Chief investment officer navigating the ldi landscape

5/3/2015 Chief Investment Officer - Navigating the LDI landscape

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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.

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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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(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



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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Latest Issue Popular Stories2015 Forty Under Forty






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Copyright ©1989–2015 Asset International Inc. All Rights Reserved. No Reproduction without Prior Authorizations

Chief investment officer navigating the ldi landscape

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