When looking at the investment objectives of an investor one distinction that needs to be made is whether the investor is looking to maximize returns potentially on a risk-adjusted basis or whether the Investment Portfolio is being used to meet a specific future liability.

For investors within aim of maximizing risk adjusted Returns the portfolio manager will follow an asset only approach.

Which is how investing May typically be thought about.

However, many investors are seeking to cover a specific future liability and may wish for their money to be invested on a liability driven investing or ldi basis.

While an asset only approach may be able to invest in any asset class liability driven investing tends to focus on investing in fixed income securities.

Since they tend to demonstrate similar characteristics to many liabilities.

In that their value is heavily influenced by interest rate movements.

if interest rates increase fixed income securities value Falls, but so does the present value of future liabilities? An ldi approach may also favor fixed income securities to reduce the riskiness of the assets held in an attempt to increase the likelihood of the liability being met through more predictable returns.

Investors may wish to follow an ldi approach because there may be significant penalties for assets being insufficient to cover the liabilities. For example, a defined benefit or DB pension plan where there is an obligation for future pension payments to be met.

Will result in the sponsoring company having to contribute additional funds if the pension plan has insufficient assets to be able to meet the liabilities.

Insurance companies may also follow an ldi approach to ensure they have sufficient funds to meet expected claims payments on their insurance policies in the future.

Failure for the insurance company to do this may result in bankruptcy.

The asset only approach tends to be followed by defined contribution or DC pension plans endowments and individuals.