Officials at Legal & General Investment Management are putting increasing focus on the U.S. institutional investment market, part of a plan to grow business in America to counter a slower-growing U.K. marketplace.
“This is a key part of our strategy going forward,” said Mike Craston, the Chicago-based CEO of America. “We expect the U.S. business to grow and be more important for the organization.”
America, the U.S. affiliate of LGIM, has seen its U.S. assets under management increase to $35.2 billion as of Nov. 30, from around $6.4 billion at the end of 2007, the unit's first full year of operation.
The AUM is still small when compared with the assets London-based LGIM manages in its home country. LGIM is the largest U.K. institutional money manager, with more than $600 billion of its $715 billion in total AUM, from institutional clients.
Mr. Craston wouldn't say how big L&G officials think the U.S. business can get, but said the company is here for the long term and is intent on building a continuing presence.
He acknowledged the result has not always been positive for European money managers entering the U.S.
“History is littered with European companies coming to the U.S. because the opportunities are alluring,” only to retreat later, Mr. Craston said.
So far, LGIMA has been in expansion mode. The company, which started with one employee in 2006, now has 60 in a downtown Chicago office building.
It is now going moving beyond its original focus of helping defined benefit pension plan clients implement liability-driven investing approaches through long-duration fixed-income strategies. Two months ago, LGIMA announced it was entering the index business in the U.S., hiring Chad Rakvin, former managing director of global equity index at Northern Trust Asset Management, as head of U.S. index funds. Shaun Murphy, director of international equity index at Northern Trust, was named index funds director.
Initially, LGIMA focused on managing money for the insurance operations of its overall parent, Legal & General Group PLC. It also handled assets of some multinational pension fund clients that had been managed by out of London.
But four years after it was formed, none of LGIMA's $12 billion in assets came directly from external U.S. clients that had hired the firm.
Company officials implemented a plan to change that, making a push for U.S. institutional investors, hoping to give a company well-known in the U.K. some American visibility.
“We had no clients, no brand, no identity,” said Tom Meyers, LGIMA's Chicago-based senior client portfolio manager and head of distribution.
Mr. Meyers said a key decision was made not to offer core or core-plus fixed-income strategies because there were more than 200 such offerings already on the market from a variety of money mangers, with an average track record of 10 years.
“It didn't seem like an easy nut to crack,” he said.
Mr. Meyers said company officials decided their best chance of initial success was focusing on LDI, helping officials of corporate defined benefit plans reduce risk through long-duration bond strategies. It was something LGIM officials in London had done for dozens of pension funds in the U.K. starting in the early 2000s.
Mr. Meyers said LGIMA has won investment contracts from 58 defined benefit plans in the past few years, a success he attributes to convincing both pension fund consultants and their clients of the strong expertise the firm has in LDI.
In the U.S., LGIMA entered an LDI marketplace dominated by a few major players including BlackRock Inc., NISA Investment Advisors LLC, Prudential Financial Inc., Pacific Management Investment Co. LLC and Aegon USA Investment Management LLC.
One investment consultant, whose company does not let him speak on the record, said he has recommended LGIMA to several defined benefit plan clients interested in LDI because it has a solid U.S. investment team with strong experience.
LGIM's long track record of implementing LDI strategies in the U.K. helped ease its entry into U.S. markets, said Edward Hoffman, a senior consultant at investment consulting firm Wurts & Associates, Seattle.
Mr. Hoffman said one of his pension fund clients, which he would not name, hired LGIMA for a $90 million account. While the pension fund has not formally adopted an LDI strategy, he said LGIMA was chosen because of its ability to implement such a plan in the future.
LGIM had almost $94 billion in assets in LDI strategies globally as of Dec 31, 2012, according to Pensions & Investments data, the fifth largest LDI investment firm in the world.
Consultants say the catalyst for LDI in the U.S. was the Pension Protection Act of 2006, which required corporations to reflect funding shortfalls of defined benefit plans in their balance sheets.
“LDI is on a growth trajectory in the U.S.,” said Bob Collie, chief research strategist, Americas institutional, at Russell Investments in Seattle.
While Mr. Collie said LDI strategies are mostly used by frozen defined benefit plans, other pension funds also are using the method as they attempt to reduce their sensitivity to interest rate changes.
While ultimately frozen pension funds will go away, it will take years for the LDI marketplace to diminish, Mr. Collie said. “The end game is very far off,” he said.
In the first nine months of 2013, LGIMA had $4.2 billion in new account net inflows to LDI strategies and $2.9 billion in net inflows from existing institutional clients, according to company statistics. Assets from U.S institutional investment clients stood at $14.5 billion as of Sept. 30, according to the data.
It's unclear whether the company will be able to obtain similar success in the index arena. In its favor, LGIM has an established track record in the U.K., and Mr. Rakvin, who will lead LGIMA's indexing efforts, is a long-time Northern Trust executive who helped build that manager's alternative beta strategies.
The company plans an assortment of approaches, offering both equity and fixed-income index strategies, Mr. Rakvin said. He said the firm plans to offer traditional, custom and alternative beta index strategies products, but would not be more specific.
The index strategies will begin being launched this year, but no exact timetable has been set.
Mr. Meyers said the company is making sure it has the right strategies for the U.S. before introducing them, making sure it builds on the positive U.K. track record.
“We're an old-line U.K. company; we're in no rush, Mr. Meyers said. “We want to make sure we do it right.”