What is a Dedication Strategy?

Dedication strategy is a strategy in asset management that is designed to match expected returns on investments with their anticipated subsequent liabilities. It is a cash flow matching used by investors in selecting investment portfolios. It involves investing in certain investment portfolios in which the expected returns are matched to pay future liabilities. Investors use a dedication strategy when investing in pension funds or insurance portfolios with the goal to match the anticipated return on the investment with future liabilities.

How Does a Dedication Strategy Work?

When an investor invests with the aim of funding certain future liabilities with the anticipated returns on investment, this is a type of cash flow matching called a dedication strategy. Dedication strategy is most effective when the investor or portfolio manager can predict future liabilities and also forecast the likely returns of earnings that an investment portfolio will accrue over a period of time. There are certain types of portfolios that the dedication strategy is commonly used for, they include fixed income securities, corporate bonds, government bonds, low-risk bonds, mortgage-backed securities and others. Pension funds and insurance companies often use dedication strategy, they make investments with the goal that the anticipated earnings on the investment would meet future liabilities.

An Example of Dedication Strategy

The illustration below would enhance a better understanding of how a dedication strategy is used. The "The California Employers' Benefit Trust (CERBT) Fund is a trust fund operated ny CalPERS which is precisely dedicated to provide funding for other after-employment benefits that can be enjoyed by Californian agencies. CERBT is contained in section 115 of the trust fund designed to prefund OPEB (Other Post Employment Benefits). The earnings of CERBT are designed to finance future costs. CalPERS is an acronym for the California Public Employees Retirement System.