As the UK Liability Driven Investing (LDI) market has grown over the last decade the KPMG LDI Survey “Navigating the LDI Market” has become a really useful tool for understanding the growth of the market at a high level and who the major players are from an asset management perspective.
The latest version of the survey, covering data up to the end of 2014 was released in June 2015 here.
What are my main takeaways from the latest survey ?
1. Total liabilities hedged increased to £657bn (or £1,164m of Pv01 exposure) – vs £510bn the previous year. So where does this leave the industry in terms of overall hedge ratio?
It’s always tough to estimate the aggregate industry liabilities due to the different measures used, but the PPF 7800 index which tracks one measure gave a total liability figure at Dec 2014 of 1,502bn. Meaning that on this basis the aggregate hedge ratio of the industry was around 44%. not surprising then that the overall funding position continues to be dominated by interest-rate driven moves in the liabilities, a point that I made in a recent blog here.
2. We know that 2014 ended with a large fall in rates, and associated increase in value of bonds and related hedges, KPMG estimate that around 75% of the increase in liabilities hedged could be put down to rates moves, with £32bn the growth attributable to new mandates.
3. Pooled LDI accounts for only about 10% of liabilities hedged, but around half of the liabilities by number of mandates. With a very competitive market in products with good 3-year track records now, pooled LDI is seeing serious growth with the amount of liabilities hedged doubling in the last year.
4. Equity exposures reported by the LDI managers increased quite substantially with a rise in mandates from 140 to 200 (across options, TRS and futures), and a doubling of notional hedged using options from £20bn to £40bn. The instruments used range from TRS, futures and options.
5. Type of LDI mandate. The last 12 months have seen the development of a much broader range of “non-passive” approaches to LDI hedging than was previously available, most of the main providers now offer various flavors of semi-passive or active management, endeavoring to harness mispricings between gilts and swaps (for example) to try and outperform, rather than just hedge the liability benchmark. Our experience when talking to clients is that these approaches are very popular and increased breadth and competition in this area is a positive development.
The LDI market continues to grow in the UK as more and more pension schemes adopt a risk management mindset toward their interest rate exposure. So far the LDI products provided by the main asset managers have played a key part in helping schemes manage these risks and I expect them to continue to do so as the next few years unfold.