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.
The historic milestone reached when the white smoke emerged from Brussels and London on 24 December 2020 represents the end of the beginning in the establishment of the new relationship between the UK and EU, rather than an end in itself. Nonetheless, with the lingering threat of a tumultuous no-deal exit now removed, the headwind that this represented to the performance of UK assets has now subsided.
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Investors have predominantly relied on developed markets sovereign bonds for defense in balanced portfolios, but low rates have diminished their diversification characteristics.
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