US - Wilshire Investment Consulltancy has unveiled an alternative investment philosophy to the current wave of LDI engulfing pension funds in the US and Europe.
In a paper entitled 'Commitment Driven Investing: LDI As We “C” It', given exclusively to Global Pensions, the consultancy outlined its belief that commitment driven investing (CDI), rather than liability driven investing (LDI), was better placed to allow pension funds to maximise returns while minimising risks.
It argued that LDI strategies were too concerned with short term balance sheet volatility and stated if one accepted “assets should be managed to behave like ‘liabilities’ and ‘liabilities’ behave like bonds”, pension fund investment was inevitably driven towards bonds.
The paper claimed the term ‘commitment’, rather than ‘liability’, was much better suited to pension plans: “[It] captures the very nature, complexity and economic reality of a pension plan: funding a stream of future benefits
that are usually not known with complete certainty (i.e. they are contingent on other factors, such as inflation).”
Dimitry Mindlin, co-author of the report and managing director at Wilshire, told Global Pensions: “We are not against LDI, we share similar concerns and in fact start from the same point. It is just, unfortunately, that the
debate as it has been framed so far is either an asset approach or LDI. This is not true – there is another
Steve Foresti, fellow co-author and managing director at Wilshire, explained: “Where we differ from the strategies which fall under the LDI umbrella is by avoiding the temptation to oversimplify things
by discounting and then managing the assets to an accounting or actuarial statement.”
Reacting to the pressures faced by trustees and sponsors facing up to the new accounting standards, Mindlin said: “We understand the importance of accounting statements and how much pension decision makers
are concerned about the way they are perceived.”
However, he argued: “Pensions are all about the future, accounting is all about the past.”
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