Corporate versus credit indices: What’s the best match for liability-driven investing?

At Wellington, we partner with corporate DB plan sponsors at all stages of the LDI process. In helping to structure and implement customized LDI solutions, we manage liability-hedging and return-seeking portfolios against a wide variety of benchmarks. These include benchmarks specific to US Treasuries or US investment-grade credit and benchmarks that blend the two, as well as equities. Further, plan sponsor benchmarks can focus on specific maturity bands, such as the intermediate (1 – 10 year) or long (10+ year) portions of the US credit market.

As we help develop these benchmarks, plan sponsors often ask what the difference is between investment-grade corporate and credit indices. It’s an important question with implications for a variety of LDI-related decisions. In this paper, we compare the composition and performance of corporate and credit indices, as well as intermediate and long-maturity indices. We also share our insights on choosing indices that are the best fit for a plan’s liability. 

Here we highlight some of our top takeaways from the research:

• Historical performance — Corporate indices have generated modestly better total returns than credit indices over most time periods.
• Downside mitigation — Given their lower level of corporate exposure, credit indices have historically done better than corporates in credit sell-offs (e.g., 2008, Q1 2020, and 2022).
• Liability fit — Corporate and credit indices can be used to match the liability, though the weightings of the “best fit” liability benchmark can vary at the margins, depending on the indices chosen.
• Benchmarks used by active managers — The majority of managers in the intermediate and long credit peer groups use a credit index today.
• Active management potential — The median manager in the intermediate and long peer groups has consistently outperformed the corporate and credit indices, though alpha generation has been modestly stronger for strategies benchmarked against the credit indices.

How the corporate and credit indices stack up

Corporate indices, as their name implies, only include corporate issues, whereas credit indices include corporates but also issues of government-related entities, such as agencies, local authorities, sovereigns, and supranational organizations. As shown…

To read more, please download the full paper below.