Dedicated Portfolio

What Is a Dedicated Portfolio?

A dedicated portfolio is an investment portfolio where the cash flows are intended to match the anticipated [liabilities](/complete liabilities). Dedicated portfolios are generally latently managed and are made out of stable, investment-grade fixed-income assets.

Grasping Dedicated Portfolio

Dedicated portfolios were advanced by financial analyst Martin L. Leibowitz, who expounded widely on the thought, calling it a cash-matching strategy. In a dedicated portfolio, bonds and other fixed-income instruments are bought and generally held until maturity. The goal is to make a cash flow from the coupons that match payments that should be made throughout a set time.

Dedicated portfolios use investment-grade securities to limit the risk of default. The security and stability of investment-grade securities can limit returns, in any case.

Advantages of a Dedicated Portfolio

Dedicated portfolios are generally suitable for investors who need a dependable source of income for what's to come. They can give unsurprising cash flow while lessening market risk, reinvestment risk, inflation risk, default risk, and liquidity risk.

Disadvantages of a Dedicated Portfolio

Deciding the least costly portfolio with a matching duration and coupon can mathematically challenge. Building dedicated portfolios requires fixed-income ability, significant level math, and enhancement hypothesis information and comprehension of liabilities. Additionally, many forms of bonds are not proper for dedicated portfolios.

Illustration of a Dedicated Portfolio

Expect a company has a pension fund, and that it hopes to make payments beginning in 20 years. The company could decide the expected liabilities, then build a portfolio that — in light of the overall value plus interest payments — would generate the right amount of cash to pay the liabilities with little investment risk.

Risk Driven Investing — LDI

A well known application of a dedicated portfolio in retirement investing is called liability-driven investing. These plans utilize a "skim way" that expects to reduce risks —, for example, interest rate or market risks — after some time and to accomplish returns that either match or surpass the growth of anticipated pension plan liabilities.

Obligation driven investing strategies contrast from a "benchmark-driven" strategy, which depends on achieving better returns than an outer index, for example, the S&P 500 or a set of benchmarks addressing different investment asset classes. Responsibility driven investing is fitting for circumstances where future liabilities can be anticipated with some degree of precision. For people, the classic model would be the flood of withdrawals from a retirement portfolio over the long haul beginning at retirement age. For companies, the classic model would be a pension fund that must make future payouts to pensioners over their expected lifetimes.