Pension schemes that invested in liability-driven investment funds run by BlackRock and other managers are being advised to sell their holdings following last year’s gilt market turmoil.

In a move expected to lead to outflows at some of the biggest asset managers, investment advisers XPS Pensions and Barnett Waddingham have cut their ratings on some pooled LDI funds to their lowest ranking, where a holding is not recommended.

The downgrades have been communicated to hundreds of pension funds, including FTSE 350 schemes, which used LDI strategies to help manage interest rate and inflation risks.

Only “pooled” fund arrangements, where a large group of pension schemes are invested together, as opposed to an individual scheme fund, were affected by the downgrades.

Four months ago the pensions sector was struck by a liquidity crisis, triggered by September’s bungled mini-Budget, which exposed weakness in some of the largest LDI funds.

Some schemes invested in pooled LDI funds struggled to meet collateral calls required under their contracts and reportedly suffered losses.

XPS and Barnett Waddingham, which advise hundreds of trustee clients investing in pension schemes using such funds, were among the consultants to review LDI managers after the crisis, which is now the subject of several parliamentary inquiries.

XPS downgraded three managers’ leveraged pooled LDI fund ranges to either amber — a “watch” rating — or red. It declined to disclose the names of the affected managers.

Simeon Willis, the adviser’s chief investment officer, said the managers it had reviewed “fulfilled their obligations according to their Investment Management Agreements” but “in some cases this [contract] was less flexible than would be desirable and inadequate client service was also a key factor.” 

Barnett Waddingham said it had decided to downgrade managers’ pooled LDI funds after meetings with the companies that “focused on the operation of the funds during the period, client servicing and importantly, the changes made to the operation of the funds in light of both the gilt volatility and updated guidance from the regulators”.

BlackRock is one of three big participants in the LDI market, along with Insight Investment and Legal and General Investment Management (LGIM).

BlackRock said: “The decisions taken by XPS and Barnett Waddingham are disappointing, in particular because there were a number of factual inaccuracies and misunderstandings in the research, in addition to some points that need to be clarified.

“We look forward to working closely with both consultants, with whom BlackRock enjoys a productive relationship, to address these issues, as well as to take action on their concerns, so that we can continue to best support our mutual clients’ interests.”

In response to the BlackRock statement, XPS said it had shared the conclusions of its review, and the factual basis of these, with affected managers several days before advising clients, and had given “explicit opportunity for all managers to correct any inaccuracies, and reviewed all manager responses in detail”. 

Barnett Waddingham said: “We made [BlackRock] aware of our change in their rating, along with our rationale and continue to engage with them on the issues raised.”

Insight Investment said its “dealings with consultants are confidential” and that its LDI funds “operated as normal through the dislocation”.

LGIM as well as smaller managers Schroders and Columbia Threadneedle declined to comment.

Bob Campion, senior portfolio manager with Charles Stanley Fiduciary Management, an adviser in LDI funds, said it was “reviewing all our managers . . . as part of our standard rigorous due diligence process”.

He added that in the case of a downgrade, the standard industry practice was to advise clients to sell their holdings. “However, as with any advisory relationship, the decision-making power sits with trustees.”

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