Liability driven investment strategy
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Liability Driven Investment Strategy
The Investment strategy of a company is based on its risk tolerance, the company's ethics and the target return. The target return is usually linked to an index (economics) or combination of indices of the sector or any other like S&P 500. This is called the benchmark-driven investment strategy. This investment strategy is no longer affordable, at least in the financial sector.
Especially in the long-term investments, like Pension fund, the benchmark-driven is no longer appreciated. Now the buzzword is Liability Driven Investment (LDI.) The investment target of the fund is no longer linked to any external index. It is linked to the liability of the fund. The liability of the fund is evaluated by the actuaries. In case of pension fund, it will be the present value of the benefits payable to the employees and pensioners, attached with a probability of those payments made.
