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Pension Funds Go Long

Pension funds are trying to better match their assets and liabilities via new investment strategies that take into account the longer-dated nature of liabilities and the change could drive pension fund managers to invest in more long bonds.

Pension funds are trying to better match their assets and liabilities via new investment strategies that take into account the longer-dated nature of liabilities and the change could drive pension fund managers to invest in more long bonds. Fixed-income professionals credit this with fueling a recent rally in 30-year Treasuries and say there could be more room to run.

"Market indices look at the combination of fixed income and equities and don't consider liabilities. When pension funds have a lot of volatility on the asset side, there's a big mismatch," said Matthew Tucker, fixed-income strategist at Barclays Global Investors. He said pension funds are moving away from widely used benchmarks because there is a gap of 10 years or more in duration between the index and their liabilities.

While the last bear market for equities ended years ago, these funds have only more recently started to consider more closely matching assets and liabilities because pension funds smooth assets over five years and price liabilities at a static rate that doesn't reflect market rates. Tucker said his clients have requested BGI's help in designing portfolios with their liabilities as their benchmark but declined to specify plans that have changed indices.

Sargent & Lundy, a consultant to the electric power industry, recently implemented a strategy to reduce risk to account for market movements, according to Kenneth Davis, head of the $175 million retirement plan's committee in Chicago. While the fund still runs its bond portfolios against the Lehman Brothers Aggregate Bond Index, it sometimes lengthens the duration of its portfolio by making off-index bets on Treasury futures.

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