When it comes to education surrounding liability-driven investing (LDI), class is no longer in session. The de-risking strategy that defined benefit plans have flocked to over the past few decades—fleeing a well-known Cerberus comprising declining asset values, rising liabilities, and widening pension fund deficits—is now a part of the fabric of the industry.
But its ubiquity, some observers say, may be muddling its true message with marketing. (A cursory Google search for LDI—sans Boolean operators—yields more than 31,000 results in 0.38 seconds.) “Years ago, that phrase took a long time to educate people on,” says Ari Jacobs of Aon Hewitt. “We now no longer need to explain to people what the phrase ‘LDI’ means. I would say it is even now overused, and there are many different flavors of it. What LDI is to one organization is different than what it means to another. I think most organizations today claim they are doing some sort of LDI, though what that means often may vary.”
In its purest form of the definition, LDI means managing with the recognition that the pension fund assets should balance off liabilities. For defined benefit plans, it means that one size does not fit all—or all asset decisions. “It’s quite different for a plan that has simply lengthened the duration of its small fixed-income portfolio, versus a plan that has done a total shift to hibernation mode, eliminating all of its equity risk and managing its fixed-income risk,” Jacobs says.
“Again, most are doing something in some form,” he adds. “Whether it be on the investment side, lump sum windows, closing or freezing their pension plan, or funding it more aggressively. That all falls into the world of de-risking and most organizations are doing one or more of those.”
With such a broad take-up—which some industry surveys put at nearly three-quarters of all corporate plans—it’s not surprising that the field of providers offering some type of LDI solution is only widening. However, CIO’s survey respondents only used an average of two LDI providers. “There are more providers trying to come in because they know it’s a growing area,” Jacobs says. “It is an area where you need the right level of fixed-income experience and the right level of understanding of liabilities. As more providers enter the space, it is important to recognize that LDI is not just about picking the right bonds; it is understanding the different dynamics on the liability side.”
To that end, look no further than this year’s slightly expanded survey representing the client perceptions of nearly 150 plan sponsors. Six providers—BlackRock, Goldman Sachs Asset Management (GSAM), Fidelity, NISA, PIMCO, and Legal & General Investment Management America—merited a closer look by receiving 10 or more responses, and an additional four received five or more responses: JP Morgan, Loomis Sales, Prudential, and Western Asset. The survey not only shows who topped the overall offering league table—a tie this year between GSAM and Fidelity, in its debut—but where each provider, like industry titans NISA, PIMCO, and BlackRock, continues to differentiate itself in an increasingly crowded field.
In the survey’s sixth year, the percentage of respondents currently using derivatives has increased more than 50% since 2011 to 71%, with those not using them shrinking to 22%. It’s a barometer of allocator comfort level with derivatives, especially as they move further down their glidepaths and into more sophisticated instruments.
But there are still holdouts. Inhibitors to LDI remain unsurprising: More than half of respondents not yet de-risking cite the current interest-rate environment and long-term expected return as reasons for not diving in.
In the end, evaluating an LDI provider is not that different from rating any investment manager, says Jacobs. Look at the makeup of the team, its philosophy, and its performance. Importantly, plan sponsors should understand their mandates. “In some cases, part of an LDI mandate may be a narrow fixed-income mandate, and other times it can be much more comprehensive,” Jacobs says.
“CIOs need to be aware that there are more players out there and they should really be ready to study those different offerings,” he concludes. The following pages of this year’s LDI survey are a good place to start. May Hercules—who vanquished Cerberus with sheer will to exit the underworld—be your guide. —Alexandra DeLuca
Methodology
The 2016 Liability-Driven Investing (LDI) Survey was conducted from late August through October 8, and asked asset owners about their practices and views regarding funding, de-risking, and LDI strategies. Of all responses, 139 were identified as qualifying—i.e., by being from a senior investment official, with the authority and knowledge to answer LDI related questions, at a qualified fund. Results show trends as far back as six years, and are broken out by various fund attributes. A spreadsheet of the full set of unattributed survey responses is available for a fee. For more information, contact surveys@strategic-i.com.