NEPC’s Aaron Chastain was recently quoted in Chief Investment Officer discussing the growing demand for customized fixed income benchmarks as institutional investors seek more tailored exposures. View the full article on Chief Investment Officer’s site here.
Fixed-income benchmarks have come a long way from when the Bloomberg U.S. Aggregate Bond Index was the main tool asset managers and asset owners used for performance measurement.
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For complex portfolios, custom benchmarks can be an improvement over traditional indexes, since they can track closer to an asset owner’s targeted hedging portfolio; however, they are not a perfect solution, wrote Aaron Chastain, a principal and the corporate solutions leader at NEPC, in an email.
“A hedge ratio of 100% for interest rates and credit spreads still cannot create a perfect hedge against economic outcomes, demographic outcomes and assumption changes,” Chastain wrote.
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NEPC’s Chastain wrote that advisers who work with clients to build a customized index seek to clearly define stakeholder expectations and constraints to ensure the appropriate focus on results is maintained.
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Not everyone is a fan of customized indexes. Chastain wrote their use is being driven by asset managers looking for business because de-risking and pension risk transfers have reduced the need for liability-driven investment portfolios.
Larger pension fund sponsors with unique needs, as well as significantly de-risked plans that are seeking hibernation for their fund, may benefit from customized benchmarks, but NEPC’s Chastain wrote, “We believe the majority of plans remain well served by a thoughtful implementation of [U.S.] Treasurys and corporate bonds, paired with completion management.”
Click here to read the full article on the Chief Investment Officer site.