Reuters
BlackRock’s liability-driven investment business is urging some smaller UK pension fund clients to stop splitting assets across multiple managers, as it tries to cut the complexity and risks of a strategy that imploded last year.
Asset managers worry new rules to make LDI investing more robust could render the strategy unviable for some schemes, but consultants warn BlackRock’s push could repel pension clients who want to minimise concentration risk.
LDI, a hedging strategy used by thousands of schemes to ensure their assets generate enough cash to meet liabilities, almost blew up the UK pension industry in September when the then-British Prime Minister Liz Truss’ disastrous ‘mini-budget’ sent government bond yields soaring.
Pension funds were forced to top up collateral to keep hedges in place but some schemes in so-called ‘pooled funds’ couldn’t raise cash fast enough and LDI managers cut their hedges, exposing them to losses.
BlackRock is now telling some clients in pooled vehicles that they should shift more non-LDI assets to one manager to limit the size of buffers needed to withstand future market shocks because it would mean easier access to cash.
On Wednesday the Bank of England said LDI funds would, in practice, need to increase liquidity buffers to withstand a 300-400 basis points surge in bond yields. That’s three-to-five times the typical amount held before the September 2022 crisis.
“We believe there will be a trend to put more overall assets with one manager, which will help increase collateral management optionality,” Alex Claringbull, BlackRock’s Global Head of Indexed Fixed Income & LDI, told Reuters, referring to the ability to raise cash for collateral through different sources.
BlackRock is also encouraging schemes to shift to a new, smaller range of LDI funds which are less complex to operate, and moving bigger schemes into segregated accounts, which fared better in the crisis, Claringbull said.
But pension consultants warn that asking schemes to hold more of their assets with a single manager is at odds with the investment principle of diversification across firms.
“There can be certain situations where it does make sense to have all of your investments with one manager,” said Simeon Willis from consultancy XPS.
“But where clients feel they are being compromised they will look to move assets,” he added.
BlackRock, the world’s biggest asset manager, competes with Legal & General Investment Management and Insight Investment as the three big providers of LDI, which is low-margin but integral to Britain’s defined benefit pensions industry.
Despite the crisis fallout BlackRock has told clients it remains committed to LDI.
Rich Kushel, BlackRock’s head of the Portfolio Management Group, said in a note sent to clients this month and seen by Reuters it wanted to create “more robust LDI solutions”.
