GMO Commentary- LDI: The Bespoke Benefit

Overview

Liability-Driven Investing requires dynamic solutions to meet clients’ evolving needs over time. In this discussion, portfolio manager and fixed income strategist Riti Samanta addressed the current LDI landscape and the advantages of employing GMO’s flexible framework to customize client portfolios according to their unique liability and other objectives.

Key Points

• LDI is not a one size fits all problem; asset owners must adapt their portfolio over time. The solution must therefore be dynamic to meet, for example, a pension plan’s return or capital preservation objectives. GMO has a long history of engaging with clients across the phases of their life cycle and our customizable and flexible LDI solutions are designed to help them meet their objectives.
• Within the LDI competitive landscape we’ve found that, as you have a complex problem, you have a variety of solutions. GMO’s primary approach is on the systematic or quantitative side, which is relatively unique in this space. Interestingly, returns and characteristics for all approaches are quite similar, so our approach offers a differentiated and complementary solution relative to the platform of broad LDI managers.

COMPETITIVE LANDSCAPE

GMO LDI has a differentiated approach within the long-duration fixed income universe.

As of 8/31/21 | Source: eVestment
* GMO uses a quantitative primary investment approach, total represents 156 managers.

• Each sector of fixed income is well covered at GMO and, when thinking about return-seeking or managing the objective of the overall portfolio, it is critical that we draw on GMO’s full range of fixed income capabilities. We then bring these together in a systematic fashion to meet return and tracking objectives.
• Systematic Credit is an innovative solution, and our ability to implement a successful portfolio leverages key competencies at GMO as well as our proficiency in quantitative and systematic investment management.
• GMO’s approach can be tailored to different investable universes and calls on the same themes of value and quality that pervade our organization. We combine these concepts with momentum to create an alpha score for every bond. Portfolio optimization takes several factors into consideration, including alpha generation, tracking error, and key constraints (like limiting duration risk).
• Our disciplined approach allows us to adjust our solutions to consider different parameters and to meet a variety of purposes. This includes, for instance, integrating ESG considerations or the need to extend to European credit and high yield for broader, global corporate mandates.