Cash Flow Matching in Liability-Driven Investment Strategies

As a fixed income portfolio manager, you have been tasked with constructing a liability-driven investment strategy for a pension fund that has a series of projected cash outflows over the next 10 years. These cash outflows occur semi-annually and are due to pension payments to beneficiaries. The total expected cash outflow amounts to $5 million per year, with the first payment due in six months.

The fund has a current asset base of $50 million, invested primarily in a mix of corporate and government bonds. Given the specific timing and amounts of cash flows, discuss the cash flow matching approach you would implement to effectively align the assets of the pension fund with its liabilities.

In your response, be sure to include the rationale behind cash flow matching, the types of fixed income securities you would consider utilizing, and any risks that may arise in executing this strategy. Support your argument with relevant calculations where appropriate.