Assets for matching adjustment

Discussion in 'SA2' started by GauravT, Mar 27, 2018.

  1. GauravT

    GauravT Member

    Hi,
    If a particular asset or assets are used/backing for matching adjustment, can they still be used for diversification benefit with other class of assets within the fund or outside the fund?
    Also, can direct investment in property be used for matching adjustment?
    Thanks
     
  2. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    If assets are used to gain the matching adjustment, they need to be very closely matched to the liabilities - and hence there is limited market risk arising. There is therefore limited scope for diversification against the market risk arising on other assets.
    As stated in the Core Reading, the assets used for the matching portfolio need to be bonds or "bond-like", which property investment is not.
    Hope that helps.
     
  3. GauravT

    GauravT Member

    Thank you. I was thinking from the view that since rental yield can be stable like coupon payments so if property can be used.
    though maturity value and liquidity will be an issue in property investment.
    Is there any merit in this?
     
  4. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Not sufficiently "bond-like" I'm afraid. As you say, the ultimate value achieved on the sale of a property is unknown, there is no fixed maturity date and future rental will change at rent reviews by an unknown amount. Therefore cannot arrange sufficiently close matching with liability cashflows.
     
  5. GauravT

    GauravT Member

    Thank you so much.
     
  6. Sponge

    Sponge Member

    There has been a move to equity release/LTM assets. Are these considered "bond like". if so why? is it that the repayments are "known" with regard to the fixed term of the agreed repayment sort of replicates the longevity of annuitants in the longevity of the debtor. Is there additional risk from equity release/LTM products such as repayment forfeit/default, mortality risk?, fall in property market value, property deterioration
     
  7. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Hi - no they aren't sufficiently "bond-like" on their own, which is why securitisation might be used (in order to generate something which is potentially "bond-like" in form), as is mentioned in the course notes (Chapter 15, Section 6.3).

    You should find the following thread helpful in addressing what you have asked, including re the securitisation (and it also refers to another thread which highlights the key risks of such products):

    https://www.acted.co.uk/forums/inde...ons-on-equity-release-plans.14134/#post-53705
     
    Sponge likes this.
  8. Sponge

    Sponge Member

    thank you. will take a look
     

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