Investors Demand More LDI Innovation | Chief Investment Officer

The asset management industry has not offered sufficient innovation to help institutional investors meet their liabilities, according to a survey.

Natixis Global Asset Management questioned 642 asset owners with $31 trillion in assets under management—including pension funds, sovereign wealth funds, and insurers—and found 59% thought the industry had not developed innovative liability-driven investment strategies.

As a result, fewer than half of the respondents said they were making use of asset-liability matching methods. This is despite 60% of asset owners expecting to experience difficulties in meeting their long-term liabilities.

36% of respondents said they do not have the tools needed to manage their liabilities“While institutional investors have been implementing strategies designed specifically for managing longevity risks for more than two decades, many say they still find the tools for liability management to be lacking,” Natixis’ report said.

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More than a third said they did not have the tools they needed to meet their liabilities. Natixis said this had led to just 49% of respondents incorporating asset-liability matching strategies.

59% said the industry has not been innovative in the development of LDI strategies“When asked what posed the biggest challenges in their management of liabilities, our survey respondents painted a picture of a complex and volatile investment environment,” Natixis said. “Topping their list of challenges is their ability to generate returns, followed closely by low investment yields.”

Regulation, liability management, “unhedgeable risks”, and meeting solvency ratios were also named by investors as important challenges.

Return outlook

Despite concerns about generating sufficient returns, on average, asset owners believe they could achieve annualised returns of 6.9% after inflation.

Looking to 2015, investors pointed to equities as the likely top performing asset class, specifically, US, emerging markets, and global equities portfolios. However, Natixis reported a degree of caution in investors’ approaches to equities, with 41% of institutions saying they expected to add value-based strategies. Less than a third said they would favour growth-biased equity strategies, and just 16% said they would be increasing risk overall in their portfolios.

38% of investors said they will decrease risk in 2015When asked about the biggest investment challenges in 2015, asset owners highlighted geopolitical risk and slowing growth in Europe and China. “Russia’s annexation of Crimea and the rise of ISIS are two events that may have contributed to institutional concerns over geopolitical risk,” Natixis said. “These sentiments may soon be exacerbated as Russia and the Middle East grapple with the political fallout of a sharp decline in oil prices.”

In response to these risks, many institutions said they were looking to implement risk-budgeting tactics or increase their allocations to non-correlated asset classes.

Wall Street’s junior analysts are moving more to private equity firms than hedge funds, according to recruitment data from start-up firm Vettery.

Some 36% of nearly 1,400 investment bankers found jobs at private equity firms, compared to the 9.3% who were employed at hedge funds after the two-year analyst program. The move to private equity was even greater than the 27.5% of analysts who had stayed at their banks. A total of 47% of the 2012 analyst class had been employed in buy-side jobs, Vettery said.

Vettery data (Source: Vettery)

However, certain banks succeeded more than others in placing their bankers to buy-side jobs.

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Goldman Sachs and Morgan Stanley recorded the highest number of analysts to move to the buy-side—with upwards of 60% of their graduates securing employment—while only about 30% of Deutsche Bank analysts were successful.

Vettery also found top boutique banks such as Greenhill and Evercore had placed 71% of their analyst class into buy-side jobs.

According to the data, analysts from mergers and acquisition groups were high targets for major private equity firms such as Blackstone, KKR, and Carlyle, and hedge funds, including the likes of Bridgewater, Tiger Management, and Och-Ziff.

About three-quarters of private equity and 93% of hedge fund jobs were located in New York, the large majority of which were taken by Caucasian men.

Vettery found about half of private equity associates at top firms had graduated from Ivy League undergraduate programs. Research showed University of Pennsylvania alumni were most successful in landing buy-side jobs, with 63% of its graduates finding such employment after two years as an analyst.

Charlottesville-based University of Virginia had the highest percentage of analysts that received hedge fund jobs, the data revealed, while Stanford had the highest placement rates into the buy-side for both men and women.

Vettery data1 (Source: Vettery)