LDI Dead?

[WWSituation]

I haven't seen anyone posting about the successes of the LDI movement in the US, so I just assume that there still aren't any.

Can anybody report of a well-known plan using LDI of any kind? (risk mgt. overlay / specific portable-alpha strategy) ?

Still curious.

[JMO]

What does LDI stand for?

[WWSituation]

Originally Posted by JMO

What does LDI stand for?

LDI = Liability Driven Investing

[Optimus Prime]

Originally Posted by WWSituation

LDI = Liability Driven Investing

Is that a different way to say Asset Liability Matching/Modeling?

[JMO]

Originally Posted by Optimus Prime

Is that a different way to say Asset Liability Matching/Modeling?

I think so, but LDI is pension-speak, ALM is more like insurance lingo.

[WWSituation]

Originally Posted by Optimus Prime

Is that a different way to say Asset Liability Matching/Modeling?

It is quite different. Asset Liability Matching is simply investing in a bond portfolio whose duration matches the duration of the liability. Asset Liability Modeling is the practice of using a rigged optimization system to justify the liberal use of equity in order to meet an EROA assumption.

LDI is a much broader look at a pension's capital structure from the standpoint of the sponsoring organizations corporate financial objectives. You might see a strategy of long duration bonds but the conversations takes a step back and examines exactly what betas a plan sponsor should and shouldn't be taking with their plan. Instead of using an investment product and tying up cash, they could acquire those betas synthetically using interest rate and total return swaps. They would then select the various sources of potential alpha that they feel comfortable allocating their capital towards and using the cash toward those opportunities.

That is what it is in a nutshell. It has gained momentum in Europe over the last couple of years, but I haven't seen much here in the US. I left pensions around 2 years ago after many futile attempts to get companies to adopt and implement this methodology. I was wondering if anyone who still works with pensions knows if this ever took off.

[Juris Doctor]

Originally Posted by JMO

I think so, but LDI is pension-speak, ALM is more like insurance lingo.

we do both inhouse, and they are actually 2 different animals. WWsituation covered it well, but I'll add....

They tend to have similiar results, but they are different ways of attacking a similiar problem.

Also, ALM can be used to study more than just assets...but the focus for LDI is assets. ALM can be used for long term planning, also. We've used ALM with a client to help model the potential impact of freezing a plan versus keeping it. I'd say that is probably overkill in general, but it wasn't in this case.

[Juris Doctor]

Originally Posted by WWSituation

Can anybody report of a well-known plan using LDI of any kind? (risk mgt. overlay / specific portable-alpha strategy) ?

To answer your question directly...yes, we've used it on about 25% of our clients/plans in the current calendar year.

[WWSituation]

Out of curiosity, to what extent is the LDI being performed? (i.e. what type of structures are being used, what type of portable alpha strategies are the clients being directed into and why, and what percentage of the client's portfolio do you have discretion over?)

Also, how large are the plans (i.e. <$1B, over $5B?)

I'm very interested to know if there has been a true tide shift or if it has just been a few nibbles.

[FAS158]

Today's money management letter reports that Fedex is considering LDI. SO is JC Penney. These are large pension funds.

Right now LDI is in a stage where we are just laying the foundation. In 3 years' time when FAS Phase II comes out and CFOs start getting hurt due to income statement volatility is when LDI will take off.