- Introduction & Methodology
- Industry Trends
- Respondent Profile
- Defined Benefit Plans
- Portfolio Characteristics
- LDI Usage
- League Tables
- Vendor Ratings
- Number of Responses and Scores
- Average Scores by Categories
- Vendor Details
- BlackRock
- Dodge & Cox
- Fidelity Investments
- Goldman Sachs Asset Management
- Jennison Associates
- Legal & General Investment Management America
- NISA Investment Advisors
- PIMCO
- Prudential Investments
- Wellington
- Western Asset Management
Past Surveys
The Parade into Bonds Marches On
But lower interest rates are leading to complications
The march of LDI continues. Amid lowered short-term interest rates, courtesy of the Federal Reserve, pension funds managed to keep up their efforts to de-risk their portfolios and improve their funded status.
Liability-driven investment strategies are meant to undo the damage that the Great Recession did to pension portfolios, moving away from dependence on equities (read: “risky asset”) and toward safer fare (read: “fixed income”). This year, 57% of respondents say they are using LDI strategies, versus 49% in 2018.
Among the survey’s findings, which involved 168 asset managers, the fixed income migration stands out as a significant change. This asset class, encompassing bonds and their equivalents, is swelling, claiming 59% of assets in our survey, up from 44% last year. “Allocation to fixed income is creeping up higher,” said Kevin McLaughlin, head of liability management, North America, at Insight Investment, an asset manager specializing in LDI.
Still, as Insight Investment’s review of the US pension market indicated, the slide in interest rates has driven liability values higher, and that, in turn, has lowered funded status. According to Insight Investment, its traditional pension index dropped in the third quarter to just above 80% funded, from just over 90% in the year-prior period.
Meantime, domestic equity slid to 17% from 19% and foreign stocks to 13% from 18%. Surprisingly, alternative investments, which can range from private equity to real estate, showed a small reversal of their popularity, dipping to 11% from 16%. And derivatives, a tool in widespread use that aids fixed income as a hedging device, saw a small reduction, with 66% using them, as opposed to 71% last year.
To be sure, LDI is a lot like the Tetris game, where one facet has an impact on all the others. “LDI doesn’t exist in a vacuum,” said Jon Pliner, head of US delegated portfolio management at consulting firm Willis Towers Watson. “You have to think how your whole portfolio interacts.”
At the same time, our survey indicates that plans are proceeding with their limiting future participants in defined benefit plans. This year, just 19% say their end game is to maintain their programs as open to all employees, a large decrease from 44% last year.
What are the biggest inhibitors to an LDI strategy? Funded status is the chief one, with 66% saying this factor was important or very important. The second-biggest inhibitor is the interest rate environment, and the third is the board or staff’s education.
The survey ranks various providers on overall offerings (Western Asset Management is No. 1), responsiveness (Western again), timely reporting (Fidelity Investments), and knowledge sharing (PIMCO).
Plans’ glide path—their procedure to rearrange asset allocations as funding status improves—is made concrete in investment policy statements as a “contract” or an “intent” for 49% of respondents. Some 24% have no intention to institute a glide path. What no one disputes is that the riskiest investments are something to be wary of, and better, more safe options are preferred.
“The path toward lowering risk in a portfolio,” Willis Towers’ Pliner noted, “has led to an expansion of diversification.” —Larry Light
Methodology:
The 2019 Liability-Driven Investing (LDI) Survey was conducted from mid-August to mid-September 2019, and asked asset owners about their practices and views regarding funding, de-risking, and LDI strategies. Of all responses, 168 were identified as qualifying—i.e., by individuals with the authority and knowledge to answer LDI-related questions, at a qualified fund. For the seventh year running, the survey includes LDI vendor evaluations. Asset owners that indicated they use LDI were asked how they selected their provider(s) and also to rate those providers’ services in various categories. For more information, contact surveys@strategic-i.com.