A primary objective of any large-scale investment strategy is to match the asset investment with the projected purpose of any returns. Otherwise, an investor’s capital isn’t being put to good use, is it.
Well, that’s exactly the kind of thinking involved with liability-driven investing, where assets that are currently being invested in are projected to cover liabilities that are expected to be incurred at some future point.
A structured approach to investments
From an institutional standpoint, such a liability-driven investing strategy would be used to cover liabilities such as a pension fund. Although the amount of capital needed to support such a liability can be extremely large, it’s a rather predictably structured outlay, which means that a similarly-structured investment portfolio can be arranged too.
From an individual investor standpoint, such a liability-driven strategy could be used to cover liabilities such as a retirement, which could be funded by a retirement plan the income of which is derived from a current asset-based investment strategy.
Both sides of the balance sheet
This approach of current asset investing covering future liabilities is why liability-driven investing is also sometimes referred to as balance-sheet investing, or a more holistic approach to investing. This is in contrast to benchmark investing, which rates investment performance based on comparisons to stock and bond indexes.
Liability-driven investing is simply an approach to capital that matches current strategies with future needs.