CHAPTER 19: Bond portfolio management strategies
Passive management strategies
Active management strategies
Core-plus management strategies
Matched-Funding strategies
Contigent and Structured management strategies (CFA level 3)
Buy and hold
Modified buy-and-hold: still look for oppurtunities to trade with more desirable postion if the occasion rise
=> if the buy-and-hold strategies is modified too much, it becomes and active strategies
Manager selects a portfolio of bonds base on the objectives and constraints of the client with the intent to hold to maturity
Bond ladder: divide investment funds evenly across the portfolio into instruments that mature at regular intervals.
=> receive regular income payment and reduce interest rate risk
Indexing
Full replication
Statified sampling
Interest rate anticipation
relying on uncertain forecasts of future interest => the most risky active strategy
Adjust duration: When interesr rate is expected to increase => price is expected to decrease => decrease Duration and vice versa
Purpose: preserve capital when i is expected increase and achieve capital gains when i is expected to decrease
Valuation analysis
Select bond by intristic value
=> buy undervalued and sell/ignore overvalued bonds
Credit analysis
Project rating changes of bond issuer's credit quality prior to rating agency's announcement
Most apply for High-yield (Junk bond)
Credit analysis model: modified Z-score
Yieild spread analysis
Spread analysis assumes normal relationships exist between the yields for bonds in alternative sectors (e.g., the spread between highgrade versus low-grade industrial)
When an abnormal relationship occurs, a bond manager
could execute various sector swap
Swap: implement sau khi analysis đống trên
Pure yield pickup swap
Substituitio swap
Tax swap
Trading out a low-coupon bond into a comparable higher-coupon bond => realize increase in current yield and YTM
Assume a short-term imbalance in yield spread between issues that are perfect substitutes. The imbalance will be corrected in near future => tận dụng imbalance in yield đấy để swap trong short term
Popular to individual investors because it's simple and few rísk
Sell bond with low profit and loss then buy another bond => defer tax (eg: buy municipal bond)
Note: can not swap identical issue -> wash sale => loss will not be recognized
Core: 70%-80% of available funds in passively managed portfolio of high-grade securities
Plus: the remainder of the funds would then be managed actively => to achieve abnormal rates of return
Dedicated portfoilios
Definition: Bond portfolio management techniques that are used to service a prescribes set of liabilities
Pure cash-matched dedicated portfolio: develop a portfolio of bonds that will provide a stream of payments from coupon, sinking funds, and maturing principle payment that exactly matcheda liability schedules
Dedication with reinvestment: giống pure cash-matched except stream of payment do not have to match exactly. Any inflows can be used to reinvest at conservative rate
Immunization strategies
Interest rate risk
Price risk:
i increase => realized price > expectations
i decrease => realized price < expectations
Coupon reinvestment risk:
i increase => ending wealth < expectation
i decrease => ending wealth > expectation
i changes lead to cash flow change => immunize là điều chỉnh ntn đấy cho 2 cái risk trên offset nhau để specific rate of return nó vẫn giữ nguyên như ban đầu
Classical immunization
Mechanic of Bond immunization:
Duration > Investment horizon => Investor faces Net price risk
Duration < Investment horizon => investor faces Net reinvestment risk
Duration = Investment horizon => investor is immunized
Horizon matching
the combination of cash-matched và classical immunization ( 2 strategies ở trển)
Contingent-immunization
Definition:a portfolio strategy that allows a bond portfolio manager to pursue the highest returns available through active strategies while relying on classical bond immunization to ensure a given minimal return over the investment horizon. nôm na là dùng active nhưng vẫn phải kết hợp immunize**
Cushion spread: the difference between current market rate and some floor rate => require client be willing accept floor rate-để dùng cái difference từ initial investment (side fund) đấy để active manage
When the value of portfolio reaches the minimun return (trigger point) => stop active strategies and use claasical immunization
- Cái này xem hình 19.21 đọc ví dụ mới hiểu chứ t cũng không biết giải thích như nào