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BOND AND EQUITY PORTFOLIO MANAGEMENT STRATEGIES - Coggle Diagram
BOND AND EQUITY PORTFOLIO MANAGEMENT STRATEGIES
ACTIVE BOND PORTFOLIO STRATEGIES
TYPES OF ACTIVE MANAGEMENT STRATEGIES
INTEREST RATE ANTICIPATION
The riskiest strategy because the investor must act on uncertain forecast of future interest rates.
When interest rate rise bond price drop & rise.
Increase the long term investment bonds when the interest rates are expected to decline & vice versa.
The risk of misestimating interest rate movement
VALUATION ANALYSIS
The bond was chosen based on its intrinsic values.
Factors that affecting the bond's intrinsic value?
Bond-rating
Call feature
Interest rate
Buy undervalue and sell it when overvalued bonds
If the bond rating is higher than interest is low and as result income is low
CREDIT ANALYSIS
It involve with detail analysis of the bond issue to determine expected changes in its default risk.
Internal & external factor affect the credit rating of the company such as inflation.
Higher the risk higher the return
YIELD SPREAD ANALYSIS
Yield spread means difference between the return of two bonds
Factor affecting yield spread:-
Business cycle
Volatility in the market interest rate
Take advantage of the market scenario.
Requires major time to time adjustment or changes in portfolio.
The goal is to maximize total return but at increased risk.
Requires continues analysis and observation on the part of portfolio manager
PASSIVE BOND PORTFOLIO STRATEGIES
This type of strategy most likely just follow the market chart and holding of a particular index.
-This kind of strategy will require the lower cost of fees incurred
.
This strategy does not any specific management team to the investment decision in the company.
This is because the strategy is not proactive with the market.
Types of passive strategy.
Buy and hold strategy
From the name itself, we can understand that this strategy most probably the investment manager will buy the bond and hold it until it reaches the maturity period or close to it.
The investor was a risk-averse and don't trade actively to maximize the return.
Only the default-free or high qualities security will be chosen to trade.
This strategy will minimize the amount of transaction.
Increase the amount of income and lower the risk.
Applicable for pensioners and insurance companies.
Indexing strategy
The objective is to construct a portfolio of bonds that will equal the performance of a specifies bond index.
Investment is done only in the bond of specific bond index.
Performance is measured in terms of total return realized over the investment horizon.
Advantages of Indexing Strategy.
Poor & inconsistent performance of active bond managers could be avoided.
Lower transaction cost.
Degree of control exercised by the investor.
Factors affecting the selection of the index.
Investors risk tolerance.
Objective of the investors.
TYPES OF BOND STRATEGIES
PASSIVE BOND STRATEGIES
MATCH-FUNDING TECHNIQUES
ACTIVE BOND STRATEGIES
MATCH-FUNDING TECHNIQUES
Combination of passive and active management strategy.
Objective is to get higher return at minimum risk.
Require constant monitoring.
Could give more return than buy & hold but not higher than active management strategy.