Liability Driven Investing

Our Capabilities

We help pension plan sponsors design, execute and monitor liability-driven investment (LDI) strategies. We offer these services to support our clients’ existing relationships with investment consulting and actuarial firms.

Three guiding principles encapsulate our viewpoint on LDI strategies. We believe these three principles lie at the core of successful strategies:

  1. Embrace a change in mindset
  2. Redefine risk and reward
  3. Take calculated risk

We discuss these guiding principles in detail in our article, What’s The Big Idea? 

Design

LDI Decision Matrix

Simply stated, our design process begins and ends with the client. Rather than offering ‘textbook’ solutions, we prefer to walk with a plan sponsor through an exploratory, iterative discussion regarding strategic objectives, sources of pension risk, and potential options to address unwanted risks. Of course, no two LDI design discussions will ever be the same (because every plan sponsor has unique circumstances, preferences and tolerances); nevertheless, the flowchart shown above illustrates a generalized framework, summarizing common phases of an LDI design discussion.

Quantitative analysis fuels the LDI design process by helping a plan sponsor evaluate upside and downside risks for potential strategies. We use quantitative risk analysis both to assist the sponsor in prioritizing risks and to identify strategies that embody that sponsor’s priorities. Our toolkit contains deterministic (pre-determined scenario), probabilistic (mean/variance) and stochastic (random sampling) models which together offer a plan sponsor a range of perspectives from which to make informed decisions.

We discuss LDI strategy design in greater detail in our article, Where To Begin?

Execute

Our fixed income investment management expertise can help plan sponsors accomplish strategic pension objectives.

Our investment track record includes more than a decade of managing long duration portfolios against a range of standard and custom benchmarks, including:

• Barclays U.S. Long Credit Index

• Barclays U.S. Long Government/Credit Index

• Custom liability-based benchmarks (including benchmarks that utilize Treasury STRIPS and interest rate swaps)

Please see our Long Duration Strategy page to learn more about our investment philosophy, process and performance history.

Monitor

Pension plan sponsors who employ a liability-driven investment strategy should regularly monitor the strategy’s effectiveness using objective, informative measurements. Our investment team includes credentialed actuaries who are available to assist plan sponsors in developing LDI reports and metrics like the sample report shown above.

Our LDI risk management reports help clients assess the effectiveness of current investment strategies and identify residual sources of pension risk. We generate these reports monthly using proprietary models tailored to meet the needs of our clients.

We can also provide more frequent (daily or weekly) estimates of a plan’s funded status.

We discuss LDI risk management metrics in greater detail in our article, Is Our Strategy Working? 

Important Disclosure

This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. The projections or other information included in the report are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Statements in this report do not constitute an actuarial opinion on behalf of the authors or Reams Asset Management. Statements in this report are based on the opinions of the author and the information available at the time this letter was written. All opinions are subject to change without notice. All investments involve risk, including the possible loss of principal. Reams Asset Management is a division of Scout Investments, Inc., a registered investment advisor that offers investment management services for both managed accounts and mutual funds. Scout Investments is a wholly owned subsidiary of UMB Financial Corporation. Copyright © 2017. UMB Financial Corporation. All Rights Reserved.