Bespoke Liability Driven Investment (LDI): increased transparency, flexibility and accuracy

Yes, schemes can often earn higher returns by using risk free collateral assets more productively than holding them as excess collateral in pooled LDI funds.

By moving to a bespoke LDI mandate, excess collateral can be invested in credit or other liquid assets to capture risk premia and target higher returns if underlying liquidity is sufficient when collateral is required.

In addition to unlocking dead money, bespoke LDI solutions have several key advantages over multi-investor pooled LDI funds:  

• Greater precision in how a scheme matches its liabilities, increasingly important as pension schemes de-risk and want to run lower risk strategies vs their liabilities.

• Greater control as trades can be placed at specific market levels and pulled back if necessary, whereas LDI pooled fund instructions are required a day or two in advance – meaning you don’t know what you’re buying.

• Each client is provided with a bespoke hedge and pool of collateral. A bespoke mandate is unaffected by the decisions of other schemes.

• Far greater flexibility  in terms of rebalancing assets, with a more customised window to top up collateral levels when needed, rather than the formulaic approach of multi-investor pooled LDI funds. There is also a far broader toolkit of instruments for investment.

• Having the LDI and credit mandate managed alongside each other can also help in times of market stress or large anticipated redemptions from credit assets. This can ease some of the cost tensions of rapidly liquidating credit in a stressed market.

• Enhanced portfolio transparency, with clients and their advisors receiving detailed daily reports. In a pooled fund, clients often only see fact sheets on a monthly basis.                                                                                                      
• More opportunity when settling liabilities with an insurer to enter “price-lock” portfolios and potentially deliver assets in specie to lower trading costs and out of market exposures.

Switching over from multi-investor pooled LDI funds to a bespoke LDI mandate is a straightforward, cost-effective process – schemes that make the switch will see immediate benefits.  

In addition, Cardano’s use of ‘funds-of-one’ offers the advantages of a segregated LDI mandate with the operational and tax efficiency of a pooled fund.

In the past, segregated funds have sometimes been seen as either too costly or complex for smaller pension schemes. That’s no longer the case. Bespoke mandates are now increasingly accessible to schemes with total fund assets as low as £150-200 million, often costing much the same as multi-investor pooled LDI funds.  

A growing number of smaller pension schemes now appreciate the benefits of turning to a bespoke LDI approach.  

Thanks to the cost of a bespoke portfolio becoming increasingly competitive, smaller and medium-sized schemes can now draw on the customised investment support they need to navigate an increasingly unpredictable and complex environment.