Liability-Driven Investment

CHAPTER 1Liability-Driven Investment and Multi-Asset Class Investing

MOVING BEYOND MODERN PORTFOLIO THEORY: INTRODUCING THE WORLD OF LIABILITY-DRIVEN INVESTMENT

In the last few decades, and the last few years particularly, volatile asset markets, shifting demographics, increased living standards and changing consumer expectations have created a demand for better savings products and resultantly more advanced financial risk management. These changes, coupled with a world which has an ageing population across many industrialised nations, but in which we anticipate secularly declining asset returns, has meant that there has been an increased focus on understanding investors' exact needs and the risks that they face.

Events such as the Global Financial Crisis or GFC, have meant that investors young and old have had first-hand experience of capital loss and the effect of market uncertainty on Savings Outcomes. The events of the crisis and its aftermath has changed permanently our estimates of society's ability and willingness to tolerate financial risk, as well as skewering central bankers and regulators belief in the efficiency of the capital markets. The Efficient Market Hypothesis (EMH), which had dominated the thoughts of academics, regulators, central bankers and investors alike, has now lost its primacy and the need for regulation to tilt markets towards better outcomes has become much more accepted. As a result of the large capital losses caused by the crisis, there has naturally ...