LDI: Low Yields, Customization, and Managing Downside Risk—Avoiding a “Mexican Standoff”

Abstract

Liability-driven investing (LDI) has come a long way since its inception and early days as a risk management framework. The landscape now includes a broad range of providers and corresponding strategies, with varying degrees of sophistication and associated benefits. However, it faces a number of challenges as a consequence of the prevailing low-yield and low-return investment environment. This article seeks to highlight the low-yield environment and how it may be managed under a framework that creates value for investors and is aligned with those investors’ underlying fiduciary obligations. By intention, the article is broad in coverage, as a function of the many issues and considerations affecting U.S. defined-benefit pension plans as they relate to LDI and associated risk management considerations.