UK - PIMCO has issued a report exploring whether liability driven investment (LDI) is best viewed as an active or passive strategy.
It said: "We believe LDI portfolios should be managed actively by managers using the full fixed-income toolkit because there are plenty of opportunities to outperform.
"In addition, a passive approach will at best be based on estimated liability cash flows. Given the substantial uncertainty about actuarial assumptions such as future mortality, active management offers the potential for additional return without substantially increasing overall risk."
The report's authors argued it was "virtually impossible to run LDI portfolios on a riskless passive basis" and was, in any case, usually very expensive to implement.
They said as active mangers were not limited to static swap overlays in the same way as passive managers, they would be able to replicate a client's liability risk characteristics, through bonds, futures and swaps.
The fact future cash flows used to calculate the risk characteristics of liabilities were based on actuarial estimates also led to a tracking error of about 3.5%. The authors said active strategies could increase returns, while adding only slightly to the tracking error.
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