Legal & General Investment Management has been expanding through what might be dubbed as a grave-to-cradle approach to pension funds.
Key to the firm's growth in recent years has been a suite of products that takes corporate clients with maturing defined benefit plans through the risk-reduction phase and eventually to a full pension buyout, coupled with the launch of new defined contribution plans as clients shift to DC from DB.
“We have a very large percentage of the U.K. DB market,” Mark Zinkula, London-based CEO of Legal & General Investment Management, said in a recent interview. “As that market reaches its maturity phase and starts to decline gradually, we clearly need to continue expanding our DC business.”
The growth strategy has been working. LGIM's net inflows for the quarter ended March 31 were £5.5 billion ($8.6 billion), or a 113% increase from the first quarter of last year. Total assets under management increased 9% in the quarter and 15% for the year to £441 billion, according to the first-quarter financial update released May 2.
Liability-driven investing strategies spurred growth outside of the U.K., particularly in the U.S. LGIM also has steadily been expanding in the Middle East and Asia, mostly targeting institutional investors. For the quarter ended March 31, LGIM reported record international net flows of £6.7 billion, a fivefold increase compared with the $1.2 billion international net flows for the same quarter last year. International assets under management totaled £52 billion as of March 31, up 21% for the quarter and more than double the £20.3 billion reported a year ago.
“Our expansion efforts have been very targeted, both in terms of client base and products,” Mr. Zinkula said.
“In the U.S., we led with core competencies, but not the same core competencies that we had in initially building our business in the U.K., where we led with passive,” he said. “In Asia, there's a lot of wealth being created, and therefore, a lot of asset growth. There, we will likely lead with passive strategies.”
The firm also works with its insurance parent, Legal & General Group PLC, to structure DB plan buyouts, buy-ins and longevity insurance. Earlier this year, the group completed the biggest longevity insurance contract in the U.K., covering £3.2 billion in liabilities associated with the BAE Systems 2000 Pension Plan, Farnborough, England. (BAE Systems reported aggregate U.K. defined benefit assets of £16.6 billion as of Dec. 31.)
Since the U.K. government launched a national auto-enrollment program in October, LGIM has helped implement auto-enrollment at some of the nation's largest companies, including Barclays PLC, Marks & Spencer PLC and Asda, which is the British unit of Wal-Mart Stores Inc.
In the DC sector, one major area in which LGIM is looking to expand is liability-driven investing.
“Within our solutions team, the same team overseeing product development and asset management for LDI in the DB market is also taking a leadership role in DC,” Mr. Zinkula said. “We believe the problems we're trying to solve are similar. But obviously, the strategies would need to be packaged differently for DC.”
“We have to make sure we don't over-engineer the products for this space, so that they're straightforward, relatively low-cost and fairly easy to understand,” Mr. Zinkula added. “Those are our general guiding principles.”
LGIM is also developing strategies that combine active with passive management. In 2011, LGIM launched an institutional hybrid real estate fund that combines a percentage of actively managed assets with a percentage invested in passive global real estate investment trusts. The goal is to improve risk-return characteristics with some cost control factors.
“We're continuing to explore strategies like that,” Mr. Zinkula said. “In that case, we worked with a consulting firm that thought it would be an attractive product for their (pension fund) client base. We are being more innovative, but only if it meets client needs. We want to avoid being gimmicky or have products that are overly complicated.”
