Assessing the Benefits of Diversification During a Downturn
While returns are lower during a downturn, it is clear that the benefits of diversification and effective asset allocation increase significantly.
Most public and private defined benefit pension plan sponsors aim to design an effective liability driven investment (LDI) strategy that balances several objectives – achieving the desired funded status for the plan, managing return-seeking assets in the portfolio against relevant benchmarks, and effectively de-risking and hedging future liabilities. LDI portfolios traditionally rely on a combination of Treasury securities and long and medium duration corporate bonds as hedging instruments. Today, 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.