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Abstract

Dedicated bond portfolios allow a corporate pension fund to take advantage of favorable fixed income markets and of the actuarial system’s willingness to provide special benefits for a minimum-risk investment approach. Purely as an investment approach, a dedicated portfolio serves as a least-risk asset, minimizing the risks involved in fulfilling a large class of nominal-dollar liabilities. Because the process is largely assumption-free, it provides the sponsoring corporation with an actuarially acceptable way to take advantage of available market interest rates to improve funding status.

Cash-matching, the simplest form of dedication, produces a fixed income portfolio that provides a stream of payments from coupons, sinking funds and maturing principal payments that matches a given liability schedule. In many cases the objective will be to assure fulfillment even under totally passive management—that is, no reinvestment. Reinvestment at positive interest rates, however, can lower pension fund costs without substantially increasing risk or complexity. Active management of cash-matched portfolios, within the constraints of the portfolio’s conservative purpose, can be employed to take advantage of changes in the market structure.

About the Author(s)

Martin Leibowitz
Martin L. Leibowitz PhD

Martin L. Leibowitz is a managing director on Morgan Stanley's Global Research Strategy team, responsible for producing studies on such topics as beta-based asset allocation, long/short equity strategies and the need for greater fluidity in policy portfolios. Prior to joining Morgan Stanley, Mr. Leibowitz was vice-chairman and chief investment officer of TIAA-CREF from 1995 to 2004, with responsibility for the management of more than $300 billion in equity, fixed income and real estate assets. Previously, he had a 26-year association with Salomon Brothers, where he became director of global research, covering both fixed income and equities. Mr. Leibowitz has written more than 150 articles on various financial and investment analysis topics and has been the most frequently published author in both the Financial Analysts Journal and the Journal of Portfolio Management. Ten of his articles have received the Graham and Dodd Award for excellence in financial writing. He also has written several books: his first, Inside the Yield Book, is considered an investment standard. The CFA Institute has presented him with three of its highest awards. Mr. Leibowitz received an AB and MS from the University of Chicago and a PhD in mathematics from the Courant Institute of New York University.