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.
By considering the return profile of a manager along with its size in the portfolio, active risk provides additional insight to risk management decisions, helps build better portfolios, and contributes to better governance.
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In 2018, we reviewed the state of social equity investing, with a focus on racial equity investing. The themes we highlighted then are even more relevant today. In this paper, we discuss the renewed sense of urgency around racial equity investing and put forward three actions investors can take to address the inequities inherent in our society.
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