Liability Driven Investments

Our Long Duration Fixed Income strategies are typically measured against high quality long maturity benchmarks such as the Barclays Capital Long Government Index or Barclays Capital Long Government/Credit Index. To meet the objective of consistent outperformance of these indices, we use a diversified mix of fixed income strategies including duration management, yield curve management, sector rotation, and execution.

In creating liability-driven strategies (Overlays) for our clients, we weigh a number of considerations, including:

• Understanding the client’s objectives, including their plan for achieving their targeted funding status, asset allocation preferences, and surplus volatility targets;
• The dynamic nature of pension liability cash flows and the impact on liability duration;
• Convexity and yield curve differences between assets and liabilities;
• The impact of different types of interest rates influencing the value of assets versus liabilities (basis risk);
• The use of derivatives to achieve the desired immunization objective;
• The need for ongoing monitoring of liabilities and management of the assets; and
• Frequency of rebalancing asset-liability targets.

For our Overlay strategies, we work with clients to model their liabilities, then measure the duration, convexity and curve characteristics of the liability cash flows. We then create a variety of long duration portfolio options and stress-test each one versus the client’s liabilities across a wide variety of interest rate and yield curve scenarios. The potential solutions may include cash-based long duration bonds, swap-based portfolios and overlay strategies.

This is not a “one-size-fits-all” strategy, and there is no inherently “correct” solution for a client. Rather, there is a range of potential solutions that offer discrete risk/return profiles. TCW MetWest works with each client to quantify and explain the tradeoffs of each strategy and help select a solution that best meets the client’s objectives and risk tolerances.