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Dow Chemical’s Pension Fund Ups Allocation In Risky Investments

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Dow Chemical's Pension Fund Ups Allocation In Risky Investments

The Dow Chemical Company (NYSE:DOW) signed an agreement with eSecLending to serve as its securities lending agent to boost the profits from its US pension plan assets.

According to Peter Bassler, managing director of eSecLending, the agreement concluded the negotiation  between the two companies, which was initiated few years ago by Gary McGuire, chief investment officer of The Dow Chemical Company (NYSE:DOW).

In a statement McGuire said, “We are very happy with eSecLending’s consultative approach and ability to customize our securities lending program to incorporate Dow’s specific risk/return profile. As we re-engage in securities lending for the first time in several years, we are pleased to be partnering with an institution whose interests are aligned with ours.”

A report from aiCIO described McGuire as a finance-savvy player in the corporate pensions industry and cautious when it comes to securities lending since the financial crisis in 2008. He previously served as head of Dow Chemical’s global risk management division.

During an interview for the Power 100, McGuire said, “I’m focused on finding a diversified and uncorrelated return space. I would summarize my approach as putting convexity into our portfolio, both on the upside and downside.”

aiCIO states that 20% of the $16.1 billion assets of Dow Chemical’s pension fund are concentrated on alternatives. The report also noted that McGuire is heavily inclined on derivatives and interest hedging with put and call options.

According to Bassler, eSecLending’s agreement with The Dow Chemical Company (NYSE:DOW) will help the securities lending agent bolster its potential client base. He said, “Funds saw what happened in the credit crisis. Securities lending was an area that many corporate pensions participated in and many experienced challenges on cash collateral reinvestment side of the business. These issues surprised a lot of people, and it has taken time for people to want to participate again. Programs today are executed with many more restrictions to mitigate risk.”

Bassler added that eSecLending addresses all the concerns raised by funds on securities lending. According to him, “We make sure we structure a lending program around those specific concerns. Concerns are generally around the key risks such as collateral and counterparty risk. It’s not a back-office custodial product anymore.”

Meanwhile, last week, the optimism over the deal on the U.S fiscal cliff drove the value of the largest junk ETFs to its highest level since the start global financial crisis, including iShares iBoxx $ High Yid Corp Bond (ETF) (NYSEARCA:HYG) and SPDR Barclays Capital High Yield Bnd ETF (NYSEARCA:JNK). The stock price of the HYG surged to $94.23 per share while JNK rose to $41.03 per share.

The rally has pushed the average yield on speculative grade bonds below 6% for the first time. All of this has been enabled by the Federal Reserve’s ongoing efforts to pin down short-term interest rates near zero and force investors into riskier, higher-yielding asset classes.

It looks like the problems of 07-08 are starting once again.

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