a positive return over a specific time horizon, regardless of whether interest rates are rising or falling.

Absolute return bonds can be a good option for investors who are looking for a fixed-income investment that offers more flexibility and potential for higher returns than traditional bond funds. However, they can also be riskier than traditional bonds and may not be suitable for all investors. As with any investment, it is important to carefully consider your investment objectives, risk tolerance, and investment horizon before investing in absolute return bonds.

What's meant by "cashflow driven investment"?

Cashflow-driven investment is an investment strategy that aims to generate a predictable and stable income stream by investing in assets that generate reliable cash flows. The primary objective of cashflow-driven investment is to meet the income needs of investors, such as retirees, who require regular income to cover their expenses.

Cashflow-driven investments typically include fixed-income securities such as bonds, preferred stocks, and real estate investment trusts (REITs), which generate regular cash flows through interest payments, dividends, or rental income. These investments are often chosen based on their ability to provide consistent income and protect against inflation.

Cashflow-driven investment strategies can be particularly attractive for investors who are nearing retirement or who have a short-term investment horizon. By investing in assets that generate reliable cash flows, investors can minimize the risk of having to sell assets at an inopportune time to meet their income needs. Additionally, cashflow-driven investments can help investors maintain their standard of living even in times of market volatility.

It is important to note that cashflow-driven investment strategies may not be suitable for all investors. The performance of these investments is heavily dependent on prevailing market conditions and interest rates, which can be volatile and unpredictable. As with any investment strategy, it is important to consult with a financial advisor to determine whether a cashflow-driven investment strategy is appropriate for your investment goals and risk tolerance.

What's meant by Multi-asset credit?

Multi-asset credit is an investment strategy that involves investing in a diversified portfolio of credit instruments, such as corporate bonds, loans, asset-backed securities (ABS), and mortgage-backed securities (MBS). This approach allows investors to gain exposure to a range of credit risk profiles and can help to reduce volatility and manage risk in their portfolio.

Multi-asset credit funds typically have a flexible mandate that allows them to invest across multiple credit markets and regions. This can provide investors with access to a broad range of credit opportunities, including high-yield bonds, investment-grade bonds, emerging market debt, and structured credit products.

The goal of multi-asset credit strategies is to generate consistent returns while managing risk through diversification. By investing in a range of credit instruments, multi-asset credit funds can potentially provide a more stable income stream than a single-asset class fund, such as a high-yield bond fund or an investment-grade bond fund.

However, it is important to note that multi-asset credit strategies can be complex and carry a higher level of risk than traditional fixed-income investments. Multi-asset credit funds may be exposed to market volatility, credit risk, interest rate risk, and other risks associated with the underlying investments. As with any investment strategy, it is important to carefully consider your investment objectives, risk tolerance, and investment horizon before investing in multi-asset credit funds. It is also important to work with a financial advisor to determine whether this type of investment is appropriate for your individual circumstances.

What's the main difference and similarity between a liability driven investment and cashflow driven investment?

Both liability-driven investment (LDI) and cashflow-driven investment (CDI) are investment approaches that are designed to address the specific needs of institutional investors, such as pension funds. However, there are some key differences between the two approaches.

The main difference between liability-driven investment (LDI) and cashflow-driven investment (CDI) is the focus of the investment strategy:

Liability-Driven Investment (LDI):

LDI is an investment strategy that seeks to minimize the risk of not being able to meet future liabilities, such as pension payments. LDI focuses on matching the duration of the investments with the duration of the liabilities, which helps to reduce the risk of interest rate fluctuations affecting the value of the portfolio. This strategy involves investing in fixed-income securities, such as bonds, that are specifically chosen to match the timing and cash flows of the future liabilities.

Cashflow-Driven Investment (CDI):

CDI is an investment strategy that focuses on generating predictable cash flows to meet future liabilities. CDI seeks to generate a steady stream of income that can be used to make future payments, such as pension payments. CDI involves investing in a diversified portfolio of assets, such as fixed-income securities, real estate, and infrastructure, that generate steady cash flows over time.

In summary, the main difference between LDI and CDI is the focus of the investment strategy. LDI aims to minimize the risk of not being able to meet future liabilities by matching the duration of the investments with the duration of the liabilities. CDI aims to generate a predictable stream of cash flows to meet future liabilities by investing in a diversified portfolio of assets. The similarity between the two approaches is that they are both designed to address the specific needs of institutional investors, such as pension funds, and to help ensure that future liabilities can be met.

Buyout policy

An insurance policy issued to each pension scheme member individually which enables the scheme to wind up.

Buy-in policy

An insurance policy that covers a proportion of the pension scheme's liabilities and is held as an asset by the scheme.

Longevity insurance

A policy that protects the pension scheme against the risk that members live longer than expected.