Same Head, Different Hat

We aren’t the only ones surveying liability-driven investing (LDI) implementation and opinions (but do see page 72 for our second-annual Liability-Driven Investing Survey results): The Cambridge, Massachusetts-based investment consulting firm NEPC also has been asking plan sponsors about the de-risking strategy. Their results, like our own, will surprise you.

“We saw a dramatic increase in implementation from last year’s survey,” Bradley Smith, an NEPC partner working out of the firm’s Atlanta office, told aiCIO in a sneak-peak interview in early November. “In 2011, over 70% of respondents indicated that they were using some form of LDI, but overall usage was very low— they were just putting their toe in the water, really.” Not so this year. “Last year, 43% of the 75-odd respondents told us that they had less than 25% of total plan assets in LDI. This year, that number is 37%. So plans are continuing to implement by adding assets to the LDI portion of their portfolio.” This occurred, Smith noted, even as rates continued to fall—a move in stark contrast to conventional wisdom (but which also agrees with the aiCIO iteration of this survey).

NEPC, for the first time, also asked how many LDI managers each asset owner was using. “The results show a willingness to diversify their managers,” Smith noted. “We found that 24% of plans use one LDI manager, 35% use two, 14% are using three, 16% are using four, and 10% are using more than four. Just through conversations with funds, I find that when a fund has between $500 million and $700 million in LDI assets, they start to diversify the firm-specific risk—but that funds of all size tend to hire more managers as LDI assets increase.”

However, funded ratios were down slightly in 2012, the survey found. “For the first time, we added the option of indicating that they were below 70% funded,” Smith said. “Six percent said they were. Twenty-seven percent said they were between 70% and 79%. Thirty-seven percent were at funding levels between 80% and 89%, while 21% were between 90% and 100%. A select 9% were above the 100% mark.” Compared to 2011, however, funds were generally less funded.

Conventional wisdom would suggest that funding levels fell because of downward-moving interest rates—and here, conventional wisdom is right, Smith believes. “Looking at the hedge ratios, they fell year over year in general, so it looks to me like some respondents may have unwound some LDI hedging.” Unfortunately, NEPC didn’t ask whether this unwinding was unintentional—which leaves the opportunity for them (or aiCIO) to ask even more questions next year.

—Kip McDaniel