Home ListingDecember 15, 2014

Investors Demand More LDI Innovation

Despite a growing need for asset-liability matching strategies, product providers have not offered enough new thinking.

Reported by Featured Author

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.

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.