Liability Relative Investing

Commercial real estate is widely recognized as one of the four primary core assets: stocks, bonds, real estate and cash. Liability-driven investing (LDI) has received renewed attention, particularly in the aftermath of the global financial crisis. Although liabilities often have been modeled using long-term government or corporate bond returns, most liabilities are linked in some way to inflation. Liability-driven investing need not restrict the opportunity set only to fixed income assets, which remain exposed to credit risk, inflation risk, political risk and currency risk.

Morningstar recently conducted an LDI analysis using data through 2009 that examines strategic allocations to U.S. and international real estate as determined using liability-relative optimization.

Real Estate Investment In Liability-Driven Portfolios - Morningstar, July 2011