The Role of Indexing in Liability-Driven Investment Strategies

As an investment manager overseeing a fixed income portfolio for a large pension fund, you have been tasked with developing a liability-driven investment strategy. The fund has specific future cash flow obligations, including pension payouts that are indexed to inflation. In this context, discuss the role of indexing as part of a liability-driven investment strategy.

Specifically, analyze how indexing can help align the fixed income portfolio with the cash flow needs of the pension fund. Consider the benefits and potential drawbacks of an indexing approach compared to more active strategies. Your analysis should include examples and demonstrate an understanding of the implications of indexing in a liability-driven framework.