Commercial Mortgage Loans: An Alternative Asset In LDI Portfolios?

PGIM Real Estate

May 2020

Most public and private defined benefit pension plan sponsors aim to design an effective liability driven investment (LDI) strategy that balances several objectives. Today, however, public and private defined benefit pension plan sponsors are challenged with the implications of a low interest rate environment, as well as the potential for negative credit migration within their investment grade corporate holdings.

In a new Investor Insights paper, experts from PGIM Real Estate highlight how core commercial mortgage loans, such as those originated by life company lenders, represent a large and scalable market and offer attractive risk-adjusted returns due to a strong yield profile and downside protection through the structural protections afforded by direct origination. The team suggests that these loans have proven to be an effective asset class within the LDI space due to their variety of duration profiles, including those greater than 10 years. All these factors contribute to PGIM Real Estate’s strong conviction that core commercial mortgage loans serve as an attractive diversifier and fundamental allocation within an institutional credit portfolio.