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The combination of low interest rates, extreme market volatility, and limited funded status progress in 2020 compelled plan sponsors to reassess liability-driven investing (LDI). This reassessment revealed the impact of the market turbulence and also brought to light the strong relative performance of LDI strategies and their broader role in portfolio risk mitigation.
2020 in hindsight
Amid historic volatility, LDI returns significantly exceeded expected returns in both 2019 and 2020, returning 14%-17% in 2019, and 12%-15% in 2020, depending on the duration of liabilities. LDI (along with U.S. Large Caps) was one of the two consistently strong positive contributors to investment portfolios. In addition to positive returns, LDI continued through 2020 to serve as a hedge for the present value of pension liabilities, which declining discount rates increase.
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