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5/3/2015 Chief Investment Officer - Navigating the LDI landscape
http://www.ai-cio.com/channel/NEWSMAKERS/Navigating_the_LDI_landscape.html?p=1 1/2
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A “perfect number” exists in mathematical theory.
In liability-driven investment (LDI), it does not.
On one side of the Atlantic, investors are suffering
an embarrassment of riches; on the other, it’s slim
pickings. This uneven spread is failing both sets of
investors—but it might be about to change.
In the UK, the market that arguably led the LDI charge, there are 14 providers offering
services to pension funds, according to KPMG’s calculations. But with rates continuing to
edge downwards, many investors are loathe to lock in and instead avoid these strategies.
Does that mean there are too many providers? And how many are “me too” brands rather
than real innovators?
The UK market has traditionally been dominated by three players: Legal & General
Investment Management (LGIM), Insight Investment, and BlackRock. But there has been a
flurry of new entrants who are themselves fund management heavyweights: Schroders,
AXA Investment Managers, and F&C Investments.
There might be even more pretenders to the throne, except for a controversial barrier: the
consultant market. TC Jefferson, senior consultant at London-based executive search
specialists Plenum Group, tells aiCIO some consultants only give airtime to providers with
a sizable and dedicated LDI solutions team. This means less-established players who want
to grow organically can find it a tough market to penetrate.
“There is a serious catch-22 in that consultants, while wanting more choice for their
clients, stand accused of exacerbating the problem in reinforcing barriers to entry for new
and smaller LDI providers,” he says. “This capacity issue is made worse by the
conservative nature of trustees themselves, many of whom may lean towards a household
name. The current LDI landscape is a reflection of the fact that, as a relatively low-margin
business, the success of LDI can be a question of scale.”
The state of the LDI market is seen completely differently on either side of the Atlantic,
however. Russell Investments told aiCIO that demand is outstripping supply in the US,
while the UK market is ripe for consolidation.
Marty Jaugietis, Russell’s head of LDI for the Americas, notes that there is a huge appetite
for the strategy that has yet to be sated stateside. “The average allocation to LDI fixed
income of our US consulting client base has risen from 25% to 43% over the past six years,”
he says. “However, this is still regarded as the relatively early innings in terms of the
amount of interest-rate risk being hedged, which results in material differentiation in
solutions.”
Some feel there still isn’t enough variety on offer in the US. Dave Wilson, managing
director at Cutwater Asset Management, says there’s plenty of room for more entrants into
the US LDI space because there are too few providers offering bespoke products. “While
there are many investment managers in the US that offer LDI, there are very few that are
truly committed to providing customized, solutions-based investment programs for their
clients,” he explains. “Too often, US plan sponsors are presented with a one-size-fits-all
recommendation of extending duration, which may not be appropriate for some or precise
enough for others.”
Kimberlee Lisella, senior client portfolio manager at LGIM America (and formerly of
Headlines June 21, 2013
Navigating the LDI landscapeFrom aiCIO's June issue: What is the right number of LDI providers? Charlie Thomas investigates
in the strategy's two main markets.
Home Surveys Lists Events Webcasts Videos Opinions Thought Leadership For the world's largest asset owners
5/3/2015 Chief Investment Officer - Navigating the LDI landscape
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Subscribe to PLANADVISERdashPLANADVISERdash is a daily e-mailnewsletter addressing the needs andconcerns of advisers who specializein the sale and servicing ofinstitutional retirement plans.
Kimberlee Lisella, senior client portfolio manager at LGIM America (and formerly of
Cutwater) agrees; she says the US LDI market is split into fixed-income providers who “do
LDI” and what she calls true LDI providers.
Most managers offer LDI in terms of managing a single, long-duration strategy
benchmarked against a standardized market index. The exciting ones might also offer
blends of standard market benchmark long-duration strategies, but there aren’t many who
offer a tailored experience for pension plans and their liability benchmarks, she claims.
But are those bespoke tailors worth the extra money? Lisella argues (perhaps
unsurprisingly, given her employer) that they are, as they manage credit and develop LDI
strategies while understanding that pension liabilities are un-investable and do not have
default risk. “Essentially, these LDI managers recognize that outperforming a market
benchmark does not necessarily mean the client has achieved success relative to their
custom liability benchmark,” she says. “A customized liability benchmark holds the LDI
provider accountable for performance against the client’s actual liabilities, and provides a
detailed attribution which quantifies ‘un-investability’ and how the manager has added
value.”
Story continues...
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Latest Issue Popular Stories2015 Forty Under Forty
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U. California Loses Hedge Fund Chief, Looks to Recruit
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Copyright ©1989–2015 Asset International Inc. All Rights Reserved. No Reproduction without Prior Authorizations
5/3/2015 Chief Investment Officer - Navigating the LDI landscape
http://www.ai-cio.com/channel/NEWSMAKERS/Navigating_the_LDI_landscape.html?p=2 1/2
POPULAR STORIES
2015 Forty Under Forty
The Great Inflation Conundrum
Drinking Through a Diversity Hangover
I Don't Want to Be a Role Model
U. California Loses Hedge Fund Chief, Looks to Recruit
Why the Heathrow Express Is Insanely Expensive
FEATURED VIDEO
Behind the Cover: The Riddle of Tampa BayLeanna Orr on investigating Bowen, Hanes & Co.'sunique and unorthodox operation at Tampa's Fire &Police Pension.
