23 May 2017
Liability-driven investment, or LDI, has been one of the most successful components of the investment strategies implemented by pension schemes over the recent past.
Small and medium sized schemes typically invest in LDI pooled funds to implement their LDI strategies. The LDI pooled fund market has gone through a number of evolutions over time, and a new suite of pooled LDI funds have recently come to market aimed at schemes that want to increase their levels of liability hedging even further. Collectively, we refer to these funds as “Growth LDI”.
What makes these new funds quite interesting is that, unlike traditional LDI pooled funds that comprise a portfolio of cash overlaid with derivatives, in these new funds, the cash element has been invested in growth strategies to improve returns. That means a scheme can transfer some existing growth assets into these funds and benefit from additional liability hedging, whilst still maintaining exposure to growth assets.
Who should consider “Growth LDI” funds?
There are three types of pension schemes that should seriously consider these types of products:
- Poorly funded schemes that need to increase their levels of hedging but cannot afford to sell growth assets;
- Clients who are limited to maintaining a minimum amount in growth assets, but would like to hedge more of their liabilities; and
- Clients pursuing a buy-in of their pensioners using their existing hedging assets, as these funds allow them to potentially increase the size of that transaction, without reducing hedging.
In my latest video I talk about “Growth LDI” funds in more detail - watch it here
Pension schemes should also be aware of the latest changes in market regulation – the new rules which affect all LDI portfolios. Gavin Orpin outlines what these are in his video – watch it here