Liability Driven Investments
As a manager of significant insurance assets, liability-driven investing has always been a core activity of the Liability Driven Investments (LDI) team through providing solutions for our parent Old Mutual South Africa since 2004.
What is LDI?
Liability Driven Investing, or LDI as it is commonly known, is a risk-based investment strategy that manages a fund’s assets relative to its liabilities. LDI has two distinct components:
- Risk-protection component.
- Return-seeking component.
The risk-protection component hedges the risk factors of the liability which are typically interest rate risk and inflation risk. The solution will use a combination of assets and derivatives in structuring the hedge depending on the liquidity and depth of the respective markets.
The return-seeking component is a function of the derivative overlay and the funded status of the fund.
Assets typically considered are:
- Unlisted Debt (to capture a credit premium).
- Infrastructure assets (to capture an inflation premium).
- Hedge Funds (to capture a skills premium).
- Private Equity & Property (to capture an illiquidity premium).
The aim of the LDI boutique is to offer clients the same focus on their liability and dedication to the management of the assets relative to the liability to ensure a stable, consistent surplus over time. Every solution is customised for a particular fund as each fund has a unique liability and different risk appetite, although the techniques and instruments used to manage the liability are the same for each solution.
Liability Driven Investments are typically applied to Defined Benefit funds but there are other applications as well. Even a Defined Contribution fund has implicit liabilities due to members’ expectations that retirement benefits will at least increase annually with inflation. The principles of liability driven investing can be applied to any liability, not just pensioner liabilities. The liability of a mining rehabilitation fund is an example of a non-pensioner liability that can managed using LDI principles.
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Contact Details
To experience Performance through Focus and gain access to Liability Driven Investments, please call Naadira Ebrahim on 021 504 7947.