Bond asset management - an overview [ppt]

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Bond asset management - an overview [ppt]

  1. 1. Finance & Investment Conference Bond Asset Management – An Overview Paul Sweeting 22-24 June 2003 The Caledonian Hilton Hotel, Edinburgh 
  2. 2. Topics <ul><li>Types of bonds and their components </li></ul><ul><li>Credit ratings </li></ul><ul><li>Bond pricing </li></ul><ul><li>Benchmarks and indices </li></ul><ul><li>Liability-based benchmarks </li></ul><ul><li>Index-tracking </li></ul><ul><li>Active management </li></ul><ul><li>Risk controls </li></ul><ul><li>Implementation </li></ul><ul><li>Reporting </li></ul>
  3. 3. Types of bonds and their components <ul><li>Government and credit </li></ul><ul><li>Fixed interest and index-linked </li></ul><ul><li>Sterling and non-sterling </li></ul><ul><li>Actual and synthetic </li></ul><ul><ul><li>synthetic versions of hard-to-get bonds </li></ul></ul><ul><ul><li>corporate + inflation bonds = synthetic index-linked corporate </li></ul></ul><ul><ul><li>ilg + credit default swap = synthetic index-linked corporate </li></ul></ul><ul><ul><li>gilt + cds = synthetic corporate </li></ul></ul>
  4. 4. Credit ratings <ul><li>Investment grade </li></ul><ul><li>High yield </li></ul>
  5. 5. Bond pricing <ul><li>Gilts </li></ul><ul><ul><li>given by yield </li></ul></ul><ul><li>Investment grade corporates </li></ul><ul><ul><li>given by spread </li></ul></ul><ul><li>Sub-investment grade bonds </li></ul><ul><ul><li>given by price </li></ul></ul><ul><ul><li>quoted as p per £ if close to default </li></ul></ul>
  6. 6. Benchmarks and indices <ul><li>Single currency government bond indices </li></ul><ul><li>Global government bond indices </li></ul><ul><li>Single currency aggregate/corporate bond indices </li></ul><ul><ul><li>Barclays Capital </li></ul></ul><ul><ul><li>iBoxx </li></ul></ul><ul><ul><li>Merrill Lynch </li></ul></ul><ul><ul><li>JP Morgan </li></ul></ul><ul><li>Liability based </li></ul>
  7. 7. Benchmarks – desirable qualities <ul><li>Transparent </li></ul><ul><li>From an experienced provider </li></ul><ul><li>Replicable </li></ul><ul><li>Representative </li></ul><ul><li>Investible </li></ul><ul><li>Flexible </li></ul><ul><li>Reflective of investor needs </li></ul><ul><li>Consistent </li></ul>
  8. 8. Index-tracking – why <ul><li>No under-performance </li></ul><ul><li>Low fees </li></ul><ul><li>Diversification </li></ul><ul><li>Time-efficient </li></ul><ul><li>Rule-based decision making </li></ul><ul><li>but </li></ul><ul><li>Anomalous index construction </li></ul><ul><li>Corporate bond market inefficiencies </li></ul><ul><li>Replication challenges </li></ul>
  9. 9. Index-tracking – how <ul><li>Full replication </li></ul><ul><li>Stratified sampling </li></ul>
  10. 10. Active management <ul><li>Sources of added value </li></ul><ul><ul><li>market allocation </li></ul></ul><ul><ul><li>yield curve positioning/duration </li></ul></ul><ul><ul><li>sector allocation </li></ul></ul><ul><ul><li>stock selection </li></ul></ul><ul><ul><li>off-benchmark </li></ul></ul><ul><li>Relative importance </li></ul><ul><li>Diversification </li></ul><ul><li>Performance & dispersion </li></ul>
  11. 11. Risk controls <ul><li>Client restrictions </li></ul><ul><ul><li>duration </li></ul></ul><ul><ul><li>country </li></ul></ul><ul><ul><li>credit </li></ul></ul><ul><li>Modelling credit risk </li></ul><ul><ul><li>ratings migration </li></ul></ul><ul><ul><li>contingent claims </li></ul></ul><ul><ul><li>market based </li></ul></ul>
  12. 12. Implementation <ul><li>Dealing in the market </li></ul><ul><li>New issues </li></ul>
  13. 13. Reporting <ul><li>Frequency </li></ul><ul><li>Content </li></ul><ul><ul><li>Commentary </li></ul></ul><ul><ul><li>Data </li></ul></ul><ul><ul><li>Other </li></ul></ul>

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