Ignis brings tailored LDI offering to market
Swap uptake creates liability hedging spike
UK schemes were hedging £13bn of interest rate liabilities at the end of September, up from £9.3bn the previous quarter.
F&C figures also showed inflation hedging was up 34% to £9bn over the same period.
The fund manager put the dramatic increase down to significantly higher volumes of swaps being used by pension schemes.
F&C derivatives chief Alex Soulsby said: “These trades are switches between instruments used for hedging which occur where a scheme takes advantage of higher gilt yields compared to swaps, or simply takes profit on an existing position.
“The relationship between swap and gilt yields was especially volatile during the last few months due to rumours about the Bank of England buying gilts – quantitative easing.
“We believe that while outright hedging has remained muted, switches, either physically or synthetically, will continue to be a major contributor to the total risk traded in LDI.”
Ignis Asset Management has launched a bespoke liability driven investment (LDI) offering based on its parent company’s insurance portfolio.
Earlier this year PW revealed the asset manager was launching its Absolute Return Government Bond fund (PW 28 February 2011) for pension schemes, which could act as a pooled liability matching vehicle.
But now it is offering tailored solutions for individual schemes, and is running this for the full liabilities of its £1bn defined benefit scheme.
Like the absolute return vehicle, these strategies assess the likely future interest rate and inflation risk to a client’s ability to pay benefits, using gilt forward rates – the cost of buying gilts now at preset future dates.
This is the basis on which it has run the £25bn Phoenix insurance fund for four years.
Ignis also switches between two types of derivative – swaps and ‘repos’, used to match assets and liabilities.
Repos are similar to swaps, whereby an investment bank creates a hedge against certain risks in exchange for collateral offered by the investor, except they are secured against the investors’ gilt holdings.
They are currenly trading at around 50 basis points cheaper than swaps, so form the backbone of Ignis’ strategy, but this can change with the relative price of the synthetic assets.
Ignis head of institutional, Helen Farrow, told PW the firm is currently pitching to schemes and consultants and plans to make LDI sales “a priority” for the business next year.
“We think there is a demand out there for a more diverse spread of LDI offerings, beyond the current main players,” she added.
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