Pension funds that used so-called liability-driven investment (LDI) strategies outperformed funds with traditional asset allocations in 2008 by a significant margin, according to global consulting firm Watson Wyatt; Portfolios using LDI strategies likely had returns in the range of negative single digits to break-even, while traditional asset allocation strategies likely yielded 20 percent to 30 percent losses or more.
Watson Wyatt constructed a set of hypothetical portfolios, one LDI and one traditional, in December 2007 and tracked returns. The hypothetical LDI portfolio broke even in 2008 and the traditional suffered a 25-percent loss.
“New accounting and pension rules — and the desire for more predictable returns — have prompted some companies to adopt LDI strategies in recent years,” says Carl Hess, global head of investment consulting at Watson Wyatt. “LDI served those companies well in 2008.”
“However,” Hess continues, “most companies are still using traditional allocations or are in the process of phasing in LDI strategies. Unfortunately, options are more limited for now, as hedging opportunities have dwindled with the credit crisis, and market volatility makes big investment moves risky.”