Across Los Angeles boardrooms, fixed income is often treated as the balancing force within a portfolio strategy.
Corporate treasury teams rely on it to preserve the value of future operating capital. Pension committees depend on it to help manage liability expenditures. Family offices use it to generate long-term income and preserve capital.
For decades, bonds have served to manage overall portfolio volatility while providing income, liquidity and relative consistency through market cycles.
Southern California is home to one of the largest concentrations of institutional capital in the country. Pension systems, health care networks, entertainment companies and privately held family enterprises collectively oversee hundreds of billions of dollars in assets, making the region particularly sensitive to changes in investable capital and broader markets. Yet many bond portfolios today still reflect assumptions formed in a marketplace transformed by data, technology and artificial intelligence.
For much of the past decade, relatively low directional volatility and steady monetary policy formed the basis of positioning within the U.S. bond market. Duration exposure was often one of the primary drivers of returns. Passive bond strategies delivered consistent income, while liquidity and price stability were widely viewed as inherent attributes of the asset class.
That backdrop has changed.
Non-directional interest rate volatility is now wider than it was for most of the post-financial-crisis era. Capital markets remain in constant flux as investors seek to balance price and income objectives. Despite this shift, many institutional portfolios still resemble frameworks built during the prolonged period of yield-curve steepening – characterized by limited short-duration exposure and heavy weighting at the long end.
Evaluating the shift
For Los Angeles institutions, these shifts are often driven more by internal structural considerations than by pure market dynamics. Many organizations in the region manage complex capital structures with exposure to investment-grade bonds, public equities, private debt and equity, bank loans, and venture capital. Within these portfolios, fixed income is typically earmarked to deliver steady, reliable returns that help meet inflationary pressures and ongoing liabilities.
Duration exposure, for example, plays a critical role in how bond portfolios respond to interest rate movements. Allocations with higher rate sensitivity can experience price fluctuations that differ significantly from what many committees grew accustomed to during years of unusually stable bond markets.
Liquidity assumptions represent another important structural consideration. While investment-grade bonds are generally viewed as readily accessible sources of capital under normal conditions, periods of market stress can lead to tighter trading conditions and elevated transaction costs.
Benchmark construction also warrants closer attention. Most broad bond indices weight holdings based on the amount of debt issued, meaning the largest borrowers account for the largest portions of the index. Portfolios built around these benchmarks, therefore, mirror the market’s issuance patterns rather than optimized risk-return objectives.
None of this changes the central role bonds continue to play in institutional portfolios. Fixed income remains a core component for managing capital, balancing risk and maintaining liquidity.
In Los Angeles, where balance sheets frequently include significant exposure to real estate, operating companies and private investments, the behavior of the fixed income allocation can materially influence broader financial planning decisions. As market dynamics evolve, long-held assumptions about stability, liquidity, and diversification must be re-evaluated.
For Los Angeles executives, board members and fiduciaries, the question is not whether bonds still belong in portfolios – they clearly do. The more relevant conversation today is whether yesterday’s assumptions about how they perform still match the realities of today’s market environment.
David Kang is the founder and chief executive of Ducenta Squared Asset Management, which is based in El Segundo and has $4 billion in assets under management.
