Seems like just semantics, but Bobcat2 says using two funds to match liabilities is duration targeting, not duration matching.
Quote from: https://www.perplexity.ai/search/compar ... U8kDIcn5cQ follows:
Quote from: https://www.perplexity.ai/search/compar ... U8kDIcn5cQ follows:
I kind of doubt that what we are doing to cover the gap years is precise enough to truly qualify as duration matching, but it seems more precise than duration targeting with several bond funds.Duration matching and duration targeting are two strategies used in fixed-income portfolio management to manage interest rate risk. While both approaches aim to align a portfolio's duration with a specific target, they differ in their implementation and precision.
Duration matching involves precisely aligning the duration of a bond portfolio with the investor's investment horizon or the duration of their liabilities. This strategy aims to completely eliminate interest rate risk by ensuring that any changes in interest rates affect both assets and liabilities equally. For example, if an investor has a 10-year investment horizon, they would construct a portfolio with an exact 10-year duration.
Duration targeting, on the other hand, is a more flexible approach. It involves maintaining a portfolio duration close to, but not necessarily exactly matching, a target duration. This strategy allows for some deviation from the target, which can be beneficial in terms of portfolio management flexibility and potentially capturing additional returns.
Key Differences
Precision: Duration matching is more precise, aiming for an exact match between portfolio duration and the target. Duration targeting allows for some deviation from the target duration.
Flexibility: Duration targeting offers more flexibility in portfolio management, as it doesn't require constant rebalancing to maintain an exact duration match.
Risk Management: Duration matching theoretically eliminates all interest rate risk, while duration targeting may leave some residual interest rate risk.
Implementation: Duration matching often requires more frequent portfolio adjustments to maintain the exact match, especially as time passes and the investment horizon shortens. Duration targeting may require less frequent adjustments.
Potential Returns: Duration targeting may allow for potentially higher returns by providing more flexibility in security selection and portfolio composition.
While duration matching offers more precise risk management, duration targeting is often easier to implement and maintain, especially for individual investors or smaller portfolios. The choice between the two strategies depends on the investor's risk tolerance, investment goals, and resources available for portfolio management.
Statistics: Posted by MtnBiker — Fri Feb 07, 2025 9:10 pm
