Bond Portfolio

Management Strategies

Presented By: Mr. Vishal Narvekar

Types of strategies

Passive bond portfolio strategies

Passive strategy

• Less role expectation • Key inputs are known at the time of

investment analysis• Key inputs such as objective of the investors,

risk taking ability• Type of passive strategy – Buy & hold strategy– Indexing strategy

Buy & hold strategy• It simply involve buying a bond & holding it

until maturity• A manager selects a portfolio of bonds based

on the objectives of the client with the intent of holding these bonds to maturity

• Investors don’t trade actively to maximize the return

• Hold the bond with a maturity or duration which is close to their investment horizon

Buy and hold strategy cont…

• Examine factor such as quality rating, coupon level, terms to maturity, call features etc.

• Only default-free or very high quality securities should be held

• Also, those securities that are callable by firm (allows the issuer to buy back the bond at a particular price and time) or putable by holder (allows bondholder to sell the bond to issuer at a specified price and time) should not be included

Buy and hold strategy cont…

• The buy-and-hold strategy minimizes transaction costs

• Suitable for income maximizing investor with low level of risk

• Applicable for pensioners, endowment funds, bond mutual funds, insurance companies etc.

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 • Barclays Capital Aggregate Bond Index, Merrill Lynch

Domestic Master, J.P. Morgan Government Bond Index, FTSE UK Gilts Index Series, J.P. Morgan Emerging Markets Bond Index, Merrill Lynch High Yield Master II

• Performance is measured in terms of total return realized over the investment horizon

Advantages of indexing strategy

Factors affecting the selection of the index

Investors risk tolerance Objective of the investor

Active management strategies

• Take advantage of market scenario• Requires major time to time adjustment or

changes in portfolio• The goal is to maximize total return but at

increased risk• Requires continuous analysis and observation

on the part of portfolio manager

Types of active management strategies

Interest rate anticipation

Valuation analysis

Credit analysis

Yield spread analysis

Interest rate anticipation• This is the riskiest strategy because the investor

must act on uncertain forecasts of future interest rates

• When interest rate rise bond price drop & when interest rate drop bond price rise

• Increase the investment in long duration bonds when interest rates are expected to decline & vice versa

• The risk of misestimating interest rate movement

Valuation analysis• Select the bond on the basis of their intrinsic

values• What are the factors which affect the bonds

intrinsic values?• Bonds rating, call feature, interest rate etc.• Buy the undervalued bond & sell the

overvalued bonds• If bond rating is higher then interest is low and

as result income is low

Credit analysis

• It involves detailed analysis of the bond issuer to determine expected changes in its default risk

• Internal & external Factors affect the credit rating of the company such as financial ratios, inflation, etc.

• 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

Matched-funding techniques

• Mixture of passive buy & hold strategy 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

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