Indexing Strategies in Liability-Driven Investing

As a portfolio manager of a fixed income fund with a significant focus on liability-driven investment strategies, you are tasked with developing a comprehensive plan to implement an indexing strategy. The portfolio will need to match the duration and cash flow profile of the fund's liabilities while also maintaining cost efficiency and managing tracking error.

Discuss the benefits and challenges of using an indexing strategy in the context of liability-driven investing. Include specific considerations related to duration matching, reinvestment risk, and the potential impact of changes in interest rates on both the liabilities and the strategy's effectiveness. Conclude with your recommendations for constructing an indexed portfolio that aligns with the fund's liabilities.