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Turbulence to push pension funds toward LDI, fiduciary management, says BlackRock

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  • Turbulence to push pension funds toward LDI, fiduciary management, says BlackRock

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UK - Recent market turbulence will drive pension funds into fiduciary management and liability-driven investment (LDI), according to BlackRock.

Juliet Bullick, head of UK institutional business, told IPE finance directors across UK companies would, "ideally and ultimately", look to address the pressure of defined benefit liabilities by having no liabilities at all, with LDI being one of the tools offered for de-risking.

However, she conceded that, despite a turbulent month on global stock markets - triggered partially by Standard & Poor's downgrade of US debt, as well as concerns over sovereign debt in the euro-zone - pension funds are reluctant to change long-standing investment strategies immediately.

"Clients are taking stock right now," she said. "It's too soon for people to have decided they are going to move away from what they thought they were going to do, or to have decided they are going to introduce changes.

"We are seeing a lot of focus on [the effects the fall in markets had on funding positions], so we are talking to our clients daily on that."

Bullick questioned if the status quo in the UK pension industry would be sufficient to deal with the problems now arising and argued that there would be an increased focus on de-risking.

"Are the trustees equipped to deal with swift changes in markets?" she asked. "Is the scheme's fixed benchmark really going to help it through turbulent times? Or would it be better to delegate to professional investors?"

Bullick argued that, as a result of these questions, there will be an "increased demand" for diversified growth assets, as well as fiduciary management and LDI.

But she stressed that returns could still be achieved, even if not from the traditional sources used by UK schemes.

"The search for return will accelerate a trend we've already seen - an increased demand in alternatives," Bullick said.

Arguing that hedge funds and private equity will receive more attention, Bullick also said that, once trustees decide to invest in more illiquid assets, as much as 10% of their portfolios can be exposed to such assets.

She said pension funds, with their long-term investment horizon of several decades, could afford to have an "appropriate amount locked up in illiquid assets".

"Am I talking to my clients today about making an investment in a global macro hedge fund?" she asked. "Probably not. It's more about listening to what they are wrestling with and providing a solution that's most appropriate."

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