Traditional LDI Based on Snapshots of the Past: El-Erian
BY Caroline Cakebread | March 2, 2010
According to a report today by Global Pensions from the annual conference of Allianz Global Investors, PIMCO boss Mohamed El-Erian told his audience that traditional liability-driven investment (LDI) strategies are based on indices that are backward looking “snapshots of the past.” He says pension funds should be shaking up their approach to LDI by including forward looking indices and active elements — especially post financial crisis.
“What you need now is not just passive LDI strategies, you need smart passive ones. Before LDI strategies tried to construct schemes’ portfolios by matching investment returns to liabilities by using backward looking government bonds indices,” he explained. Before the crisis hit, it was commonly believed this would be enough to cover liabilities and that diversification could mitigate risk. In light of what El-Erian calls a “new normal,” pension funds would do well to revisit their approach to LDI.