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To some, LDI (liability-driven investing) evokes boredom. Thinking of the term immediately creates a feeling of emptiness, devoid of emotional attachment. For these people, the term is a three-letter word. Just pondering LDI translates immediately to sheep jumping over clouds.
These people are not our target audience. Our audience cares about this strategy deeply, and thus (we hope) a magazine that analyzes every possible angle of the approach from a critical perspective is valued. Our special issue attempts to not just scrutinize the superficial layer of this investment strategy—one of the most prominent strategies for investing defined-benefit pension assets worldwide. The goal is not to define LDI and trace its historical origins. While the background of LDI is naturally embedded within every article of this magazine, its true purpose is to provide a more personal and human touch to LDI—for example, outlining how this investing tactic changed the course for one St. Louis-based shoe company (page 54).
As with every issue, our columns often delve into topics more sharply than our articles because they celebrate opinion (well-informed ones). The column by Angelo Calvello quickly comes to mind. “LDI has its own internal contradictions,” he writes, noting that the objective of a company’s pension plan—which has a fiduciary duty to shell out benefits—is often directly at odds with the company as a whole, which has the profit motive firmly at the forefront of its mind. So what does that mean for General Motors’ CEO Daniel Akerson, or any corporation with overwhelming pension liabilities? They should expect to continue taking huge hits to company margins to free themselves of their pestering pension problem. A more colorful analogy: A corporation wanting to divest itself of massive pension liabilities is like willingly amputating an arm because of a severe but somewhat unknown injury. Who knows if it’s the right choice—but at least the injury is gone.
Our founder Charlie Ruffel asserts in his column that the evolution of LDI may mean death for many asset managers, as there will be few who are relevant to “this new world” in which the goal among corporate pensions is gaining sufficient assets to meet all liabilities, both current and future. His prediction: Out of the top 50 asset management complexes in the US, perhaps 10 will be competitive enough to stay in the pension universe. What are the implications of this for institutional investors? Asset managers will increasingly be contending with the NISAs of the world—ones that have already established credibility and trust to help companies like Brown Shoe thrive.
Those are just two examples. These, and the rest of our columnists, serve as proof that LDI is not just a three-letter word, but a strategy that affects the lives and futures of corporations worldwide. When you dream at night after reading this issue, I hope you dream of how NISA succeeded in dominating a piece of the LDI market, or of GM’s CEO struggling with whether to cut off his company’s metaphorical painful arm. Just as long as you don’t fall asleep reading any of it.
—Paula Vasan, Managing Editor, aiCIO