(Bloomberg) -- One of Britain’s largest asset managers abandoned mark-to-market pricing on funds at the height of the UK government bond crisis last year as it deemed gilt moves disorderly.
Legal & General Investment Management chose its own prices for bonds in its pooled liability-driven investment funds for Sept. 27, saying market prices didn’t represent fair value, according to a letter sent to some clients and seen by Bloomberg News. The following day the Bank of England intervened to stop the gilt market from collapsing.
LGIM, the asset management arm of insurer Legal & General Plc, valued all gilts and index-linked gilts in its pooled LDI funds at the price they had at end of trading on Sept. 26, LGIM said in the letter sent in April.
A representative for LGIM declined to comment.
Pensions strategies were caught in a downwards spiral at the end of September after former prime minister Liz Truss announced a round of unfunded tax cuts. That led to a rapid drop in gilt prices that forced defined benefit pension schemes using LDI strategies to sell their gilt holdings to raise cash for margin calls, a vicious cycle that pushed prices even lower.
LGIM has emerged as the second firm to abandon mark-to-market pricing during the period. Insight Investment disregarded market prices for its books for Sept. 27 and instead used Sept. 26 values, the Financial Times reported in February.
LGIM is one of Britain’s largest providers of LDI funds alongside BlackRock Inc., Columbia Threadneedle and Schroders Plc. Jefferies analysts estimated at the time that around 30% of assets at parent Legal & General Group were tied to the kind of strategies that were at the center of the chaos.
A spokesperson for BlackRock and Schroders’ James Barham, who chairs the firm’s solutions business, confirmed they followed mark-to-market pricing in their LDI funds during the gilt crisis. Columbia Threadneedle did not respond to a request for comment.
LGIM called a meeting of its asset pricing and valuations committee at 12:30 p.m. on Sept. 27 when the UK’s gilt market was in free fall and introduced an ad-hoc “dealing day” to value the assets in some of its LDI funds, according to the letter.
Outgoing L&G boss Nigel Wilson and chair John Kingman told a parliamentary committee earlier this year that the firm had never stress-tested for a situation similar to the rapid fall in the price of gilts and blamed the then government for creating instability in the market.
The use of fair value pricing reduced the risk of failure of the underlying funds, LGIM said in the letter. That move had a positive impact for clients, who as a result did not see material reductions in their LDI exposure, LGIM said.
--With assistance from Katherine Griffiths.
©2023 Bloomberg L.P.