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LDI differentiator: the holding of third-party funds

Adil Gulamali
Adil Gulamali
Client Director, UK Institutional
Simon Bentley
Simon Bentley
Head of UK Solutions Client Portfolio Management

Over the coming months we will publish a mini-series of short articles that will shed light on overlooked but important factors to think about when structuring your LDI portfolio framework. First up is the integration of third-party funds.

An often under-discussed but hugely important factor that pension schemes need to consider when structuring the framework around their LDI portfolio is the integration of third-party funds. This is the ability of the LDI manager to integrate funds managed by other investment managers.

Why is this important?

Under both bespoke pooled and segregated LDI portfolios1 it is possible to integrate third-party funds – but not all investment managers offer this service. However, there are three key reasons why pension schemes should factor this in, which we will go into in more detail:

  1. The governance benefits associated with an integrated structure
  2. The independence factor in retaining the ability to choose a preferred fund
  3. The significant cost savings of not being a forced seller

Governance benefits

During the 2022 ‘mini-budget’ crisis, some of the biggest challenges pension schemes faced were accessing external assets outside of those managed by their LDI manager (in some instances, even accessing those was a problem), and then executing trades in a timely fashion to bolster LDI collateral. There are significant governance benefits to giving the LDI manager discretion to transact third-party funds, as it reduces risk and effort for the Trustee. For instance, this would negate the requirement for Trustees to deal with the operational challenges of executing transactions (especially under stressed market conditions when timing is key).

Independence factor

The ability to integrate in-house non-LDI funds within the LDI portfolio framework is a service most LDI managers provide, but what Columbia Threadneedle Investments offers in addition is the ability to integrate all third-party funds. This means pension schemes retain the flexibility to pick the funds they want to invest in, and thus retain their independence over the structure and design of their investment strategy. They will not be ‘forced’ into buying products from the LDI manager that the Trustees or investment advisors may not consider ‘best-in-class’.

Cost savings

Most pension schemes will have a large allocation to fixed income funds, especially as they get closer to their endgame. As such, being a forced seller of such assets is sub-optimal for pension schemes – in fact, the round-trip costs of selling and buying investment grade credit may, in some cases, be prohibitive. But by allowing pension schemes to fully migrate all their holdings on to the LDI platform, significant transaction costs can be avoided.

Closing thoughts

So, the merits of having an LDI manager able to integrate third-party funds into their LDI portfolio framework are significant. As well as providing benefits from a governance perspective, it also allows pension schemes to retain full independence in designing their investment strategy and can allow for very significant cost savings.

But this is just one example of how we have developed a flexible, effective and tailored LDI offering that is adapted to a constantly moving marketplace. The next article in this mini-series will explore the concept of implementation manager services and the benefits of delegating the implementation of investment strategy to a market-facing practitioner.

We have developed a flexible, effective and tailored LDI offering that is adapted to a constantly moving marketplace.

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LDI differentiator: the holding of third-party funds

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LDI differentiator: the holding of third-party funds

1 Columbia Threadneedle Investments, Our stance on bespoke and segregated LDI portfolios, November 2024

Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.
In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
 
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.
In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
 
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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