Buy and maintain credit strategies - Transforming the LDI endgame

Investment objectives evolve over time for plans using liability-driven investing (LDI). As plans approach endgame, the focus often shifts from closing a funding gap to preserving funded status, managing liquidity and aligning assets more closely with liabilities. In this stage, buy and maintain credit strategies can help reduce unnecessary turnover and costs and support more stable long-term cash flow delivery.

In the earlier stages of a plan’s de-risking journey, the primary funded-status objective is to close the funding gap gradually through some blend of cash contributions and investment returns. Strong investment returns require efficient exposures to diversified investment risk premia and may involve active management, high allocations to diversified growth assets or both.

Over time, as funded status improves, plans’ primary investment objective shifts from growth toward preservation. As a result, plans may reduce reliance on incremental active alpha return and increase emphasis on stability, cost control and liability alignment through fixed income portfolios that more closely reflect future benefit payments. As the fixed income allocation becomes a larger part of the endgame portfolio, plans may separate it into credit and Treasury components, each serving a distinct role:

• The actively managed credit component is designed to add alpha investment risk premium to the overall return.
• The Treasury component can be customized to deliver an efficient overall interest rate hedge against the plan’s liability profile.

A buy and maintain credit portfolio emphasizes long-term credit underwriting, lower turnover and liability-aware cash flow delivery. Buy and maintain credit portfolios hold well-diversified collections of bonds that are intended to provide payments when a plan needs them. Rather than managing closely to evolving benchmark rules or short-term mark-to-market movements, these strategies emphasize fundamental research to underwrite the long-term credit risk of each bond. The goal is for the plan to be insulated from factors that affect the market price of its bonds, as long as the bonds do not default. As a result, there generally is no need to buy and sell securities.

Unless otherwise stated, references herein to "L&G" and “L&G – Asset Management” refer to the global asset management business of Legal & General Group plc. that includes Legal & General Investment Management Ltd. (a U.K. FCA authorized adviser), Legal & General Investment Management America, Inc. (a U.S. SEC registered investment adviser) Legal & General Investment Management Asia Limited (a Hong Kong SFC registered adviser), Legal & General Investment Management Japan KK (licensed by the FAS in Japan), and LGIM Singapore Pte. Ltd. (licensed by the MAS in Singapore). The LGIM Stewardship Team acts on behalf of all such locally authorized entities.

This material is intended to provide only general educational information and market commentary. Views and opinions expressed herein are as of the date set forth above and may change based on market and other conditions. The material may not be reproduced or distributed. The material is for informational purposes only and is not intended as a solicitation to buy or sell any securities or other financial instrument or to provide any investment advice or service. L&G – Asset Management, America does not guarantee the timeliness, sequence, accuracy or completeness of information included. Past performance should not be taken as an indication or guarantee of future performance and no representation, express or implied, is made regarding future performance.

Certain of the information contained herein represents or is based on forward-looking statements or information, including descriptions of anticipated market changes and expectations of future activity. Forward-looking statements and information are inherently uncertain and actual events or results may differ from those projected. Therefore, undue reliance should not be placed on such forward-looking statements and information. There is no guarantee that L&G – Asset Management, America’s investment or risk management processes will be successful.

Hypothetical performance results have many inherent limitations and no representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.

One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

The use of hypothetical performance is subject to inherent limitations derived from the reliance on historical data and the benefit of hindsight. All trading strategies applied to the analysis were available throughout the performance period. However, the analysis includes certain assumptions where actual performance could be different from the hypothetical performance presented.