Modern portfolio management increasingly includes the use of targeted-duration strategies as a means of achieving a desired balance between risk and return. In such strategies, a constant duration is maintained through periodic rebalancing.
One of the most important characteristics of duration-targeting strategies is the “focusing” of the return distribution on a minimum-variance point. This point occurs when the duration is equal to about one-half the investment horizon. It is consequently possible to achieve “partial immunization” of a bond portfolio by simply maintaining its duration at one-half the length of the investment horizon.
Many performance benchmarks, including the Salomon Brothers BIG Index, exhibit an almost constant duration. It follows that, by tracking a bond index, one can obtain many of the results of a duration-targeting strategy.
