Reviewed by Feb 19, 2021| Updated on
A dedicated portfolio is an investment portfolio, where cash flows balance the planned liabilities. Dedicated portfolios are typically operated passively and consist of stable fixed-income assets of investment-grade quality. Financial analyst, Martin L. Leibowitz, who wrote extensively on the concept, has advocated dedicated portfolios calling it a cash-matching technique.
Bonds and other fixed-income securities are bought in a dedicated portfolio and typically retained until maturity. The aim is to create a cash flow from the coupons matching payments that must be made over a specified period.
Dedicated funds use securities of an investment-grade to mitigate default risk. However, returns may be constrained by the quality and stability of investment-grade securities.
Dedicated portfolios are ideally fit for investors seeking a stable source of potential profits. These will have steady cash flow while mitigating market risk, risk of reinvestment, risk of inflation, risk of default, and risk of liquidity.
It can be mathematically challenging to evaluate the least expensive portfolio with the corresponding length and coupon. Creating dedicated portfolios includes experience in fixed income, high-level mathematics, and knowledge and understanding of liabilities in the theory of optimisation. Additionally, other types of bonds are not appropriate for dedicated portfolios.
Assume a corporation has a pension plan, and expect payments to start in 20 years. The company was able to calculate the estimated liabilities, and then create a fund that would produce the correct amount of cash to cover the liabilities with little investment risk based on the overall value plus interest payments.