The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

CHAPTER 19

Bond Portfolio Strategies for Outperforming a Benchmark

Bülent Baygün, Ph.D. Head of Interest Rate Strategy U.S. BNP Paribas

 

Robert Tzucker, CFA Inflation Trading Credit Suisse

 

 

 

 

 

Increasingly, fund managers and, more importantly, chief investment officers are looking to measure the performance of portfolios and portfolio managers in an objective fashion. We believe that the best way to approach the problem is to adopt a “beat the benchmark” approach.

The first question that this approach raises is: “What is an appropriate benchmark?” This chapter addresses this question with a discussion of six widely recognized academic principles of a good index and then looks at a quantitative technique to achieve this goal. A good index should be (1) relevant to the investor, (2) representative of the market, (3) transparent in rules with consistent constituents, (4) investible and replicable, (5) based on high data quality, and (6) independent.

The second question that we address in this chapter follows naturally from the first, which is: “How does one beat a benchmark?” There are countless strategies that can be employed to outperform a benchmark. Outperformance in a bond portfolio is affected through a combination of fixed income asset class preferences, as well as duration and curve positioning choices, relative to the composition of the benchmark.²⁹¹ These choices are typically driven by a top-down approach, starting with views on the economy and the projected ...