Buy and Maintain Credit Strategies - Transforming the LDI End-game
Investment objectives evolve over time for plans using liability-driven investing (LDI). In the early stages of a plan’s de-risking journey, the primary objective with respect to funded status is to close the funding gap gradually through some blend of cash contributions and investment returns. Strong investment returns require efficient exposures to diversified investment risk premia and may involve the use of active management and/or high allocations to diversified growth assets. The fixed income allocation may be separated into a credit component and a Treasury component:
- Active management of the credit component is designed to add alpha investment risk premium to the overall return.
- The Treasury component can be customized to deliver an efficient overall interest rate hedge against the plan’s liability profile.
As the plan’s funded status approaches full funding, its primary investment objective shifts more toward stability and less toward growth, calling for corresponding shifts in allocations to growth and fixed income assets. As the need to deliver incremental active alpha return declines, plans may reduce exposure to active management to rationalize future long-term costs. Some may consider designing and implementing a buy and maintain credit portfolio to pursue this objective as they approach their end-game.
Buy and maintain credit portfolios hold well-diversified collections of bonds that are intended to provide payments when a plan needs them. The matching of asset and liability cash flows may be suited to a plan’s end-game. These strategies emphasize fundamental research to underwrite the long-term credit risk of each bond, and de-emphasize shorter-term trading intended to optimize mark-to-market fluctuations or to maintain evolving benchmark requirements. The goal is for the plan to be insulated from factors that impact the market price of its bonds, as long as the bonds do not default; as a result, there generally is no need to buy and sell securities.
Download the full whitepaper
Learn more about the investment markets, timely topics and our firm capabilities in this whitepaper.
Additional insights
Collectively Forecasted, Never Arrived
Investment Outlook | Q1 2024
Like driving on ice, the trick to surviving 2024 may be not over committing in one direction. Staying flexible at the beginning of the year should allow for more insightful decisions down the road.
Rethinking Overlay Manager Diversification
LDI
At LGIM America, we believe overlay manager diversification is likely inefficient and creates uncompensated risks. Using multiple overlay managers can result in increased costs, collateral inefficiency and higher governance burdens.
Views and opinions expressed herein are as of the date published and may change based on market and other conditions. The material contained here is confidential and intended for the person to whom it has been delivered and may not be reproduced or distributed. The material is for informational purposes only and is not intended as a solicitation to buy or sell any securities or other financial instrument or to provide any investment advice or service. Legal & General Investment Management America, Inc. does not guarantee the timeliness, sequence, accuracy or completeness of information included. Past performance should not be taken as an indication or guarantee of future performance and no representation, express or implied, is made regarding future performance.
Unless otherwise stated, references herein to "LGIM", "we" and "us" are meant to capture the global conglomerate that includes Legal & General Investment Management Ltd. (a U.K. FCA authorized adviser), LGIM International Limited (a U.S. SEC registered investment adviser and U.K. FCA authorized adviser), Legal & General Investment Management America, Inc. (a U.S. SEC registered investment adviser) and Legal & General Investment Management Asia Limited (a Hong Kong SFC registered adviser). The LGIM Stewardship Team acts on behalf of all such locally authorized entities. © 2024 Legal & General Investment Management Limited. All rights reserved. No part of this publication may be re-produced or transmitted in any form or by any means, including photocopying and recording, without the written permission of the publishers.