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 year 2020 continues to be tumultuous. For many US pension plan sponsors, the déjà vu of falling discount rates and volatile equity markets again raises the question…
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With the initial chaos of the COVID-19 market dislocation behind us but uncertainty still ahead, now is the time to refocus and potentially recalibrate core tenets of pension plan management. In this video series, we share our recommendations on how to address these challenges.
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