We think that shareholders will benefit more from the reduced interest rate risk of a portfolio with a shorter duration than they will be harmed by the slightly lower yield on intermediate-term bonds. The change also permits us to buy bonds with a slightly lower credit rating. The benchmark change allows us to move down a level to A-rated bonds, which are far more plentiful than double A and triple A securities. As of year end, only 239 corporate bond issues were rated double A or better, compared to 2,400 with ratings of A or better. The new benchmark gives us opportunities to diversify the fund and operate in a more liquid market when buying and selling bonds.
Rating agencies determine a company's creditworthiness based on the amount of debt it has taken on.
The change came after academic studies proved companies could improve returns to shareholders by strategically increasing their debt level. The studies showed a better return on capital raised through debt than on equity issued as additional shares of stock, and corporate America took notice. It's not as though this happened to corporations when they weren't looking. The restructuring of the portfolio is almost entirely an exercise in duration, not sector, management. I don't expect that to change significantly as we reconfigure the portfolio to align it with the new benchmark.