Better understanding drives demand for LDI

The issue of whether – or how – to use liability driven investment (LDI) strategies is by far the most important topic of discussion across the pension fund industry, according to the latest survey by the Investment Management Association (IMA).

The study - an overview of the UK asset management industry in 2006 – indicates that LDI strategies only have a 6% share of the country's pension fund market. However, it also highlights demand for LDI is on the increase as pension fund deficits remain trustees' main worry.

According to Richard Watts, Head of ALM and insurance at F&C, the volume of clients considering the implementation of an LDI strategy has been steadily increasing over the last couple of years. "The findings of this survey corroborate our own observations about LDI as a strategy that definitely has a momentum behind it," he said.

He mentioned a number of factors contributing to this growing interest. "First of all, I think knowledge about LDI has improved significantly over the recent past. The whole investment community - including asset managers, pension funds and their advisers – is becoming more familiar with the LDI concept and there also seems to be a better understanding of the different tools and techniques these strategies use."

Market-driven factors such as rising interest rates and strong equity returns have also had a positive impact on institutional investors' interest in LDI.

"Over the last few months, interest rate rises and equity outperformance have resulted in pensions funds looking at LDI as something more affordable for them to implement. A growing number of investors are keen to lock in equity gains and take risk off the table by using LDI," added Watts.