(August 15, 2011) — The $390 billion liability-driven investing (LDI) market is developing into an oligopoly, a new survey by KPMG finds.

In its 2011 LDI Survey, which examined 600 LDI mandates in which investment managers use swaps and long-term bonds to hedge interest rate and inflation risks, KPMG finds that the LDI market is dominated by just three providers — BlackRock, Insight, and Legal and General — managing more than 80% of assets.

According to the research, despite increasing demand from pension schemes, the number of providers dropped from 23 in 2007 to 15 in 2010. Meanwhile, the number of providers offering pooled LDI solutions fell from 14 to nine.

“Over the last three years we have seen substantial consolidation in the number of managers operating in the LDI market place,” Simeon Willis, principal consultant in KPMG’s Investment Advisory Group, comments in a statement. “There is now something of an oligopoly operating under which just three fund managers are looking after the lion’s share of assets in both the pooled and segregated categories. Whilst the industry assets under management have continued to grow, the number of providers has reduced by around a third. The popularity of the largest LDI providers is having a compounding effect leading to concentration in a small number of managers.”

While the report assert that a healthy amount of competition still exists in the LDI market, the authors warn that this may not be the case if the number of providers decline further.

Tom Brown, European head of investment management at KPMG, adds: “Investment managers are responding to growing client demands by offering increasingly flexible and tailored solutions given the market place is so competitive, and there are currently a number of clear leaders in the market. We are seeing a continuing trend for pension schemes to adopt a plan for reducing risk over time which may lead to a more even split of LDI assets across fund managers.”

UK pensions are increasingly focussing on LDI strategies to better match their liabilities while reducing volatility of their funding level. While not as developed as their UK counterparts, the LDI marketplace in the United States has also witnessed an uptick in interest in this strategy, with April findings from Casey Quirk & Associates and eVestment Alliance revealing that alternatives, emerging markets, and LDI strategies will dominate search activity among investment consultants in the US and Canada this year.

The April study revealed that more than one-third of investment consultants surveyed anticipate a boost in LDI mandates in 2011, with three-fifths of consultants expecting moderate or strong bond search activity this year. The greater attention to LDI corresponds with previous research fromMetLife that showed underfunded liabilities is a top concern among US corporate plan sponsors, with the response being an LDI strategy.