Liability driven investment strategies account for a massive slice of pension fund assets and the market continues to grow. Pádraig Floyd looks at where LDI can go from here.
Over the past decade, liability driven investment (LDI) has developed to allow schemes getting closer to self-sufficiency (or buyout) in order to take their foot off the gas and de-risk the scheme. Last year was no different and saw considerable growth, according to the annual survey into the market from KPMG. There are two key factors that account for that growth – Q4 saw the market rally, so exposure contributed to the success. But there were also a lot of new mandates. In fact, there were more than 200 new mandates, bringing the total number of mandates above 1,000. Of these, around 150 were pooled fund mandates at the smaller end of the scale. This places the market – which broke the £500bn mark in 2014 – up to about £650bn today, a rise of about 30%. SHIFTING SANDS There were not many mega mandates, but the largest was for £25bn and the big three providers – Blackrock, Insight Investment and Legal & General Investment Management (LGIM) – continue to dominate the market. However, there has been a marked shift at the smaller end, says Barry Jones, head of LDI at KPMG. “What is more interesting,” says Jones, “is that the ‘big three’ has become the ‘big five’, with F&C and Schroders separating themselves from the rest of the pack.” These two providers have been making a play in the pooled fund arena and seem to be getting some traction, but there is another interesting development within this space. “That is the element of discretionary management within the pooled find mandate,” says Jones. “Where this discretionary element – often referred to as active LDI – is available, 90% of the assets have gone into these funds. “The days of buying hold gilts/swap products has gone.” These two managers can expect to have a little more competition as LGIM only launched its own pooled fund in 2014 and with its dominant position in the market it is reasonable to expect it to pick up some of the pooled business if consultants consider it as good as the competition.
“It’s historically been popular to come up with some notion of fair value such as a specific target for the index-linked gilts yield and set a trigger level to do some hedging, but these triggers have generally failed and so we are seeing a clear move to time-based triggers instead.”David Bennett