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LDI market dominated by three fund managers
17 June 2013
Legal & General, Insight and BlackRock control 90% of the industry, says KPMG
Legal & General
Three fund managers, Legal & General, Insight and BlackRock, dominate the liability driven investment (LDI) industry that grew 11% in 2012 to cover £446 billion of UK pension scheme liabilities, according to the 2013 KPMG LDI survey. Now 686 UK pension scheme mandates employ LDI and although a number of fund managers are entering the market, the provision of LDI remains dominated by the big three of Legal & General, Insight and Blackrock, which combined control some 90% of the market based on notional value.
Whilst the market continues to be dominated by the ‘big three’, growth has not been confined to them, noted Tom Brown, head of investment management, at KPMG. “Fund managers with both medium and large LDI businesses have added to their number of mandates over the year, although at the smallest end of the market the results were more mixed. And the fund management industry is optimistic about the future for LDI,” he said.
The big three also dominated the ‘pooled’ funds market, although here it was less marked as they accounted for a combined 61% of notional liabilities hedged, according to KPMG’s analysis.
With continued volatility and uncertainty around the direction of interest rates as the world emerges from the financial crisis, removing uncertainty, where cost effective, and focusing on seeking opportunities for growth appears to be the focus for UK pension schemes, according to KPMG.
Other key findings from the survey include: with 35 percent of mandates having extension triggers in place, any yield reversion should see the industry witness significant growth. Given the macro environment and record low nominal yields, it follows that the strongest growth has been in hedging inflation risks.
The LDI market has witnessed increasing appetite for pension schemes to use wider derivative strategies to capture return seeking exposures such as equity and credit to drive returns as well as hedge risks. And 80% of LDI managers believe their greatest source of new business will be from pension schemes new to LDI.
Pension schemes continue to look for ways in which to reduce funding level risk. In an environment where cash is king, derivative based strategies appear to be a popular way of controlling key risks whilst freeing up assets that can earn a premium invested elsewhere. “This is why we have seen growth in both LDI and Synthetic Return Generating strategies over the last year,” said Barry Jones, head of LDI research at KPMG.
“The continued development of propositions by smaller LDI players looking to challenge the market appears fully justified. The question remains whether these players can take significant market share from the big three in the segregated space which accounts for the vast majority of LDI assets in the UK,” added Jones.
According to KPMG, LDI is just one of the tools in the toolbox to effectively manage pension scheme risk and should be treated holistically alongside longevity hedging, insurance solutions, benefit changes/liability management, funding strategies and volatility controlled growth strategies.
The survey indicates that the majority of the 30 institutional managers surveyed believe that yields will rise relative to what is priced into the market over the next three years. If true, pension schemes yet to implement LDI would benefit from waiting for yields to rise. Despite this expectation, pension schemes increasingly seem to be seeing low yields as the new normal.