Cost and Process of Changing Your LDI Manager

State Street Global Advisors’ ambition is to disrupt the existing LDI industry through its innovative and technology-led approach to LDI portfolio management and meet the ever-changing needs of pension schemes in volatile markets.

Why Change Your LDI Manager?

Schemes change their liability-driven investment (LDI) manager for various reasons. Paramount among them is the choice of lower fees. Schemes also seek to benefit from an improved level of service, better-quality and timely reporting, and a deeper level of engagement with their LDI provider.

More recently, we have seen an increase in schemes choosing State Street Global Advisors as their LDI manager. Improved portfolio efficiency, better-quality and customized reporting, and lower fees could be some of the ways clients have benefitted from switching to State Street Global Advisors, with minimal disruption or transition costs.

State Street Global Advisors’ ambition is to disrupt the existing LDI industry through its innovative and technology-led approach to LDI portfolio management and meet the ever-changing needs of pension schemes in volatile markets.

Get the Transition Right

Through our relationship with Van Lanschot Kempen Investment Management, our dedicated transition project management team have been able to transition clients quickly, efficiently and at minimal cost. We have moved clients with pooled and segregated exposures—portfolios that have derivatives and repo positions—for little or no transaction cost and with no out-of-market exposure.

In collaboration with the investment consultant, we can model the current exposure of the LDI mandate with the incumbent manager and propose trading or transfer of assets that would replicate the existing level of hedging against the liabilities to create a new LDI portfolio.

To this end, we will first determine the suitable transition period depending on the amount of trading needed. Throughout the transition, our LDI team will provide regular updates on the progress. Finally, upon completion, we will provide a report on the transition, with a detailed review of the portfolio before and after trading.

We would be happy to talk to trustees in detail about how our experience, quality of service, pricing, and portfolio management technology can help with managing their scheme.

The Usual Concerns

Common client concerns while changing the LDI manager often focus on the market risks and transaction costs involved. Let us look at some of these considerations:

Pooled Fund Investors

• A common dealing date can be agreed upon between the incumbent manager and State Street Global Advisors to avoid any out-of-market exposure.
• If holdings are in unleveraged and leveraged gilts, or index-linked gilt funds, the transition can usually happen without transaction costs. 
• Transition of swap-based funds may incur some transaction costs, but, where of benefit to the mandate, there could be a move from swap to gilt-based funds to alleviate the transaction cost of entering new swaps. This may also make sense from the perspective of relative value, as well as reducing basis risk, if the scheme has gilt-based liabilities.
• Depending on the size, the transition can be spread across multiple dealing days to minimise transaction costs and market impact.
  

Segregated Mandates

• State Street Global Advisors can often simply step in on the account managed by the incumbent manager at no cost to the client
• We have a dedicated and experienced team of specialists that handle in specie events, ensuring that unleveraged LDI assets can transition at no cost or with out-of-market exposure.
• Where the portfolio includes derivatives, there are several approaches to help avoid out-of-market exposure and minimise or eliminate costs depending on the type of instrument and legal agreement; for example:
  1. Cleared swaps can be ported at the clearing house with no out-of-market exposure
  2. Depending on the nature of the legal documentation, it is possible to novate bilateral swaps to a new account, with no out-of-market exposure or transaction costs.
  3. Transition of repo portfolios can also be completed with no out-of-market exposure, either through aligning roll dates with the incumbent manager or, where necessary, executing back-to-back trades with a broker (with no transaction cost or change to underlying trade terms).

Why Choose State Street Global Advisors?

While there may be one-off costs related to transitioning to a new manager, they could quickly be outweighed by the benefits made available to the scheme. We outline a few of them below:

Portfolio Efficiency

As part of the transition, the collateral efficiency of the portfolio can be reviewed and, where appropriate, improved. Many of the clients who we have onboarded have seen such improvements in collateral efficiency help reduce portfolio leverage and deliver material savings in terms of ongoing funding costs.

An example is a portfolio that recently transitioned across to our LDI team. Its new design involved switching into more collateral-efficient bonds at each five-year tenor point across the curve, resulting in a reduction of leverage, hence saving the client over 15 basis points on exposure annually in funding costs (at prevailing funding rates, as of 15 March 2024).

Improved Level of Service

LDI remains a complex part of client portfolios. We offer a tailored service and speedy analysis that clients may not get with their incumbent managers.

With the increased volatility in the rates markets over the last two years, clients have welcomed the timely insights from our portfolio managers to discuss the impact of market moves on their portfolios, but also our ability to facilitate transitions and changes in their mandates.

Improved reporting

We offer daily access to LDI portfolio valuation and analytics reports, including all the information available to our portfolio managers.

Along with clients and their advisors, we can build bespoke daily reports in a format that best suits their requirements. These reports are complemented by our comprehensive weekly and monthly reporting, providing clients all the details relevant to their portfolios, including stress test analysis and, importantly, performance and attribution reporting.

Lower Fees

Schemes may benefit from paying lower management fees by considering other LDI providers. The savings here could very quickly dwarf any transition costs.

With the One State Street solution, our schemes can benefit from the efficiencies and pricing of operating all services from asset management to custody as one relationship. Clients may also benefit from our scaled global asset management business across cash, fixed income and equity.

Technology-led Portfolio Management

We have a technology-led approach to portfolio management. At the heart of this enterprise is the Charles River Investment Management Solution (CRIMS), a system designed to manage every aspect of a LDI mandate, including portfolio management, trading, compliance and collateral management, allowing us to not only manage portfolios accurately and with scale, but to also provide state-of-the-art, timely reporting to clients, including performance attribution.