UK - Most UK pension funds will steer clear of liability-driven investment strategies as just another marketing fad, according to the Edinburgh-based WM Company, an investment performance evaluation consultancy.
Eric Lambert, head of client consultancy, and Alastair MacDougall, head of research at The WM Company, told journalists in London today that the current fashion for liability-driven investment (LDI) and the search for alpha was driven by investment managers and management selection consultants.
They said pension fund trustees in general would avoid such strategies as, “in our view, it is unlikely that liability-led investing will become the predominant approach to investing pension schemes assets”.
Lambert said pension fund trustees would be wary of what looked like old ideas dressed in new clothes. He said: “Trustee boards may have thought asset liability modelling ALM meant matching liabilities to assets. If they are then asked to move to liability-led investment a lot of trustees may not wear it [because ALM seemed to the trustees to be doing the same_thing].”
In effect, the differences between ALM and LDI were too small and esoteric and lost on trustees without a “major education program”.
MacDougall said he also doubted whether a liability-based benchmark would appeal to most UK pension funds. “We are seeing some funds operating with a bond plus X% benchmark. Within this set up the manager becomes responsible for generating the X% at his discretion.
“Bond plus has been termed the new balanced mandate. We think it will be somewhat of a struggle to convince trustees that ‘new‘ balanced management is a superior version of the discredited 'old’ balanced management. We don’t expect it to be taken up in a big way.”
MacDougall said that the large pension plans that are most likely to be able to implement LDI have already invested considerable effort into switching from balanced mandates to specialist mandates. They will be reluctant invest more effort in a switch to LDI.
He also said that manager selection consultants were over -optimistic about their ability to pick managers with alpha – or risk-adjusted returns - skill. ‘”The ex-ante identification of managers with alpha skill is still something of a holy grail. We are sceptical about managers ability to access alpha in advance. Obviously the alpha is there but the risks of finding it ex-ante are increasing as a multiple.”