Liability based benchmark

CFA Level III Portfolio Management
#1

Which of the following portfolios is most likely to use a liability-based benchmark?

  1. A portfolio managed for a private client with a goal of capital appreciation
  2. An intermediate-duration fixed-income portfolio managed for a defined benefit pension fund
  3. The total portfolio for a defined benefit pension fund with an asset allocation of 80% fixed income/20% equity

Why is 2. incorrect here?

#2

It’s unlikely (though not impossible) that the PBO for the pension fund is exclusively intermediate-term, but it’s far more likely that it has some short-term liabilities, some intermediate-term liabilities, and some long-term liabilities. An intermediate-duration fixed income portfolio would not match the liability structure in that case.

2 Likes
#3

That explains it, thank you!