Rethinking Asset Allocation
Taking an institutional view of individuals’ retirement portfolios.
The Second Side
My colleagues Tom Idzorek and David Blanchett have drafted a paper called, “LDI Misapplied: Income Portfolios and Liability-Driven Investing.” That title probably doesn’t mean much to you. (If it does, please let me know, and I will use you as a consultant for future columns.) Its subject, however, is straightforward: asset allocation for retirement portfolios.
Conventional asset allocation addresses what investors own. In contrast, liability-driven investing, or LDI for short, considers both sides of the balance sheet. The assets exist for a reason, after all--to offset future expenditures. With LDI, the investor estimates those expenditures as thoroughly as possible and then attempts to hold assets that will generate cash that will pay them down. LDI is a matching exercise: It pairs assets with liabilities.