SPONSORED MESSAGE
Subscribe to PLANADVISERdashPLANADVISERdash is a daily e-mailnewsletter addressing the needs andconcerns of advisers who specializein the sale and servicing ofinstitutional retirement plans.
(Continued...)
Meanwhile, back across the pond, David Rae, the
head of LDI solutions for EMEA at Russell
Investments, believes we’ll see the number of
providers shrink. Any future flows to LDI will to
go to a concentrated number of providers, he says.
“In recent years, a number of providers have
entered this market to challenge the dominance of
the small number of players at the top, but it is
unlikely that the market can sustain all of the new
entrants. The success of these new entrants will depend on their ability to offer a
differentiated product and attract scale to compete with the early movers in the
marketplace.”
Howard Kearns, head of LDI for EMEA at State Street Global Advisors (SSgA), also says 14
players in the market was “clearly too many.”
Predictable statement warning: The UK’s big guns believe there’s enough capacity in the
LDI market, and that the need for new entrants is slim. But there may be more to their
claims than just self-preservation. Mike Walsh, head of solutions distribution and
management at LGIM in the UK, says pension funds need to align themselves to a manager
who is in the LDI game for the long term—and that having more managers offering
products could actually be detrimental for pension funds. “In addition, clients are looking
to access inflation protection, and the inflation market is very much driven by supply.
Merely having more managers chasing the same inflation supply will not provide a better
outcome for clients,” he adds.
Steve Aukett, director of financial solutions at Insight Investment, also believes there are
enough players in the market, although he did welcome the recent influx of managers into
the LDI space. Established managers have been challenged to justify their value
propositions by the new competition, he says.
“A broader range of providers gives clients greater choice and a better means to assess the
quality, risk, and value of different offerings,” Aukett continues. “However, new players
should not underestimate the investment and level of commitment required to meet client
objectives. “The effective management of operational risk, counterparty exposures, and
representing clients’ interests in the move towards central clearing are just some examples
of the many areas that require significant investment in both people and operational
infrastructure.”
Not everyone is convinced by the less-is-more argument though. SSgA believes the market
will grow, and has invested heavily in its LDI offering. Many of the smaller LDI managers
also tell us that new entrants would be a welcome development to shake up the status quo.
AXA IM is one of the newest players in this space: After winning a UK public-sector client,
it suffered a setback in the loss of its head of LDI to his homeland of South Africa—but a
replacement is on the horizon. In the meantime, the firm is planning on expanding its LDI
team in direct response to interest from its clients. “We see significant demand both in
terms of the number of schemes as well as the assets under management,” said Madeline
Forrester, head of UK institutional business development at the fund manager. “There is a
need for new entrants and competition in the marketplace to ensure that providers offer
the training, support and bespoke approach that schemes require.”
Other than dastardly consultants, what other barriers to entry are there for new
Headlines June 21, 2013
Navigating the LDI landscapeFrom aiCIO's June issue: What is the right number of LDI providers? Charlie Thomas investigates
in the strategy's two main markets.
Home Surveys Lists Events Webcasts Videos Opinions Thought Leadership For the world's largest asset owners
5/3/2015 Chief Investment Officer - Navigating the LDI landscape
http://www.ai-cio.com/channel/NEWSMAKERS/Navigating_the_LDI_landscape.html?p=2 2/2
Subscribe to CIO AlertCIO Alert is a daily e-newslettercovering the latest news, trends, anddevelopments in global investing,providing crucial information formanaging large pension funds,sovereign wealth funds andfoundations.
Other than dastardly consultants, what other barriers to entry are there for new
providers? The fixed costs of setting up a suitably staffed derivatives trading desk, the
operational infrastructure to support a derivatives business, and the necessary deal flow
in the market to ensure best pricing from banks, to name but a few. Julian Lyne, head of
global consultants at F&C, explains: “Entry into the LDI market will require a sustained
investment for several years, partly explaining why several providers have failed in recent
years to sustain their commitment to the LDI.”
Maybe there is no “perfect number” for LDI providers, but it is clear there are some
additions and subtractions to come—and soon. —CT
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More InfoAbout CIOTeamMagazine SubscriptionAlert SubscriptionGlobal Editorial CalendarEuropean Editorial CalendarGlobal Media KitEuropean Media KitCIO Alert ArchiveNews ArchiveContactRSS
Latest Issue Popular Stories2015 Forty Under Forty
The Great Inflation Conundrum
Drinking Through a Diversity Hangover
I Don't Want to Be a Role Model
U. California Loses Hedge Fund Chief, Looks to Recruit
Why the Heathrow Express Is Insanely Expensive
Strategic Insight / Simfund / Global Custodian / PLANSPONSOR / PLANADVISER / aiTrade / aiCIO / Pathfinder / Plan For Life / Investor Economics
Copyright ©1989–2015 Asset International Inc. All Rights Reserved. No Reproduction without Prior Authorizations