Schroders division hosting LDI lost £20bn in assets after ‘mini’ budget

Schroders lost £20.2bn of assets from the division which includes its liability-focused investment business after the ‘mini’ budget, an early sign of the impact on asset managers from the volatility in the UK government bond market.

The FTSE 100 asset manager said in a trading update on Thursday that the assets of Schroders Solutions, which builds LDI, multi-asset and derivatives strategies for pension fund clients, rose from 225.7 billion pounds sterling at June 30 to £205.5 billion at September 30.

This period includes the week following former Chancellor Kwasi Kwarteng’s September 23 announcement of a £45billion package of unfunded tax cuts, which sent UK gilt prices crashing and surging returns from the perspective of borrowing more.

Schroders expanded its LDI business this year with the acquisition of the UK solutions division of River and Mercantile Group. Alongside Insight Investment, BlackRock and Legal and General Investment Management, Schroders is one of a handful of dominant players in the LDI market. These strategies use derivatives to help UK defined benefit pension schemes match their assets and liabilities.

The rapid liquidation of UK gilts in the wake of the ‘mini’ budget led to a rush in capital calls that wrongly caught many LDI managers. When bond prices fell, counterparties demanded more cash as collateral to keep hedging arrangements in place. To raise funds, funds have been forced to sell assets, including gilts, driving prices down further and risking a “catastrophic loop”.

Total global group assets at Schroders, excluding joint ventures, rose from £637.5 billion to £614.6 billion in the quarter. Shares of the asset manager fell 0.2% in early trading Thursday.

Meanwhile, elsewhere in the City of London, the pace of outflows has slowed at Jupiter Fund Management as the company announced a new share buyback program under recently appointed chief executive Matt Beesley.

Net outflows slowed to £600m in the third quarter, Jupiter said, supported by a new mandate from a sovereign wealth fund taking total assets under management to £47.4bn.

The London-based manager has suffered from chronic outflows in recent years, largely due to its retail investor base. As of September, the group of funds had suffered net outflows of funds in 17 of the past 18 quarters, according to analysts at Panmure Gordon.

The company said it would buy back up to £10m of shares by the end of December, leaving open the possibility of further capital return announcements in the new year. From January, the dividend policy will also be reset to 50% of pre-performance fee revenue, but will no longer have a minimum set at the previous year’s amount.

“While we saw net outflows overall, retail outflows have slowed as we continue to focus on delivering a differentiated product set that both meets the needs of increasingly complexities of our clients and demonstrates the value of actively managing high conviction investments,” said Beesley.

Since his appointment, Beesley has said he will set out plans to cut costs and streamline underperforming funds in a bid to stem outflows.

“The [third-quarter] the figures and outlook were slightly better than expected, but it is clear that significant improvement is still needed. We believe the new capital policy will divide opinion. We consider it sensible and more durable, [but] this may result in lower returns than some might have expected. . . in the short term,” said David McCann at Numis.

Shares of Jupiter rose 2.25% in early trading, giving a small boost to a decline so far this year of around two-thirds.

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