U.K. money managers are putting their U.S. fixed-income acquisitions to work, hoping that local presence will help them to get a foot in the door at U.S. pension funds in order to introduce their form of LDI.
Derivatives and other synthetic instruments are commonly used by U.K. pension funds implementing liability-driven investing. In the United States, however, pension fund officials more often employ physical securities to hedge liabilities, consultants say.
“I have spoken with U.S. and U.K. shops and (there is recognition) that the U.K. way is a superior way to do it,” said Chris Redmond, London-based global head of credit at Towers Watson & Co. “We have been considering this for four or five years, but to date, generally, it has been met with resistance” in the United States.
A survey by SEI Investments of 130 corporate pension executives from the U.S., Canada and the U.K., published December 2013, found 57% of global plan sponsors are using LDI strategies. For U.S. survey participants, 71% have an LDI strategy in place. By assets, 49% of global respondents' portfolios on average, are allocated to LDI strategies. Among U.S. and Canadian plans, 72% of those strategies use long-duration bonds as a hedge.
But before even beginning to talk to U.S. pension executives, U.K. firms need to build or — as in the recent cases of Insight Investment Management (Global) Ltd.'s parent company, BNY Mellon Asset Management, and Schroders PLC — acquire the expertise and necessary track record in U.S. credit management.
“In the U.S., LDI rightly or wrongly has become synonymous with managing credit,” said Gordon Fletcher, partner at Mercer Investments in New York. U.S. plans use credit-based discount rates — a significant difference to the U.K.'s largely gilt-based discount rate. “And so to really just get your foot in the door, you need to have some demonstrable track record in managing credit. If you don't have that, it is very difficult to even have conversations with U.S. pension plans. Those looking to set up shop in LDI need to acquire that expertise or build it up or buy a company with that expertise.”
Acquisition also adds scale, an important element, said Jeffrey Stakel, partner at money management consultant firm Casey, Quirk & Associates LLC, Darien, Conn. Scale is “essential when it comes to building a profitable LDI business.” An acquisition is also a faster way to get a local footprint. “Currently, there is a lot of money on the sidelines, and LDI managers expect those assets to flow into the system as rates rise. If this happens before a manager has gained traction in a new geography, they may be too late.”