BAA switches manager as LDI competition grows

On average, LDI managers expected only 13 per cent of new mandates to come from other managers, a KPMG survey found back in 2014. This makes the £4bn scheme’s manager change relatively unusual.

The move was triggered by the trustees’ decision to increase the scheme’s interest rate hedge ratio to 100 per cent of assets, from 80 per cent in the year ending September 30, according to the latest annual report.

“As a first step, the trustee has agreed to transfer their liability hedging portfolio from Rogge to BlackRock in order to improve the efficiency of the hedging solution”, the report explained.

The hedging assets made up 42 per cent of the portfolio in September last year, while the target allocation was much lower at 24 per cent.

However, the scheme has been undergoing “a detailed review” of the investments and is planning to revise the target allocation once this is complete in the second half of this year.

Sponsor Heathrow Airport Holdings did not respond by press time, while Allianz Global Investors, which acquired Rogge last year, declined to comment.

Need for precision grows

In its recent asset management market study, the Financial Conduct Authority said it did not see any need to analyse the LDI market further. This is despite the top three managers representing 90 per cent of the UK market for mandates, based on notional value.

Steve Delo, managing director of Pan Governance, said it was not very common for schemes to change LDI manager, but noted that competition is growing.

“There is something of a view that once you have implemented with a manager, even at a low hedging level, you are likely to stay there and build that exposure,” he said. “However, it is becoming a more competitive market.”

Delo said some LDI offerings were blunt tools, which were “fine” at lower levels of hedging, but “the closer you get to full hedging of liabilities, the more precision is required”.

Other potential triggers for switching manager could be a move to a bespoke solution, collateral management, consultant downgrade, or pricing, which becomes increasingly important at higher exposures, said Delo.

Poaching likely to increase

Simeon Willis, head of investment strategy at KPMG, agreed competition among LDI managers has been growing, with clients keeping an eye on the price tag.

“We are seeing competitiveness in the market and price being a key factor,” he said. As a result, there could be more instances of mandate ‘poaching’ in the space.

Willis explained that hedging roughly falls into a build-up and a maintenance stage, which require different skills.

“For building up, a lot of clients have tended to go for a manager that is active and opportunistic and willing to take discretion,” he said.

This changes once schemes have reached their target level of hedging.

“You could think of it as a mature phase … they’re going to be focused more on value for money, operational robustness and cost efficiency.”

LDI is a ‘one-way move’

A move to a leveraged strategy could also have been behind the BAA trustee’s decision, speculated Jignesh Sheth, head of strategy at consultancy JLT Employee Benefits.

Leverage means the investor frees up assets and could, for example, gain more exposure 
to growth.

“I certainly see a lot more schemes moving from traditional bond strategies to leveraged LDI strategies,” said Sheth.

But although competition between managers may be on the rise within LDI, the strategy itself is a “one-way move” unlikely to fall out of favour any time soon, Sheth noted.

Even if schemes did consider reducing their hedge, they might think twice about it, he said, as the transaction costs to come out of such strategies can be substantial.