Which type of investor typically uses liability-relative asset allocation?

Liability-relative asset allocation is primarily employed by investors who have specific liabilities that need to be funded over time, making it essential for them to align their investment strategy with these future obligations. This is particularly relevant for banks and defined benefit pension plans, which must meet guaranteed payouts to their beneficiaries or creditors.

For banks, maintaining adequate funding to support their loan portfolios and operational risks is crucial, while defined benefit pensions have a legal obligation to meet the promised retirement benefits to employees. These institutional investors develop their asset allocation strategies in a manner that takes into account the timings and amounts of the cash flows they are obligated to meet. By focusing on their specific liabilities, they can aim for a more stable and predictable investment return that aligns directly with their payout responsibilities, thus managing the risk of underfunding their liabilities.

Other types of investors may not have the same level of obligation or time sensitivity in their investment horizons, making the liability-relative approach less applicable to them.