Institutional investors

Dynamic LDI with a view: Market timing is too risky. Right? March 2011 Mike Sylvanus Senior Consultant For the defined benefit plan sponsor who accepts the tenets of liability-driven investing (LDI) but continues to wait for the right time for implementation or wants to reverse positions already in place, we describe a very simple, dynamic strategy that adapts the liability hedge ratio to a view on interest rates. Our intent is not to recommend this particular strategy but rather to explore its potential attractiveness relative to more traditional approaches. This paper discusses: The challenge of taking interest rate views into account in LDI programs A simple model of active dynamic asset allocation strategy Historical and forward-looking simulations Whether market timing reduces risk and if implementing a dynamic LDI strategy is for you Request this research A note about our research Our proprietary research is made available to our institutional clients, and many of these published papers are available to other institutional investors as well. If you are not a Russell client, but are an institutional investor, we welcome you to request this research piece. We only require your contact information on a short request form. For more information about our research, please contact David or Gerry:     West Coast David Rothenberg Managing Director 866-926-5934 East Coast Gerry Lillis Director 866-459-4128 Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Liability Driven Investment (LDI) strategies contain certain risks that prospective investors should evaluate and understand prior to making a decision to invest. These risks may include, but are not limited to; interest rate risk, counter party risk, liquidity risk and leverage risk. Interest rate risk is the possibility of a reduction in the value of a security, especially a bond or swap, resulting from a rise in interest rates. Counter party risk is the risk that either the principal or an unrecognized gain is not paid by the counter party of a security or swap. Liquidity risk is the risk that a security or swap cannot be purchased or sold at the time and amount desired. Leverage is deliberately used by the fund to create a highly interest rate sensitive portfolio. Leverage risk means that the portfolio will lose more in the event of rising interest rates than it would otherwise with a portfolio of physical bonds with similar characteristics. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company. Date of first use: March 2011 USI-9304-03-13			Printer friendly version of this page