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Liability-Driven Investing: A Total-Portfolio Perspective in Practice

March 24, 2021

Liability-driven investing (LDI) seeks to recognize and align risk exposures between assets and liabilities. For pension plans that adopt this perspective, a common practice is to conceptually split the investment portfolio into two portions: growth assets and LDI assets. It’s not uncommon for sponsors to consider these two portions separately, with an emphasis on matching the characteristics of the LDI portfolio with those of the plan’s liabilities. 

Parametric believes this natural tendency can give rise to LDI solutions that make sense when viewed in isolation but are less efficient when viewed from a total-portfolio perspective. In this paper we’ll explore three examples of the value of considering growth assets and LDI assets together. By focusing on a total- portfolio perspective, we believe that a more efficient liability hedge can be constructed, and that sponsors can better observe the total risk profile of assets versus liabilities.

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David Phillips, CFA, ASA, EA

Director, Liability-Driven Investment Strategies

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