Explain whether you agree or disagree with the following statement: "All duration-matching strategies are indexing strategies."

What will be an ideal response?

One would disagree with the statement because a portfolio manager following an indexing strategy can be ordered not to deviate from the benchmark's duration. Thus, the manager could not achieve a desired duration match. For example, even when minor mismatches in the primary risk factors are permitted in an enhanced indexing strategy, the mismatch may not occur with respect to duration. To illustrate further, suppose that the benchmark index has a duration of 5 . Then a portfolio manager pursuing an indexing strategy is not permitted to construct a portfolio whose duration differs from 5 . More details are given below.

A duration-matching strategy refers to a method of assembling a bond portfolio so that the duration of the portfolio equals the duration of the investor's liability stream. Duration is the number of years until the investor receive the present value of all income from a bond (including interest and principal), and is used to gauge a bond's sensitivity to interest rate changes. A duration matching strategy is intended to reduce the portfolio's sensitivity to interest rates in order to reduce the risk of loss to the holder. Whereas a duration-matching strategy actively matches the duration of the assets to the duration of the liabilities, an indexing strategy is
a passive strategy, which tries to follows the weight age of an index on a daily basis. It is usually taken up with the idea of not underperforming the index, without actively handling the same aggressively. A pure bond index strategy may match that of some index that the investor may have chosen as a benchmark. Only if the matching to the index is made to achieve a certain duration can we say that the duration-matching strategy coincides with an indexing strategy.