Fund Managers Failing SWFs on LDI

(April 3, 2012)  —  Sovereign wealth funds (SWFs) have accused fund managers of failing to acknowledge their financial liabilities and as a result not offering products that would help to meet them.

Some 70% of respondents to a global survey carried out by the EDHEC-Risk Institute said asset-liability modelling (ALM) provided “a better understanding of optimal investment policy and risk management practices”, but the majority of respondents complained about the lack of such solutions for SWFs.

The survey said: “More than half of the respondents (56%) agree that there is a lack of dedicated ALM and risk management solutions for SWFs. In particular, respondents think that such issues have not been given much practical consideration or priority. In addition, the respondents agree that extending the liability-driven investing (LDI) paradigm developed in the pension fund industry to SWFs provides a better understanding of the optimal investment policy and risk management practices.”

The survey said that there was a widespread view in the fund management industry that SWFs were not constrained by liabilities, but 92% of respondents thought ‘implicit liabilities’ should be taken in to account when constructing an investment strategy.

“The majority of the respondents think that SWFs are subject to short term constraints due to peer comparison, loss aversion and sponsor risk. Even though SWFs are long-term investors without explicit liabilities, they have to manage implicit liabilities related to the objectives of the fund, the source of its revenues, and the future uses of its wealth,” the survey said.

The survey said that the model used to gauge assets and liabilities for pension funds would have to be adapted significantly to be used by these SWF investors, due to the huge differences between the sectors, but providers and investors should look to implement these strategies without delay.