UK - Investment managers looking to enter the LDI space should be aware of the high skill set and cost barriers, Investit Intelligence has warned.
A new report by the firm claimed fund managers should "think twice" before entering, and added: "There are obstacles to investment management companies thinking of entering this marketplace for the first time. New staff skills, technology and business processes required to build and support LDI are costly to acquire, increasing the competition in the marketplace."
The Investit report also warned that liability immunisation products were likely to move to a lower fee structure, which many investment managers might find unattractive.
"There is also more competition; offering immunisation funds and cashflow modelling invades the space of the actuaries and investment consultants," the report found. "Investment banks and insurance companies are also approaching trustees and plan sponsors directly with offers of LDI products."
It claimed the front office needed financial engineering skills, while operations and technology staff required expertise to deal with OTC derivatives, used in liability immunisation products and hybrids.
Performance and reporting teams would also require skills above and beyond those of dealing with physical assets and legal teams must be capable of dealing with the new requirement for derivative agreements with multiple counterparties.
Investit did however point out that LDI was "here to say", and said such products could create new commercial opportunities for fund managers, allowing them to compete for a real role in liability matching.
Richard Phillipson, principal at Investit told Global Pensions that the UK market had recently seen a marked increase in the focus on liability matching, and pointed to a number reasons behind the growth of LDI.
"Demographic and regulatory changes have increased liabilities and accounting regulation changes have made these more visible," he said. Also, there are now derivative instruments, such as swaps, which allow a closer match between assets and liabilities."
He also pointed out that the change in how sponsors and schemes thought about their liabilities and assets still represented a major opportunity for some fund managers. "Other managers should think twice about joining in.”
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