Chapter 43. Bond Portfolio Strategies for Outperforming a Benchmark

BÜLENT BAYGÜN, PhD

Head of Global Quantitative Strategy, Barclays Capital

ROBERT TZUCKER

Inflation Trading, Barclays Capital

Abstract: The performance of a fund is typically assessed relative to some benchmark market index. In order to make this a meaningful comparison, the benchmark should be selected carefully with due consideration given to several factors, such as relevance to the fund's investment goals. Once an appropriate benchmark has been identified, either among the generic offerings from index providers or through a customized index creation process, the objective is to beat the benchmark. Outperformance in a bond portfolio is effected through a combination of fixed income asset class preferences, as well as duration and curve positioning choices, relative to the composition of the benchmark. These choices are typically driven by a top-down approach, starting with views on the economy and the projected change in asset valuations. Surely, when considering measures of performance relative to the benchmark, return is but one aspect, the other being the risk taken to achieve the return. Effective portfolio management requires a framework that allows one to quantify risk versus return, and balance one against the other subject to the investment guidelines of the fund.

Keywords: optimization, benchmark selection, alpha generation, portfolio management, tactical asset allocation, strategic asset allocation, scenario ...

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