BNP RESEARCH CHAIR

Presentation of the Partner

About BNP Paribas Investment Partners

BNP Paribas Investment Partners is the dedicated, autonomous asset management business of BNP Paribas Group and offers the full range of asset management services to both institutional and retail clients around the world.

A client-centric organisation, BNP Paribas Investment Partners is structured around three major axes: institutional, distribution and Asia Pacific & emerging markets.

We boast some 700 investment professionals globally, each specialising in investing in a particular asset class or product type.

With total assets under management of EUR 473 billion as of 30 September 2013, BNP Paribas Investment Partners is the 7th largest asset manager in Europe.

*Source: BNP Paribas Investment Partners, as at 30 September 2013

Presentation of the Partnership

Objectives

EDHEC-Risk Institute has created a research chair in “Regulation and Institutional Investment”, in partnership with AXA Investment Managers (AXA IM), which is under the scientific responsibility of Lionel Martellini, Director of EDHEC-Risk Institute.

The interaction between regulation and institutional investment management is a key issue for European institutional investors, and the aim of the chair is to carry out a joint operation on a European scale to highlight the challenges for institutional investment management of regulatory developments.

The theme for the first year of this three-year programme was “The influence of the institutional and regulatory framework on the financial management of pension funds in Europe.”

Press release announcing the launch of the research chair: 21/09/07

Research Outputs:

Dynamic Liability-Driven Investing Strategies: The Emergence of a New Investment Paradigm for Pension Funds?
February 2014
Saad Badaoui, Romain Deguest, Lionel Martellini, Vincent Milhau
A number of profound changes have taken place, which have collectively led to the emergence of a new investment paradigm for pension funds. The standard paradigm for pension fund investments, which used to be firmly grounded around one overarching foundational concept of the policy portfolio, is slowly but surely being replaced by a new, more modern, investment paradigm known as the dynamic liability-driven investing (DLDI) paradigm. This new paradigm has two main defining characteristics: on the one hand, a focus on the management of portfolio risk relative to the liabilities, as opposed to absolute risk; and on the other hand, a focus on dynamically time-varying allocation within and across the risky and the safe building blocks. The purpose of this survey is to assess the views of pension funds and sponsor companies with respect to this new investing paradigm and their desire to integrate this approach into their processes.

Press release announcing the publication of the research: 24/04/14

Hedging versus Insurance: Long-Horizon Investing with Short-Term Constraints
February 2013
Romain Deguest, Lionel Martellini, Vincent Milhau
This study provides comprehensive insights into all of EDHEC-Risk Institute’s research on dynamic allocation in asset-liability management. The publication builds on these previous findings and illustrates that failing to separate long-term risk-aversion and short-term loss-aversion may lead to poor investment decisions. Relatively simple solutions exist that can be implemented as dynamic asset allocation strategies in order to control short-term risk levels while maintaining access to long-term sources of performance. These solutions are a substantial improvement over traditional strategies without dynamic risk-control, which inevitably lead to underspending of investors’ risk budgets in normal market conditions, with a strong associated opportunity cost, and over-spending of investors’ risk budget in extreme market conditions.

Dynamic Investment Strategies for Corporate Pension Funds in the Presence of Sponsor Risk
February 2012
Lionel Martellini, Vincent Milhau, Andrea Tarelli
This paper aims to go beyond simple forms of dynamic strategies, and to show that more sophisticated dynamic allocation strategies could usefully be implemented by pension funds. For instance, it shows that imposing a cap on the funding ratio, in addition to a floor, has a positive impact on both pensioners and bondholders, while only having a minor negative effect on equity value. The paper also introduces novel forms of dynamic strategies that recognise that pension risk is not only driven by the funding ratio of the pension fund, but also by the financial strength or weakness of the sponsor company. These strategies aim to control sponsor risk by avoiding states of the world where the pension fund is underfunded and the sponsor is unable to make up for the gap.

Press release announcing the publication of the research: 23/05/12

An Integrated Approach to Asset-Liability Management: Capital Structure Choices, Pension Fund Allocation Decisions and the Rational Pricing of Liability Streams
Previous version: November 2010; This version: June 2011
Lionel Martellini, Vincent Milhau
Correctly assessing the value of a pension plan in deficit with a weak sponsor company is a real challenge given that no comprehensive model is currently available for the joint quantitative analysis of capital structure choices, pension fund allocation decisions and their impact on rational pricing of liability streams. This paper is an attempt to fill this gap by analyzing the valuation of pension liabilities regarded as defaultable claims issued by the sponsor company to workers and pensioners in the context of an integrated model of capital structure. Our results show that leverage decisions have a strong impact on the fair value of pension liabilities, and conversely that the presence of a pension plan decreases the optimal leverage ratio. We also find that interior optimal values may exist for allocation decisions.

Press release announcing the publication of the research: 10/12/10

Measuring the Benefits of Dynamic Asset Allocation Strategies in the Presence of Liability Constraints
March 2009
Lionel Martellini, Vincent Milhau
The results of the study suggest that it is not so much the presence of funding ratio constraints that is in itself costly for pension funds as their reluctance to implement risk-management strategies that are optimal given such short-term constraints.

According to EDHEC-Risk Institute, dynamic risk-management strategies can turn irreversible contributions into reversible contributions and short-term constraints into long-term constraints, hence the severe opportunity cost for pension funds that do not follow them.

Press release announcing the publication of the research: 18/06/09

Related Research:

New Frontiers in Benchmarking and Liability-Driven Investing
September 2010
Noël Amenc, Lionel Martellini, Felix Goltz, Vincent Milhau
This paper argues that novel forms of investment solutions should rely on the use of improved performance-seeking and liability-hedging building-block portfolios, as well as on the use of improved dynamic allocation strategies.

Managing Pension Assets: from Surplus Optimization to Liability Driven Investment
March 2006
Lionel Martellini
A paper introducing a formal continuous-time model of intertemporal asset allocation decisions in the presence of liability constraints, and discussing how recent industry trends such as liability-driven investment fit with respect to the theoretical optimally designed strategies.