Blackrock on LDI

April 21st, 2014 9:40 am | by John Jansen |

I have written about pension investors placing new money into fixed income investments and some peeling and some peeling off equities which have enjoyed galloping gains. The logic is that if you had an underfunded pension fund and enjoyed last year’s equity returns,then selling the stock and booking the gains and buying a fixed income asset to offset the liability locks in those gains.

A fully paid up subscriber forwarded this piece to me in which Blackrock comments on that phenomenon. I think the original source is

Via a fully paid up subscriber:

BLK: BlackRock: Fixed income landscape undergoing significant ch
2014-04-17 10:39:10.564 GMT

BlackRock: Fixed income landscape undergoing significant change
Blackrock says it is witnessing a shift towards unconstrained fixed income and
increased usage of liability driven investing as large pension plans take
advantage of strong equity markets and improved funding ratios to immunize their
portfolios. The company said it sees improved performance in its U.S. active
equity business.

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  1. 3 Responses to “Blackrock on LDI”

  2. By Mike C. on Apr 21, 2014 | Reply

    Most still expect an 8% yearly return no? Eventually – there will be nowhere for them to go and they will be forced to overpay for any investment that might generate such a return. This *need* for income (as opposed to a desire for it) will eventually push them into deep losses imo.

  3. By John Jansen on Apr 21, 2014 | Reply

    i think in this specific example it is a case of merely locking in a previous gain and by so doing locking in the gains for funding purposes. You buy the bond and set against the future liability and hold it theoretically until the liability comes due at which time the bonds is matured or about to mature. So it is simply matching a liability and a less risky bond asset instead of a riskier equity asset.

  4. By Squints on Apr 22, 2014 | Reply

    This does make me wonder about how much liability immunization the managers are accomplishing if they’re moving into unconstrained bond funds. Sure, the bigger the yield one can get for a given duration, the better off one is actuarially — IF the bonds don’t have betas similar to equities. Over a long enough horizon I guess the realized periodic volatility will even itself out. But that target return number will probably have to take into account defaults. Which, I suspect, will be plentiful.

    Depends on the size of the allocation, I guess.

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