Liability Driven Investments

Our Long Duration Fixed Income strategies are typically measured against high quality long maturity benchmarks such as the Lehman Long Government Index or Lehman 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. 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.