Marty Leibowitz on Duration Targeting with Bonds

In 1990, Martin L. Leibowitz, together with Terence C. Langetieg and Stanley Kogelman, published an article, “Duration Targeting and the Management of Multiperiod Returns,” in the September/October Financial Analysts Journal. The authors found that bond portfolios maintain roughly the same maturity or duration over time as they balance out and that a duration-targeted portfolio may represent a better performance benchmark than a standard bond index. This result continued to intrigue Leibowitz, even as his career drifted away from bonds and fixed income.

In the January/February 2014 issue of the FAJ, Leibowitz returns to the topic of bonds and duration targeting with his article “Long-Term Bond Returns under Duration Targeting,” coauthored with Anthony Bova, CFA, and Stanley Kogelman.

FAJ editor Rodney N. Sullivan, CFA, got the chance to talk with Leibowitz about his recent research.

Leibowitz says that he “had always thought about . . . this result that Terry [Langetieg] had come up with” in the 1990 article. “I was curious as to how general it was and whether something more could be made out of it. . . . The finding was so intriguing, and I didn’t really understand it.”

In this extended FAJ author interview, Leibowitz defines duration targeting and its subtleties (“Funds that do duration targeting don’t know that they are doing duration targeting”). He and his coauthors argue that duration targeting continues to be underappreciated. Their theoretical model shows that over multi-year horizons, annualized duration-targeting returns converge back to the starting yield regardless of the rate path.

“Basically, duration targeting has some degree of risk reduction compared to how bond portfolios are typically viewed,” he says.

To hear Leibowitz discuss the highlights of his findings, listen to the full interview (above) or download the MP3.

CFA Institute members can access the full article on the CFA Publications website.

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