Executives at Legal & General Investment Management America, already well-versed in deleveraging as an LDI powerhouse, want to do some leveraging of their own to expand its business in ESG and defined contribution investments.
Leveraging the expertise of its London-based insurance parent, Legal & General Group PLC, helped Chicago-based LGIMA build its U.S. liability-driven investment and fixed-income business when the firm was founded 12 years ago, CEO Aaron Meder said in an interview. LGIMA managed $86.25 billion in total U.S. client assets as of June 30, including a combined $79 billion in LDI and fixed income.
Becoming a market leader in LDI and fixed income was one of three original goals LGIMA set for its business, Mr. Meder said. "I'd say we've achieved that," he said.
Mr. Meder said now the company can turn to its other two goals: leveraging its derisking capability to expand its U.S. defined contribution plan business, and using its U.K. parent's capabilities in environmental, social and governance investing to build those strategies in the U.S.
In defined contribution, Mr. Meder said, the task for LGIMA is "taking what we've built from a DB and derisking perspective to DC plans … and (also) applying it to retirement income solutions."
So far, LGIMA has been able to grow its defined contribution business by marketing to its 255 defined benefit plan clients that also have DC plans, Mr. Meder said. "This is where the success we've had in the DB space is paying some dividends, where we work with them to design DB design solutions," he said. "Given that we've had success at the upper end of that market and that a number of those plan sponsors also have larger DC plans, and the fact that we've been helping them with solutions and not selling products, they're much more willing to sit down with us and talk about what they're doing with the DC plan."
LGIMA's assets managed for U.S. defined contribution plans have grown to $3.55 billion as of June 30, from zero five years ago.
Mr. Meder said LGIMA also is leveraging its derisking expertise in post-retirement investing for DC plan participants, using a combination of long-duration bonds and "a bit of a multiasset approach. You shouldn't sell all of your return or growth assets as you derisk. We suggest you continue with that through retirement but combine that with some sort of annuitization."
As an example, Mr. Meder said, "If you take 15% of assets and take a deferred annuity that kicks in at (age) 80 and then 85% of the assets you put into a multiasset retirement income solution for those 15 years (between ages 65 and 80), that gives you a real defined time frame that you need that money to work for, then you also have a backstop at age 80 to make sure you have some stable secure retirement income throughout your lifetime."
While LGIMA has seen hefty growth on DC-related investment assets over the past five years, building its ESG strategies means not only taking the U.K. parent's expertise and running with it, but also broadening its client base from its corporate plan LDI focus — specifically to endowments, foundations and public pension funds, Mr. Meder said.
"Public funds on the East Coast and West Coast are interested in those (ESG) discussions, and endowments and foundations as well," Mr. Meder said. "One of our largest clients said they were interested in taking their current traditional market-cap global equity portfolio and implementing an ESG solution that offered similar risk and return but also significantly reduces carbon emissions and increases green revenues."
Mr. Meder said LGIMA has built up its capabilities in proprietary ESG data and analytics "to provide a range of options that are increasingly clean in relation to (investors') traditional market-cap benchmarks; you show expected tracking error, expected return, and you let them choose the pragmatic trade-off that makes sense based on their risk-and-return requirements. What we found is in many cases you can offer a solution that provides similar risk and return but a significantly cleaner portfolio. That's something we're seeing a lot of interest in … The ESG data and analytics we've invested in can support those discussions. It's not just repackaging external data. It's a combination of external and internal data that provides a proprietary approach."
LGIMA had $1.91 billion in ESG strategies as of June 30.
Mr. Meder said the hiring of John Hoeppner as LGIMA's head of U.S. stewardship and sustainable investments in June from Arabesque Asset Management, where he was senior independent adviser, complements the 13-person ESG team in the U.K.
Among other investment strategies, Mr. Meder said LGIMA also sees opportunities in its private credit offering, again leveraging the capabilities of the U.K. business. "Infrastructure debt, real estate debt and private corporate debt are three things we're building out and aggressively expanding," Mr. Meder said. "Those are three areas of debt where, if you stay in the investment-grade space and longer-dated space, it complements an LDI public corporate bond portfolio to add additional yield and diversification so you can defease those liabilities and match them yourself in a more efficient way. It's a way to pick up another 100 basis points of yield and diversify at the same time. It's the stuff insurance companies themselves are buying."
LGIMA had $887 million in private credit AUM as of June 30.