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A Deeper Look at Liability-Driven Investment

Risk, Performance, and Reporting

By Pat Reilly  |  February 21, 2019

Prior to joining FactSet seven years ago, I  was with a large life insurance company in Southern California. Part of my team’s goal was to work to tie our liabilities into our asset portfolios. Similar to defined benefit mandates, in the insurance space, it's not just about return, it's about risk-adjusted return and making sure that your cash flows, durations, and risk profiles are aligned. 

Much of this effort was purely research, seeking answers to questions such as “what is a replicating portfolio?” or “how do different derivatives impact the risk profile?”. However a significant amount of the work was also incredibly practical. As the industry has evolved, specialist groups have emerged across asset managers and consultants with the goal of tying these competing interests together. That's where I initially gained an understanding of liability-driven investment (LDI).

So What Is LDI?

First, it's the notion of an investment strategy that's based around the cash flows needed to fund future liabilities. This is most commonly observed in the defined benefit space, whether that's a corporate pension plan or a public pension plan. It combines the asset and liability sides of the balance sheet. That concept is fairly straightforward. I also view it as the intersection of fundamental and quantitative finance.

Second, LDI is truly multi-asset class. It is not just equities and fixed income, hedging instruments and third-party providers also enter the picture.

Third, LDI is an opportunity. While funding levels vary across plans, there is an incredible window to de-risk your portfolios and solidify your risk position. Taking steps towards this goal should be a key takeaway of pursuing LDI.

Whether the focus is on pension risk transfer, de-risking strategies, or asset-liability management, the goal is to understand that LDI shouldn't be something that's secret or something that's hard to uncover; rather, it's a process that fits into the modern asset management workflow.

You can learn more about LDI by clicking below for the 2018 FactSet Symposium panel that dives deeper into the topic. 

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Pat Reilly, CFA

Vice President, Director, Americas Analytics

Pat Reilly has 15 years of experience within the investment management industry focusing on fixed income. Prior to joining FactSet, Pat started his professional path as a Credit Manager at Wells Fargo and then as an Investment Services Analyst at Pacific Life. He earned a Bachelor of Science, Finance from the Eller College of Management at the University of Arizona and a Master of Business Administration from the Marshall School of Business at the University of Southern California.