When employing a liability-based mandate, what is critical for investment strategy?

In a liability-based mandate, the primary focus is on ensuring that the investment strategy is aligned with the specific cash flow needs required to meet future liabilities. This means strategically timing when certain cash flows from the investment portfolio will be available to cover outgoing liabilities.

Selecting investments that correspond directly to the timing and amount of these liabilities is crucial because it minimizes the risks associated with fluctuations in interest rates and market conditions. By matching cash flows to liabilities, the investor aims to create a portfolio that will reliably provide the necessary funds to meet obligations, thus ensuring financial stability.

Other approaches, such as diversifying asset classes or maximizing capital growth, may be beneficial under different investment strategies, but they do not directly address the imperative nature of liabilities in this context. Additionally, avoiding risks entirely is generally impractical in investing, as some level of risk is inherent in any asset class. However, a liability-based mandate prioritizes managing and aligning risk with specific cash flow needs instead of completely avoiding it.