LONDON — Bigger most likely will be better for firms offering liability-driven investments to U.K. and European funds.
It is likely that over the long term, liability-driven investing will be the sole preserve of large passive managers like Barclays Global Investors and State Street Global Advisors and larger asset managers with strong links to big investment banks.
The barriers keeping other LDI providers out of the market are so high that only those with fat checkbooks and recruitment pulling power will be able to provide the necessary levels of client servicing, trade execution, product innovation and back-office support, U.K.-based consultants said.
Consolidation in the market is likely as fees for LDI matching fall to the levels of passive bond mandates, according to Claire Ballantyne, manager research analyst at U.K. based consultant Hymans Robertson LLP, Glasgow.
But there is still room for boutique providers at different levels of the food chain, said Nick Horsfall, Reigate, England-based Watson Wyatt Worldwide senior investment consultant, and Ralph Frank, senior investment consultant at Mercer Investment Consulting, London.
Hymans Robertson estimated the size of the U.K. cash-matching market at £42 billion as of Dec. 31. Segregated mandates account for about £38 billion and pooled mandates, £4 billion.
Ms. Ballantyne was unable to estimate how much the market had grown so far this year but said it was likely that pooled LDI funds grew significantly from 2005.
Providers of LDI strategies have mushroomed in London over the last two years. A large number of local managers and U.S.-based firms such as BGI, SSgA and Morgan Stanley Investment Management Ltd., all of London, are now offering pooled LDI strategies. Many investment banks such as Lehman Brothers Inc., Merrill Lynch & Co and JPMorgan Chase & Co. have also established pension advisory groups to work with clients on financially engineered solutions such as LDI.
But not all are likely to stay the course.