January, 2016 – InvestorLiterature.com Review
Liability Driven Investing (LDI) – Update
This Review follows two earlier Reviews on this topic written in 2013(3) and 2014(4), and provides a further update on bond information plus detailed summary of LDI returns of what is called a “dual-portfolio” or “two-fund” approach to LDI investing. We present a background by Barton Waring on the two-fund approach, discuss liability duration in terms of real and nominal rates, cover the latest funding status of Canadian pension plans, provide about 60 years of LDI returns plus Fed tightening, and before concluding, we add a number of alternatives to bonds in LDI strategies. We conclude with a detailed outlook for two-fund LDI returns, given today’s very low interest rates. While we overall quite commend the use of LDI strategies over the past 34 years, i.e., since rates peaked in 1981, we suggest that pension funds may be better off today modifying their LDI strategies.