Russell: LDI Strategies Becoming the Norm

(November 28, 2011) — Russell Investments has reported that a total of 75% of its corporate defined benefit clients in the United States have now adopted liability-driven investing (LDI) strategies. 

That popularity has driven Russell’s Martin Jaugietis to be named to a newly created role: director and head of LDI solutions.

The firm reported that its US-based LDI fixed-income assets under management (AUM) have grown to approximately 50% of the company’s total fixed income AUM in the US as of June 30.

Commenting on Jaugietis’ new role, Michael Thomas, chief investment officer of the firm’s Americas Institutional business, said in a statement: “Russell wanted to have a leading voice to marshal our existing internal resources on LDI and to serve as a dedicated champion and subject matter expert for clients on the topic…Not only will Martin’s advice and perspective be valuable for our consulting clients, but also to plan sponsors that are interested in the liability-hedging component of fiduciary solutions in which we take more discretion over investment management functions.”

Additionally, Jaugietis noted that corporate plans have become increasingly sensitive to the volatility of funded status, creating a greater demand across Russell’s client base for both advice and solutions. Currently the average Russell consulting client has 38% invested in liability-hedging fixed income, up from 27% in 2006. Jaugietis also noted that as more is invested in liability-hedging fixed income, it becomes increasingly important to have a closer liability-hedging portfolio which requires more sophisticated solutions than simple duration extension.

The spark driving the popularity of LDI within the corporate pension fund universe comes from heightened regulation that demands greater solvency and higher funding ratios, along with the general longing to allow sponsors to focus increasingly on their core business as opposed to being distracted by their pension—often a pestering side problem. In 2006, the Pension Protection Act (PPA), which came into effect in 2008, provided the first set of rules forcing American sponsors to systematically contribute to their pension to carry them to full funding. Between 2003 and 2007, the funded status of plans in the US ballooned from 77% to 96%—a remarkable increase at first glance. But according to a UBS research paper by Francois Pellerin, a heightened level of contributions made by plan sponsors largely fueled the increase—highlighting a prevalent misperception among sponsors that a pure increase in equities got them out of their rut. “In analyzing the liabilities of 500 publicly traded companies with the highest pension exposure, I found that on average, the pension plan was 46% of the size of the company,” Pellerin told aiCIO, adding that “LDI has flourished to control volatility so that plan sponsors can worry about what they’re good at—whether its building cars, making widgets, or whatnot.” 

See aiCIO Magazine’s Inaugural Liability Driven Investing Survey.