Liability Driven Investing

Liability driven investing (LDI) differs from a traditional policy portfolio approach in that an actual liability stream of an organization serves as the benchmark instead of a simple return target or a proxy based on market indices.

Under an LDI approach, success is judged in terms of how closely investment returns track changes in the liability benchmark, rather than relative or absolute performance objectives.

By taking on measured, compensated risk, an LDI portfolio can decrease a funding shortfall or build a reserve against unforeseen developments in the organization or capital markets, in effect reducing the funding risk of the organization.

In our view, such an LDI approach – for organizations that have future liabilities to fund – is typically far superior to other theoretical portfolio construction approaches, as the primary role of an investment counsellor is to ensure that client’s investable assets are organized in a way, subject to client tolerance for risk, to match their future liabilities…it’s not about trying to “beat” arbitrary market indices.

The attached article by Beutel Goodman, which appeared in Pension & Benefits Monitor in May 2010, provides a great overview of the LDI portfolio construction approach.

To view this article, please click here.