Clients Want To Learn About Liability-Driven Investment Strategy

The consultancy business is handling increasing queries from clients who want to adopt a liability driven investment (LDI) approach and need help going about it. Corporate pension plans in particular need more long-duration products to de-risk, so 44% of the surveyed consultants anticipate an increase in fixed-income allocations.

Unsurprisingly, then, asset-liability management or LDI services are the most widely offered specialized services among the consultants who talked to Cerulli for its new study on The Evolving Investment Consulting Industry and Business Model. An impressive 82% of those surveyed offer ALM/LDI services, compared for example to the 59% who offer socially responsible investing or its cousin, environmental, social, and governance (ESG) research support. Fifty nine percent, also, conduct operational due diligence.

For pensions these days, decision making is about managing a glide path that doesn’t become a fiery crash. In such a climate, consultants shouldn’t think of themselves as sales people selling particular products in boxes. They should think of themselves, rather, as assisting their clients in looking for those products that will play a specific role in the client’s overall portfolio, such as hedging against inflation or reducing the risk of interest rate moves. Products that may serve such needs include alternative assets, emerging market assets, and multi-asset-class products. Those three are among the products that consultants expect will “attract additional institutional assets in the near term” Cerulli reports.

Alpha and Its Skeptics

Some clients are souring on the hunt for alpha. They have concluded that they pay too much for it, and they are moving toward greater passivity in their investing. Cerulli says this isn’t a cyclical fact but a longer term trend and it “poses a threat to active managers struggling to produce significant alpha over the long run.”

Consistent with this, Cerulli expects that the trend of institutional investors’ increased use of exchange traded funds will continue. ETFs serve a variety of purposes for institutions, including transition management, and the acquisition of both tactical and strategic exposures to a given asset class, industry sector, global region, or single country. A little less than 15% of consultants plan to increase the use of ETFs, but 85% propose to maintain their current level of reliance, so virtually nobody expects to decrease their use of it.

Despite the secular trend to passivity, consulting firms expect to add new employees to their organizations. This is for a straightforward reason: due to their outsourced chief investment officer business and to the need to have a global footprint, consultants need more people.

The report also says that the corporate defined benefits market, with $2.6 trillion in assets as of 2012, will continue for some time to offer opportunities for asset managers and consultants, “as many derisking strategies, including an LDI glidepath approach and pension buyouts, require a high level of coordination between various parties involved in a specific derisking approach.”

OCIO and ESG

Consultants surveyed by Cerulli Associates expect that their OCIO business will expand in coming years, comprising 18.5% of their total assets under advisement by 2016. The corresponding figure was 12% at the end of 2012. That was up from just 9% at the end of 2009.

Michele Guiditta, associate director at Cerulli, said, “Over the past decade, institutional investors have been seeking more proactive advice and ceding portfolio decision-making, as investment options have grown increasingly complex and markets have become more volatile.”

Finally, let’s return for a second to the ESG strategies, and related support services, we mentioned so briefly above. Cerulli asked consultants which asset classes have the most to gain from the growth of ESG strategies. Forty three percent of the respondents reported that alternative assets could benefit.

“Although the majority of existing alternative ESG funds fall under private equity in the form of venture capital and real estate funds, investment consultants believe there is a lot of room for hedge funds to develop more ESG strategies.”