TD Quantitative Capital’s immunization process is very similar to our bond indexing process, as indexing is essentially a form of immunization. The most important element of the indexing process involves closely matching the portfolio’s duration and cash flows to that of the Index. Similarly, immunization involves closely matching the portfolio’s duration and cash flows to the pension plan’s estimated liability stream. Instead of tracking an index’s cash flows, with immunization, you are tracking liability cash flows.

We would employ many of the same investment strategies and technology for an immunized portfolio as we do for our indexed portfolios. For cash flow liabilities expected during the first few years, we would employ cash-flow matching immunization techniques, selecting fixed income securities that match the portfolio cash flows with the short term liabilities. For liabilities beyond the selected cash flow matching period, the portfolio would be duration-matched against the liabilities. At the same time we will employ a variation of cash flow matching, based on the available long-term liability data, that attempts to capture the broad characteristics of the liability cash flow stream. This will ensure that the portfolio is protected against sudden shifts in the yield curve.

Subject to any investment restrictions, the portfolio would be invested in a broadly diversified portfolio of Canada, provincial and corporate bonds, as well as short term government and commercial paper. Thus, our investment process will involve selecting securities designed to maximize return, while ensuring appropriate liquidity, risk control and the matching of liability duration and cash flows.

Low cost trading is essential to effective bond indexing. TD Quantitative Capital takes great care in its selection of bond dealers with best execution being our objective. Best execution encompasses all aspects of a trade, assuming the lowest price, best fill capability and settlement efficiency. In general, we trade with all of the largest dealers on an ongoing basis. We continually solicit prices from dealers and compare these prices to determine who is the most competitive. As well, we tailor our trading strategies according to current market conditions and our knowledge of dealer inventories.

For all our fixed income portfolios, we dedicate considerable effort to ensuring that the credit quality of our corporate holdings meet our strict criteria. This involves putting corporate bonds through several credit screens, eliminating any names that have credit ratings below single-A and that do not meet our own industry and quality requirements.

Our quantitative disciplined style and use of sophisticated technology throughout the investment management process, including security selection, trading, and monitoring, guards against errors in judgment, minimizes risk, and results in low turnover and significant cost savings.

TD Quantitative Capital is a division of TD Asset Management Inc.