Managing Editor's Letter: To Sleep, Perchance to Dream

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To some, LDI (liability-driven investing) evokes boredom. Thinking of the term immediately creates a feeling of emptiness, devoid of emotional attachment. For these people, the term is a three-letter word. Just pondering LDI translates immediately to sheep jumping over clouds.

These people are not our target audience. Our audience cares about this strategy deeply, and thus (we hope) a magazine that analyzes every possible angle of the approach from a critical perspective is valued. Our special issue attempts to not just scrutinize the superficial layer of this investment strategy—one of the most prominent strategies for investing defined-benefit pension assets worldwide. The goal is not to define LDI and trace its historical origins. While the background of LDI is naturally embedded within every article of this magazine, its true purpose is to provide a more personal and human touch to LDI—for example, outlining how this investing tactic changed the course for one St. Louis-based shoe company (page 54).

As with every issue, our columns often delve into topics more sharply than our articles because they celebrate opinion (well-informed ones). The column by Angelo Calvello quickly comes to mind. “LDI has its own internal contradictions,” he writes, noting that the objective of a company’s pension plan—which has a fiduciary duty to shell out benefits—is often directly at odds with the company as a whole, which has the profit motive firmly at the forefront of its mind. So what does that mean for General Motors’ CEO Daniel Akerson, or any corporation with overwhelming pension liabilities? They should expect to continue taking huge hits to company margins to free themselves of their pestering pension problem. A more colorful analogy: A corporation wanting to divest itself of massive pension liabilities is like willingly amputating an arm because of a severe but somewhat unknown injury. Who knows if it’s the right choice—but at least the injury is gone.

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Our founder Charlie Ruffel asserts in his column that the evolution of LDI may mean death for many asset managers, as there will be few who are relevant to “this new world” in which the goal among corporate pensions is gaining sufficient assets to meet all liabilities, both current and future. His prediction: Out of the top 50 asset management complexes in the US, perhaps 10 will be competitive enough to stay in the pension universe. What are the implications of this for institutional investors? Asset managers will increasingly be contending with the NISAs of the world—ones that have already established credibility and trust to help companies like Brown Shoe thrive.

Those are just two examples. These, and the rest of our columnists, serve as proof that LDI is not just a three-letter word, but a strategy that affects the lives and futures of corporations worldwide. When you dream at night after reading this issue, I hope you dream of how NISA succeeded in dominating a piece of the LDI market, or of GM’s CEO struggling with whether to cut off his company’s metaphorical painful arm. Just as long as you don’t fall asleep reading any of it.

—Paula Vasan, Managing Editor, aiCIO

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Having seen this cover, Kathy Lutito will be slightly worried. In 1990, New Yorker scribe Janet Malcolm penned The Journalist and the Murderer—an essay detailing the Faustian bargain between writer and subject. “Every journalist who is not too stupid or too full of himself to notice what is going on knows that what he does is morally indefensible,” she famously wrote. “He is a kind of confidence man…gaining [a subject’s] trust and betraying them without remorse. Like the credulous widow who wakes up one day to find the charming young man and all her savings gone, so the consenting subject of a piece of nonfiction learns—when the article or book appears—his hard lesson.”

Malcolm went on to describe the case of Jeffrey MacDonald, a doctor convicted of murdering his pregnant wife and their two daughters, who sued author Joe McGinniss over his non-fiction novel Fatal Vision. McGinniss had been given complete access to MacDonald’s legal defense, befriending the doctor and repeatedly stressing belief in MacDonald’s innocence—all while writing a book labeling him undoubtedly guilty. A shocked MacDonald sued for fraud from a jail cell, citing 40-odd fawning letters from the author. After a hung jury the two parties settled for hundreds of thousands of dollars, a convicted murderer receiving money from an author who by most accounts produced a book void of errors.

And as it is with murders, so it is with pensions—kind of. Whereas McGinniss approached Malcolm to share his side of the story, I approached Lutito—CIO of the CenturyLink Investment Management Company—to share hers. Pension executives, unlike convicted killers claiming innocence or journalists with a guilty conscience, have no great urge to tell their tale, and thus it took some convincing to allow me access to her world.

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But access she gave. On a July afternoon in Denver, Colorado, Lutito and her team hosted me in their offices to discuss liability-driven investing (LDI), and how their fund had avoided the worst of the financial crisis’ drawdowns. It was a story of foresight, success, and a little luck. It was meant to be a straight profile—fund X did this, then this, this happened, and this is what they learned—without much surprise or excitement.

But then the story changed. As we delved deeper into the world of LDI for our second dedicated issue on the subject, we noticed something: There was a demarcation line between those funds that successfully implemented some form of LDI before the fall of 2008—like Lutito’s CenturyLink—and those that didn’t. There was the rare fund making changes following the crisis, but they are few and far between. Thus, instead of writing a pure profile of Lutito and her fund, we decided to be more aggressive and ask the larger question: Is LDI dead?

For those of you who know your magazine history, that title should resonate. In 1966, Time magazine asked the question “Is God Dead?” on its cover. That issue set records for newsstand sales, and is now one of the most famous magazine covers of all time. The article itself was perhaps overly intellectual and failed to come up with a strong conclusion. But it asked a powerful question on an issue that the media had, until then, largely and willfully ignored.

For this issue of aiCIO, I think the template fits (besides the abstruse writing and weak finale, of course). I’ve often spoken about the inherent tension within an advertising-based magazine revenue model. Every editor who is not too stupid or too full of himself to notice what is going on knows that there is a constant pull toward placating those who spend money advertising in the publication. It would be all too easy to write unfailingly positive portraits of LDI success in an issue where sponsors were all advertising a path to that very success. Thus, in an attempt to avoid being a shill—while still attempting to be fair to all sides—we asked the larger question.

But of course I worry about what Lutito will think. She is the quintessential corporate pension CIO: soft-spoken, thoughtful, intelligent, and adept at avoiding the spotlight. Will she consider what I did with this cover story—couching a profile of her fund within the larger and aggressive question posed in the title—a McGinniss-like betrayal? Will I be seen to be using her kind acceptance of my inquiry as a weapon against her? Will I, in short, be the remorseless journalist Janet Malcolm described? In her essay, Malcolm suggested that in the end, because he left such an obvious trail of deceit via the letters he sent the murderer MacDonald, McGinniss in fact secretly wanted to be exposed as the “morally indefensible” journalist we all are. I, for one, want no such surprise exposure. Thus, this letter: my mea culpa. In the end, I decided that Lutito and her team—like almost every pension management team I’ve met in the three years of running this publication—would value serious inquiry over furtive shilling. Just please don’t sue me, Kathy.

—Kip McDaniel, Editor-in-Chief, aiCIO