Stockholm (NordSIP) – According to a press release by Osmosis Investment Management, Danish pension provider PKA has invested approximately US$1 billion in a new swap product by that asset manager.
The new product allows investors to gain exposure to the Osmosis Resource Efficient Core Equity Index through Total Return Swaps (TRS). Total return swaps are a risk management and return-shaping instrument frequently used by large institutions to manage cash and synthetic exposures.
“We are delighted to extend the environmental aspect that is characteristic of PKA’s equity strategy to our swaps exposure. In this way, we can continue to take advantage of the Osmosis Resource Efficiency investment thesis which combines significant environmental savings with targeting better returns through an objective data-driven approach that will help support the pensions of our members,” said Michael Nellemann Pedersen (Pictured), CIO of PKA.
What is a TRS?
A TRS is a swap agreement in which one party (“the receiver”) makes payments based on a set rate, either fixed or variable, while the other party (“the payer”) makes payments based on the return of a “reference asset”, which includes both the income it generates and any capital gains.
Total return swaps differ from other types of financial instruments, such as futures or options, because they do not involve a transfer of asset ownership. Instead, total return swaps are purely financial agreements that allow parties to benefit from the price movements of an asset without actually owning it.
Who’s Who?
Traditionally, larger customised portfolios have allocated their TRS exposure across vanilla (non-sustainable) indices. According to Osmosis IM, “by utilising Osmosis’s proprietary indices its TRS clients can focus on delivering alpha in their cash holdings by maximising exposure to our factor of resource efficiency, a proven source of sustainable and uncorrelated return.”
Although this was not disclosed, the above appears to suggest that the Osmosis Resource Efficient Core Equity Index fulfilled the role of the “reference asset” in this TRS transaction. The asset is owned by the party receiving the set rate payment. Given the standard structure of these deals, it also seems likely that PKA plays the role of “the receiver” while JP Morgan, which was described by Osmosis as PKA’s counterparty in this transaction, appears to play the role of “the payer”.
“We are observing a growing trend among investors who are actively seeking to align their sustainability objectives with their overall portfolio management requirements, and increasingly using equity derivatives for efficient strategy implementation and cash management. The collaboration with Osmosis and PKA on this first trade reaffirms J.P. Morgan’s commitment to providing investors with customised solutions that seamlessly integrate sustainability preferences with their trading activities,” Ludovic Peiron, Global Co-Head of Equity Derivatives Sales and Marketing, for J.P. Morgan said.
