What does an LDI portfolio look like?
LDI does not mean that sponsors should invest all or most of the plan’s assets in fixed income, although this is a common misperception. LDI will mean different things to different sponsors. A sponsor’s financial goals with respect to cash flow and expense, its time horizon, and its plan’s funded status will drive the right LDI strategy. How do you determine the right LDI? To find the ‘right LDI,’ sponsors should undertake an asset-liability matching study, or ALM. In an ALM, the plan’s assets and liabilities are modeled under thousands of potential economic scenarios, and expectations for the cash flow, pension expense and the associated volatility are quantified. This modeling process examines these expectations and the associated risk under multiple asset allocations, generally considering the split between equities and fixed income, and the use of long duration fixed income or even derivatives. Rather than thinking in terms of asset returns, this type of analysis helps sponsors mak
