@article {Ge109, author = {Wei Ge}, title = {Assessing Low-Volatility Assets in the LDI Framework}, volume = {25}, number = {4}, pages = {109--120}, year = {2016}, doi = {10.3905/joi.2016.25.4.109}, publisher = {Institutional Investor Journals Umbrella}, abstract = {In the liability-driven investing (LDI) framework, an underfunded pension plan may use the glidepath approach{\textemdash}dividing assets for liability-matching and asset-growth purposes. This practice introduces a dilemma, as the projected funding ratio and funding ratio volatility may not be improved at the same time. Low-volatility assets may be suited in the LDI framework to resolve this dilemma. This article examines the behavior of several low-volatility assets, including three low/minimum volatility equity indexes and two alternative low-volatility series (the HFRI Fund Weighted Composite Index and a volatility risk premium{\textendash}based construct), in a generic underfunded pension plan with typical assumptions. The study concludes that low-volatility investments may be a good choice for growth assets in the LDI framework, as the low-volatility profile can help pension plans reduce projected funding ratio volatility and may improve funding ratio projections. On the other hand, the benefits of low-volatility investments in the LDI framework depend on such assets continuing their past return{\textendash}risk patterns into the future, an assumption that may not materialize. Pension managers are encouraged to consider low-volatility assets as potential components for underfunded pension plans, although the decision whether to include such assets in pensions depends heavily on future return assumptions.TOPICS: Portfolio construction, pension funds, analysis of individual factors/risk premia}, issn = {1068-0896}, URL = {https://joi.pm-research.com/content/25/4/109}, eprint = {https://joi.pm-research.com/content/25/4/109.full.pdf}, journal = {The Journal of Investing} }