LDI Solutions Support Surge in Custom Institutional Portfolios

A new Cerulli Associates analysis shows institutional custom solutions assets stood at $1.7 trillion at year-end 2016, and assets are projected to grow 10.4% to 1.9 trillion by 2021.

The latest report published by Cerulli Associates seeks to develop a working definition of “custom institutional investing solutions.”

“True institutional custom solutions are a relatively new phenomenon in the modern history of asset management and there remains a great deal of debate in the industry regarding what constitutes a custom solution,” says Christopher Mason, senior analyst at Cerulli.

The framework established by Cerulli researchers suggests the “custom institutional solution” label is appropriate for “any strategy managed for an institution characterized by the major functions of liability-driven investing (LDI), multi-asset-class solutions, outsourced chief investment officer, and pension risk transfer or pension settlement transactions.”

“Cerulli suggests that LDI is the ultimate custom solution and that the growth of the discipline is intertwined with the developments in the U.S. corporate defined benefit (DB) plan universe,” Mason explains. “LDI is used by corporate plans in the United Kingdom, Canada, and elsewhere; however, the U.S. corporate market is by far the largest.”

Alexi Maravel, director of Cerulli’s institutional practice, observes that the LDI topic is “probably the most competitive pricing environment among the different types of institutional custom solutions available today.”

“In such an environment with pressure on pricing and rising cost of resources, Cerulli believes more mergers and acquisitions among LDI managers could occur in the near future as organizations look for scale in their delivery of services,” Maravel says.

Cerulli’s report, “North American Institutional Markets 2017: Strategies for Implementing Customized Services Across Client Segments,” also covers the increased use and adoption of collective investment trusts (CITs), and the ongoing influence of investment consultants.

Details from the Cerulli report

Cerulli’s reporting shows institutional assets rose 5.5% year over year to roughly $20.7 trillion as of year-end 2016, reflecting growth across defined contribution (DC) plans, state/local DB plans, corporate DB plans (including Taft-Hartley), insurance general accounts, and nonprofit institutions. According to Cerulli’s proprietary sizing models, total institutional assets are projected to reach nearly $25 trillion by 2022.

“Relatively low long-term interest rates remain a challenge to the finances of insurance companies and to the internal investment professionals charged with company investments,” Cerulli notes. “However, the actual impact of rates varies by company and the type of business the company writes.”

Cerulli researchers highlight that approximately one-quarter (26%) of surveyed managers’ product development plans will be allocated to multi-asset-class products during the next 12 months.

“The leading priority among managers’ product-related initiatives is building out new vehicle offerings. For managers that don’t currently offer collective investment trusts (CITs), 86% of managers are currently considering offering them, with the remaining 14% indicating they have formal plans to build them during the next 12 months,” Cerulli explains. “Target-date strategies make up approximately 19.4% of total CIT assets held in DC plans.”

 The majority of managers (43%) anticipate adding portfolio specialists/client portfolio managers to their institutional sales teams during the next 12 months. Other findings show surveyed providers indicate that a lack of internal resources and a desire to improve governance processes are the top reasons institutional investors pursue OCIO service offerings.

Information about obtaining Cerulli Associates research is available here.