Consider alternative de-risking assets as Gilt yields fall, says LGIM

Legal & General Asset Management (LGIM) has called on UK pension funds to consider alternative de-risking strategies, as Gilt yields dipped into negative territory.

The UK’s largest asset manager said, in light of the Bank of England’s quantitative easing programme, it was likely the prevailing low yields, and the occasional negative yields seen on short-term paper on 10 August, could last for even longer than expected.

As a consequence, it urged schemes to use real assets and corporate bonds for de-risking rather than rely solely on Gilts.

LGIM’s head of institutional distribution Mike Walsh said that such alternative de-risking assets should be considered by gradually maturing defined benefit (DB) funds.

“Adopting cashflow-matching techniques can assist schemes as they mature and become increasingly cashflow negative, thereby avoiding the need to be a forced seller of assets at a time when potentially a scheme can least afford it,” he said.

“Market dynamics since the Brexit vote have reminded us that different types of real assets can diverge wildly in response to market events.”

Walsh added that UK-quoted infrastructure and utilities had performed well since the UK’s vote in June to leave the European Union.

“On the other hand,” he added, “we saw significant falls in the prices of UK REITs in the immediate aftermath of the vote, as well as some unit price reductions and suspensions from the managers of physical property funds.”

Aberdeen Asset Management, Standard Life Investors, M&G and Aviva Investors all announced either suspension of trades on their property funds or introduced a discount on redemptions in the wake of the vote.

“Although there are some signs the market is now becoming less pessimistic about the prospects for UK property,” Welsh said, “such short-term volatility can represent opportunities for longer-term investors such as pension schemes.”

Pension funds will potentially be forced to rely on alternatives to Gilts in the wake of the UK central bank’s stimulus programme, which has seen the bank struggle to find sellers of UK debt.