Smaller schemes take advantage of pooled funds in bumper year for LDI

LDI mandates surpassed the 1,000 mark during 2014 as pooled mandates increased 41 per cent over the year, superseding segregated deals for the first time.

According to consultancy KPMG’s latest annual LDI survey, flows into the market increased by £146bn to £657bn during 2014 against a backdrop of record-low yields.

There were very few new mandates among schemes with less than £50m under assets but the report identified the smaller end of the market as a key area for growth.

Source: KPMG

Simeon Willis, chief investment consultant at KPMG, said exponential growth during the year demonstrated the capacity for bond markets to grow in response to low yields, as well as a growing appetite among more mature schemes to lock in some protection.

“With the sort of numbers we’re dealing with now the sky’s the limit as to where this can go,” he said.

“If we think back to what that number would have looked like 10 years ago people would not have believed… schemes would be hedging this level of assets – the gilt market is now four times bigger than it was then.”

Rising competition

The 'Big 3' managers, BlackRock, Insight Investment and Legal and General Investment Management, continued their dominance of the market, accounting for 85 per cent of total liabilities hedged.

With the sort of numbers we’re dealing with now the sky’s the limit as to where this can go

Simeon Willis, KPMG

However, manager FandC won the most number of pooled mandates during 2014 and the report attributes this success to the popularity of its discretionary pooled fund range.

Barry Jones, head of LDI at KPMG, said growth in the number of pooled mandates during 2014 was the result of fierce competition among managers but the dominance of the Big 3 made it difficult for new entrants to crack into the market.

“The providers that want to gain market share have to prove their worth in the pooled space and therefore they’ve really developed their propositions,” said Jones, adding: “Because they have these in shape I think it’s become a very easy market for medium-sized pension schemes to actually just go out there and do LDI – it's not complex to do.”

Jones said funds outlying the “Big 3” managers currently held little exposure in the market and that fierce competition demanded a unique selling point from every new product.  

Concentration risk

However Shajahan Alam, senior solutions manager in Axa Investment Managers' UK LDI team, said the concentration of the market in three investment management houses was evidence of herding behaviour among pension scheme investors.

"If you look at where pension schemes are going, they’re going to have quite a lot of assets in LDI – 30-50 per cent, possibly more,” said Alam.

It seems at odds with that general trend towards diversification to have just three dominant LDI players

Shajahan Alam, Axa IM

“To have all of your assets with one manager when over the last 15-20 years there’s been a successful move towards diversifying across asset classes and managers,” he said, "it seems at odds with that general trend towards diversification to have just three dominant LDI players.”

Alam added that managers with a growing client base and a big book of business could struggle to be nimble.

Roger Mattingly, managing director at Pan Trustees, said trustees must ensure full due diligence when taking any investment decision and must be alert to the risks of asset concentration.

Mattingly said investors seeking safety in numbers could find themselves in a queue for the exit in troubled times. 

“Any market that is dominated to that extent... [there is] concentration risk and that needs to be overcome either by spreading the risk or by fairly heightened due diligence,” he said.