By Tommy Wilkes
LONDON, March 30 (Reuters) - BlackRock's liability-driven investment business is urging some smaller UK
pension fund clients to stop splitting assets across multiple
managers, as it tries to cut the complexity and risks of a
strategy that imploded last year.
Asset managers worry new rules to make LDI investing more
robust could render the strategy unviable for some schemes, but
consultants warn BlackRock's push could repel pension clients
who want to minimise concentration risk.
LDI, a hedging strategy used by thousands of schemes to
ensure their assets generate enough cash to meet liabilities,
almost blew up the UK pension industry in September when the
then-British Prime Minister Liz Truss' disastrous 'mini-budget'
sent government bond yields soaring.
Pension funds were forced to top up collateral to keep
hedges in place but some schemes in so-called 'pooled funds'
couldn't raise cash fast enough and LDI managers cut their
hedges, exposing them to losses.
BlackRock is now telling some clients in pooled vehicles
that they should shift more non-LDI assets to one manager to
limit the size of buffers needed to withstand future market
shocks because it would mean easier access to cash.
On Wednesday the Bank of England said LDI funds would, in
practice, need to increase liquidity buffers to withstand a
300-400 basis points surge in bond yields. That's three-to-five
times the typical amount held before the September 2022 crisis.
"We believe there will be a trend to put more overall assets
with one manager, which will help increase collateral management
optionality," Alex Claringbull, BlackRock's Global Head of
Indexed Fixed Income & LDI, told Reuters, referring to the
ability to raise cash for collateral through different sources.
BlackRock is also encouraging schemes to shift to a new,
smaller range of LDI funds which are less complex to operate,
and moving bigger schemes into segregated accounts, which fared
better in the crisis, Claringbull said.
But pension consultants warn that asking schemes to hold
more of their assets with a single manager is at odds with the
investment principle of diversification across firms.
"There can be certain situations where it does make sense to
have all of your investments with one manager," said Simeon
Willis from consultancy XPS.
"But where clients feel they are being compromised they will
look to move assets," he added.
BlackRock, the world's biggest asset manager, competes with
Legal & General Investment Management and Insight Investment as
the three big providers of LDI, which is low-margin but integral
to Britain's defined benefit pensions industry.
Despite the crisis fallout BlackRock has told clients it
remains committed to LDI.
Rich Kushel, BlackRock's head of the Portfolio Management
Group, said in a note sent to clients this month and seen by
Reuters it wanted to create "more robust LDI solutions".
(Reporting by Tommy Reggiori Wilkes;
Editing by Sinead Cruise and Emelia Sithole-Matarise)
