LDI provider Insight Investment rocked as assets slump 28%

One of the biggest players in last year’s crisis in the UK gilt market has revealed a major drop in assets under management.

Insight Investment, which provides liability-driven investment products (LDIs), posted a 28 per cent drop in assets from £767.6bn to £555.2bn in 2022 following last September’s chaos.

The company blames the sharp drop on Autumn’s mini-budget, when Liz Truss’ government announced a £45bn package of unfunded tax cuts.

Crisis quickly engulfed the sector, dominated by Insight, but also by rivals BlackRock, Schroders and Legal & General, with UK government bond prices plummeting and yields skyrocketing on the prospect of higher borrowing costs.

In its results, published in April, Insight said: “The reduction in assets under management was due to adverse market movements that reduced liabilities for our pension clients across our LDI portfolio.

In the United Kingdom, the government bond market came under particular pressure following the mini budget, causing a sharp rise in government bond yields, with both a fall in the present value of the assets Insight manages and an outflow of cash from our customer. held assets that were necessary to hedge collateral.’

The results also showed that despite the carnage, Insight’s highest-paid executive took home £6.7 million last year, a sharp increase from £4.2 million the year before.

The company — which is owned by investment banking group BNY Mellon — declined to say whether the pay raise was awarded to CEO Abdallah Nauphal, an industry veteran known as the “godfather of the LDI market.”

The reward came as Insight posted a profit of £149.1m, up from £125.3m the year before.

LDI products were used by pension funds to hedge against risks caused by unfavorable movements in inflation and interest rates, but last autumn the speed of UK government bond sell-off in the aftermath of the mini-Budget led to a rush of cash calls that wrong -paid many LDI managers.

As bond prices fell, counterparties demanded more money as collateral to maintain hedging arrangements. To raise the money, the funds were forced to sell assets, including government bonds, further depressing prices and threatening a doomsday.

Insight’s results reveal the extent of the chaos wrought by the crisis and come at an awkward time for the industry as UK bonds, known as gilts, are on track for their biggest rise – aside from the mini-Budget – since 2008.

Two-year Treasury bonds reached 4.38 percent yesterday, with ten-year bonds at 4.21 percent — both recently below 3 percent — on fears that LDI strategies could be exposed again.

In March, Legal & General admitted that the collapse in the value of LDI funds was a factor in the £225bn drop in the value of assets managed by its fund management arm, LGIM, to just under £1.2tn.

Rival Schroders also lost £20.2bn in assets last October from the division that includes its liability-based investing business.