Many US pension plan sponsors believe they are well positioned to weather the current volatility in global markets thanks in large part to a new model of portfolio management designed to generate the investment returns needed to fund future pension liabilities while minimising risk levels within their portfolios. The results of Greenwich Associates’ 2008 US Investment Management Research Study reveal that a growing number of corporate and pension plan sponsors are adopting this new portfolio management model in whole or in part. The new model has two main elements: broader portfolio diversification and asset-liability matching. Broader portfolio diversification is based in large part on the approach that has proven successful for US endowments. It rests on the fundamental assumption of modern portfolio theory that a diversified portfolio with low levels of correlation among holdings can increase investment returns and decrease risk. It is the application of these theories that is driving the dramatic growth of pension investments in hedge funds, private equity and other alternative asset classes. Asset-liability matching encompasses a series of approaches and products designed to more closely align assets to future pension liabilities. For a growing minority of funds, tightening the link between assets and liabilities has entailed steps as simple as reducing their exposures to long-only equities, increasing fixed-income exposure, and lengthening the duration of their portfolios. However, more funds are beginning to implement more sophisticated strategies of asset-liability matching, liability-driven investing and portfolio immunisation.
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