Liability-Driven Investments
| Date: | May 2006 |
| Author: | Catherine Doherty |
Liability driven investment (LDI) may seem a commercially attractive proposition for investment management companies. However, the increasingly competitive marketplace, and the new staff skill-sets, operational processes and technology needed to support these products may be prohibitive to many investment managers entering this market.
This report looks at the commercial aspects of LDI products and their potential future. It sets the potential costs and revenues in the context of the operational and technological support required. In addition to interviewing a number of investment management companies, Investit also assembled a panel of investment management companies - who offer LDI products - third party administrators and independent consultants to guide the research.
The research report also examines the growth of LDI, it's commercial aspects and the operational and technological issues associated with offering LDI products. It also outlines competitors in the marketplace, the different ways of building LDI funds and current best practice in supporting LDI.
Table of contents
| Management Summary | 1 | |||
| 1.0 | Introduction | 3 | ||
| 1.1 | Methodology | 5 | ||
| 1.2 | Before LDI | 6 | ||
| 1.3 | Why has LDI become a hot topic? | 7 | ||
| 1.4 | A note on swaps | 10 | ||
| 2.0 | The Mechanics of LDI | 13 | ||
| 2.1 | The LDI model | 14 | ||
| 2.2 | The risks to immunise | 16 | ||
| 2.3 | The LDI immunisation | 18 | ||
| 2.4 | Gap closing | 22 | ||
| 3.0 | The Commercial Perspective | 23 | ||
| 3.1 | Competitors in the market | 24 | ||
| 3.2 | Immunisation products | 27 | ||
| 3.3 | Gap closing products | 31 | ||
| 3.4 | An outline business case for an LDI product | 33 | ||
| 3.5 | Is LDI here to stay? | 36 | ||
| 4.0 | Operations | 39 | ||
| 4.1 | Operational impact | 40 | ||
| 4.2 | Reporting and performance measurement | 42 | ||
| 4.3 | LDI and outsourcing | 44 | ||
| 4.4 | Creating the LDI skilled enterprise | 46 | ||
| 5.0 | Technology Requirements | 49 | ||
| 5.1 | Modelling and risk | 50 | ||
| 5.2 | Aggregation and strategies | 51 | ||
| 5.3 | Workflow, event and cashflow management | 52 | ||
| 5.4 | Valuations and data management | 53 | ||
| 6.0 | Conclusions | 55 | ||
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