LIABILITY DRIVEN INVESTING (LDI)

capability & expertise

• Nearly 20 years of experience in executing diverse LDI strategies
• Currently manage over $10.8 billion of LDI strategies, serving a diverse client base, including defined benefit pension plans, insurance companies, financial institutions, government/municipalities, and conduits
• Executed over $85 billion of LDI strategies on behalf of our clients

The LDI team specializes in structuring and managing portfolios to meet a host of liability profiles for a wide range of clients. Through our consistent market presence and diverse business model, we've established strong relationships in the market, managed various LDI strategies in multiple currencies, and successfully navigated portfolios through multiple cycles, including the most recent market crisis. As a result, we've developed a deep knowledge base and infrastructure, with the team and systems in place to handle all aspects of an LDI business. Cutwater's LDI team offers an informed perspective, unparalleled top-level client engagement, innovative solutions, and superior service.

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philosophy

Cutwater views LDI as not just an investment strategy that incorporates liabilities into the asset allocation decision but as a framework for de-risking asset/liability situations over time. We consider our clients' objectives and constraints and construct an optimized portfolio to meet or exceed their expected liabilities. As each LDI assignment is unique and requires a customized strategy and portfolio to achieve the objective, we do not track the performance of our LDI portfolios versus a common benchmark. This highlights our unique LDI philosophy: while a total return strategy defines success in terms of a benchmark, Cutwater's customized liability-driven investment strategies define success in terms of meeting a targeted liability at all points in time. The team at Cutwater believes that our performance track record in LDI is measured in the successful management of hundreds of client portfolios.

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approach & process

We utilize a comprehensive and integrated approach to LDI and have developed sophisticated, proprietary models that can be tailored to our clients' unique circumstances. These industry- leading models optimize the investment profile to meet liquidity demands, immunize liabilities, and enhance yield. Furthermore, we apply our proprietary stochastic model, the Risk Analysis Manager (RAM), to assign probabilities of the desired outcome for a given investment strategy versus a liability stream through time. We believe this quantitative analysis is unique and better informs the fundamental portfolio construction decisions that we develop through our disciplined process.

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de-risking solutions for defined-benefit pension plans

Customized LDI Solutions
Cutwater can construct a customized portfolio of fixed income securities designed to minimize funded status volatility and expected contribution volatility. The portfolio would be customized to match the liability portfolio on both a cash flow and duration basis (both overall and partial durations). Generally, the payment obligations of pension plans are long-dated, and though the portfolio would be consistent with Cutwater's credit and diversification principles, it would likely contain a focus on the corporate bond sector, which has exhibited relatively stable yield enhancing properties and is correlated with the Citigroup Pension Liability Index, the most common discount curve for pension liabilities. These cash matching and corporate-centric strategies would serve to minimize funded status volatility.

Long Duration Composite
For clients who are seeking an alternative to a fully customized LDI strategy, Cutwater also offers a Long Duration strategy which is intended to meet the needs of pension funds who desire a total return style of investment management. Compared to other investment styles, this strategy goes a long way to better match investments to the duration of the liabilities and greatly increases the correlation between asset and liability valuations. The Long Duration strategy seeks to provide investors with a competitive total return emphasizing both income and capital appreciation to obtain this goal. The portfolio seeks to achieve its objective by primarily investing in a diversified portfolio of investment-grade fixed income securities while managing duration within +/- 20% of its benchmark, the Barclays Capital U.S. Long Government/Credit Index. The portfolio strategy focuses on active portfolio management with an emphasis on sector and sub-sector allocations over a full market cycle.