Money managers pouncing on LDI business in U.S.

LDI strategies already represent big business in Europe, since mark-to-market accounting has been implemented in the U.K. and the Netherlands. Combined, these firms manage about $87 billion in LDI strategies, mostly from European clients.

BGI, the leading asset gatherer in LDI, manages about $40 billion in such strategies, mostly for European clients, including about $30 billion for clients in the U.K., said Lance Berg, a BGI spokesman.

SSgA manages some $20 billion, about 80% for European clients, said Alistair Lowe, senior managing director and director of the firm's global asset allocation and currency teams.

GSAM's fixed-income team manages about $5.4 billion in LDI strategies, which includes assets from European clients, said Andrea Raphael, a firm spokeswoman. She said assets in LDI strategies grew 30% in 2005 and a further 20% since the beginning of 2006.

BlackRock manages about $20 billion in LDI strategies for clients in both the U.S. and Europe, said Barbara Novick, a managing director at the firm.

According to Greenwich Associates, Greenwich, Conn., 3% of U.S. corporate plans have already implemented some type of asset-liability management strategy. Also, 12% of U.S. corporate pension plans are planning to implement one, and an additional 16% of the respondents to the survey said they would consider such strategies if the Financial Accounting Standards Board does implement mark-to-market accounting standards for pension assets. The findings were part of the firm's 2006 Institutional Asset Allocation Research Study, which surveyed more then 2,000 plan sponsors with an average of $250 million in assets.

Some money managers said the players who will be most successful are the ones that can offer customized solutions, rather then one strategy.

Johnathan Cohen, fixed income strategist and head of BGI's LDI strategies team, said: "The future for a multiasset-class manager is one that can look all the way through a company or public fund's balance sheet and offer them an LDI solution in a customized way. No two liabilities are the same."

BGI already offers a set of strategies for European clients that enables them to build a customized LDI strategy. Mr. Scanlan said BGI executives are working on LDI strategies for U.S. pension plans that use interest rate swaps or long-duration bonds to align a client's liabilities with its assets, and they're looking at ways to add layers of alpha on top of those liabilities.

Karen McQuiston, a managing director in JPMorgan Asset Management's long-duration and structured bond strategies team, said, "I think U.S. plan sponsors are waiting for LDI solutions, as well as advice (from managers) on what the first step is in implementing an LDI strategy."

Last week, JPMorgan Asset announced the launch of its long-duration diversified alpha fund, a new commingled fund targeting pension fund clients that want to align assets with liabilities, said James Reidy, vice president and head of the long-duration strategies group. He said the fund already has $500 million from a pension fund client he would not name.

Two weeks ago, SSgA launched a U.S. version of its pooled asset liability matchingsolution. The PALMS strategy, first introduced to U.K. pension plans in January 2005, predominantly uses zero-coupon swaps to match its clients' liabilities out to 2045.

"We have 12 client contact meetings set up in the next two weeks. We're seeing huge interest from clients to be educated on strategies such as PALMS," said Mr. Lowe.

Northern Trust already manages about $1.5 billion in long-duration bond portfolios for U.S. clients that have specifically requested that their assets be aligned to their liabilities. Gregory M. Kuhl, Northern's director of client service, said while the LDI market is still very young in the U.S., the managers that can offer customized solutions should be successful.

Scott McDermott, managing director in the global investment strategies group at GSAM, said that for skilled managers, the competition should not be that intense. "While LDI is a new way of thinking about a plan, it's not a new strategy per se. Existing managers can still do what they are good at doing. The good fixed-income managers will continue to be good. They will just be managing to more long-duration and customized swap benchmarks than they did before," he said.

Other executives in the industry — such as Lee R. Thomas III, chief investment officer who oversees the firm's Alpha Vision strategy at Allianz Global Investors, Newport Beach, Calif. — question whether pension executives will stick to their plans of defeasing liabilities when their plans return to full funding.

Speaking at an April 6 CFA Institute asset allocation conference in Marina del Rey, Calif., Mr. Thomas said plan sponsors are praying, "Lord, I know that I have sinned. Just get me back to even and I won't sin again." However, if investors once again experience strong markets, "everyone will feel cheery again and go for risk," Mr. Thomas said.

Jay Kloepfer, a managing director at Callan Associates Inc., San Francisco, said plan sponsors should consider a variety of LDI strategies and not just interest rate swaps to extend duration. "These derivatives products are exotic and may be getting ahead of the market a little bit," said Mr. Kloepfer. "My only caution is that these swaps are not the answer to all that ails pension plans. If all you have is a hammer, then pretty soon everything will start to look like a nail."

(updated with correction)