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.
Mr. Pat Reilly is Senior Vice President, Senior Director of FactSet’s Analytics solutions for the Americas. In this role, he focuses on providing content, analytics, and attribution solutions to clients across equities, fixed income, and multi-asset class strategies. Prior to this role, Mr. Reilly headed the Fixed Income Analytics team in EMEA and began his career at FactSet managing the Analytics sales for the Western United States and Canada. Before joining FactSet, he was a Credit Manager at Wells Fargo and an Insurance Services Analyst at Pacific Life. Mr. Reilly earned a degree in Finance from the University of Arizona and an MBA from the University of Southern California and is a CFA charterholder.
The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.