Liability-Driven Investment

CHAPTER 9Moving Beyond Liability-Driven Investment

THE WORLD OF CDI

Financial theory and the multiple techniques for Multi Asset Class investing are constantly moving forward and with ‘Peak LDI’ arguably upon us, investment consultants are always looking for the new new thing to demonstrate their expertise. As even the most bullish consultant knows that LDI is certainly not a perfect hedge for most pension schemes.

The often-used phrase, when things go wrong, is ‘the only perfect hedge is in a Japanese garden’. To address any imperfections, finance practitioners are always looking to add overlay strategies to compensate for some of the deficiencies within the basic LDI framework. With a holistic approach to investing now expected for institutional portfolios, the industry has to look for ways of expanding their product suite beyond just long-term risk hedging and to address other identified consumer needs. Indeed, most funds and trustees will quickly identify many risks other than inflation and interest rates which are the main concern of the LDI practitioner.

The development of new products is becoming acutely important as Liability Driven Investment nears market saturation in some developed markets, particularly in the UK. Resultantly LDI practitioners are constantly refining their frameworks and introducing new ideas and concepts, both to closer align end-users' investments with their needs, but also to protect the consultants' value proposition as LDI expertise is becoming ...