What Is Liability-Driven Investing?

How are returns generated in an LDI strategy?

In an LDI approach, a portion of the portfolio is typically built upon liability-hedging strategies to reduce interest-rate risk. These strategies may employ the use of Treasury STRIPS, long government and credit bonds, and derivative exposures. Leading LDI solutions providers typically employ hedging strategies that are capital-efficient, and we believe that the best ones also offer dynamic portfolio management in order to exploit market opportunities.

Most liability-driven investing strategies will also involve defining the plan’s non-LDI assets as return-seeking assets, and then implementing an asset allocation designed specifically to close the shortfall in the plan’s funded status. This can include shifting the plan’s return-seeking exposure toward a global equity orientation, including exposure to listed real assets and private equity where appropriate. These asset classes may offer more resilient cashflows, helping assets grow faster than liabilities in volatile markets.

The bottom line: What to look for in an LDI solutions provider

Each organization has its own unique set of challenges and circumstances, which evolve and change over time. This is why we believe it’s vital for liability-driven investing strategies to be flexible by design, allowing for easy customization and adaptability in the face of shifting internal and external factors. Ultimately, we believe that a uniquely tailored LDI solution, bolstered by a flexible implementation platform and broad actuarial and advisory capabilities, is best equipped to create real, lasting value for pension plans.

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Disclosure: These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

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