As a global investment manager, we help institutions, intermediaries and individuals meet their goals, fulfil their ambitions, and prepare for the future.
Better. Stronger. Faster. Future-proofing an LDI strategy for the market environment to come
1/07/2020
There’s an old proverb that loosely translates to Prepare your umbrella before it rains. We firmly believe that now is the time for plan sponsors to tune up their LDI portfolios, even though the sun is still shining. Credit market conditions, as well as structural challenges, create a need to re-design LDI portfolios to succeed in the years to come. This paper examines the changes to the investment landscape and structural inefficiencies within current LDI practices which make a more innovative approach to LDI both timely and of great consequence. Our aim is to offer insights on creating a more powerful and robust LDI portfolio. One that is powerful enough to deliver sufficient alpha to offset the downgrade-driven performance drag versus the liability, and robust enough to achieve true manager diversification that persists over different market regimes.
Introduction
It’s hard for investors to be concerned about LDI portfolios since nothing alarming has happened. They have largely “delivered”, particularly when their purpose is seen to be one of reducing funding volatility. We fear this has lulled investors into a false sense of security where they may not appreciate the dangers lurking just beneath the surface of their LDI portfolios, especially given the latecycle environment we’re in.
We wrote this research paper because we believe there is a profound need to rebuild LDI portfolios to endure and thrive in the environment of the next 10 years, which we believe will be characterized by:
- lower returns on risky assets
- elevated downgrade activity due to high leverage and shareholder-friendly maneuvers
- persistent benchmark issuer concentration
- structural liquidity shortages hampering the ability to buy and sell corporate bonds
This paper builds upon the extensive research Schroders introduced in prior papers–such as the Folly of False Precision and Satellite/Satellite–which detail the practical challenges and risks of hedging US pension liabilities with a multi-manager approach, and introduces a unique, multi-faceted approach to LDI portfolio construction.
While corporate pension funded status has been relatively flat since the financial crisis (see Figure 1 attached), plan sponsors have enjoyed relative success with their LDI portfolios.
Click below to download
This site is for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy any security which may be referenced herein. This site is solely intended for use by institutional investors and institutional-investment industry consultants.
Schroder Investment Management North America Inc. (“SIMNA”) is an SEC registered investment adviser, CRD Number 105820, providing asset management products and services to clients in the US and registered as a Portfolio Manager with the securities regulatory authorities in Canada. Schroder Fund Advisors LLC (“SFA”) is a wholly-owned subsidiary of SIMNA Inc. and is registered as a limited purpose broker-dealer with FINRA and as an Exempt Market Dealer with the securities regulatory authorities in Canada. SFA markets certain investment vehicles for which other Schroders entities are investment advisers.
Schroders Capital is the private markets investment division of Schroders plc. Schroders Capital Management (US) Inc. (‘Schroders Capital US’) is registered as an investment adviser with the US Securities and Exchange Commission (SEC).It provides asset management products and services to clients in the United States and Canada.For more information, visit www.schroderscapital.com
SIMNA, SFA and Schroders Capital are wholly owned subsidiaries of Schroders plc.