Avoid the Agg Drag
- Some defined benefit pension plan sponsors that have not begun to de-risk are hesitant to shift out of Agg-based fixed income allocations toward longer-duration mandates in the current environment, citing the specter of rising interest rates.
- Lengthening the duration of the existing fixed income portfolio can immediately lower surplus risk, without the need to reduce the allocation to growth assets.
- The Agg’s duration and composition mean it isn’t well suited to track a long duration liability that is discounted based on high-quality corporate bonds.
- Even ignoring the liability, a long-duration strategy may actually outperform the Agg if interest rates do not rise by as much as or as fast as is already priced into the yield curve.