Most LDI solutions are aimed at reducing the funding ratio volatility for a given level of expected return.  These types of solutions tend to focus on long-duration assets with the intent of better matching the interest and credit hedge ratios. 

At the other end of the spectrum, some plans are also interested in solutions that can provide liquidity to help them defease their short-term cash flows (typically three to five years).  This can allow plans to hold on to more illiquid assets in their RSA in an effort to generate higher returns.

Bar chart showing Liquidity Risk for the first five years and Market Risk over the remaining years.

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Liability Driven Investments SolutionsDiversified LDILiability BenchmarksCash Flow GenerationCompletion ManagementGlide Path DesignCash Balance HedgingLHA DesignLiquidity Solutions

Risk

Liquidity solutions tend to have more of a buy and maintain nature where coupons and maturing principles are extracted and used to pay off upcoming liabilities while portfolio turnover is kept at low levels.  As a result, the initial portfolio construction is critical and should seek cash flow sufficiency under presumed default scenarios.

Bar chart of Cash Flows over fourty months for Liabilites and Asset Flows.

Given the maturing nature of these types of solutions, there are no readily available benchmarking options. Therefore, excellent communication regarding the plan's specific objectives is critical.  Questions such as "Can the portfolio hold on to downgraded bonds?" and "Is the only measure of success defeasance of the cash flows?" are of significant importance and need to be addressed.

The ability of an actual portfolio to deliver the required cash flows is not guaranteed and is subject to a variety of factors including, but not limited to, the availability of bonds, active management and trading, transaction costs, default risk, reinvestment risk, rebalancing risk and liquidity risk.

Commodity, interest and derivative trading involves substantial risk of loss.

Any investment that has the possibility for profits also has the possibility of losses.

This is for informational purposes only and should not be construed as investment advice. Investment decisions should consider the individual circumstances of the particular investor. Any opinions or forecasts contained herein reflect subjective judgments and assumptions of the author and do not necessarily reflect the views of Loomis, Sayles & Company, L. P. Investment recommendations may be inconsistent with these opinions. There can be no assurance that developments will transpire as forecasted. Examples and analysis are provided for illustrative purposes only and do not represent actual accounts. Accuracy of data is not guaranteed but represents our best judgment and can be derived from a variety of sources. Opinions are subject to change at any time without notice.