In the investment industry, there is a widely-held belief that a Core Fixed Income strategy is a commodity. There are variations among managers and styles of course, but over time those distinctions will offset and there cfa fixed income analysis pdf ultimately be an immaterial difference in returns.
Further, with yields across the investment grade universe near historic lows, the distribution of returns across managers should be even less substantial on a relative basis. The question necessarily becomes, is there evidence to support this belief? Or are there in fact significant differences in returns over longer periods of time? If there are, the costs of assuming homogeneity could be more significant than investors realize.
Removing the Noise We wanted to explore this concept further, but to do so objectively, it was essential to level the playing field. With these factors in mind, we evaluated a universe of institutional core managers with the most comparable objectives and characteristics we could find. Below we show the distribution of returns for this peer group across 1, 3, 5, 7, and 10 year periods. 5th and 95th percentile is substantial at 1. Exploring the Differences So if performance does in fact affect returns for investors, what is driving the differences in a low interest rate environment? When you dissect the core universe by size, there is a consistent pattern of manager returns relative to the benchmark Bloomberg Barclays Aggregate Index. 25 billion exhibited consistently superior performance, while both the largest and smallest managers uniformly trailed.
Risk Adjusted Excess Return is defined as Alpha. Alpha is the measure of the difference between the portfolio’s actual return versus its expected performance, given its level of risk as measured by beta. It is a measure of the portfolio’s performance not explained by movements of the market. One way to analyze this underperformance is to explore the managers’ average sector allocation along the same size segments we examined above. In Figure 3, the table highlights that larger managers had hefty allocations to liquidity sectors such as US Treasury and Agencies and the lowest allocation to credit related sectors that traditionally offer more yield. Green indicates the highest average allocation in the peer group while red indicates the lowest.
50 billion and over category had the lowest allocation to credit sectors and overall, the most benchmark-like allocations. This helps explain why the largest managers appear to have the most difficulty delivering excess returns as their positioning closely aligns them with the benchmark itself. For the smaller managers there is no specific explanation for their underperformance other than they lack the resources or scale to gain full access to bond dealer offerings. Execution It stands to reason that the largest managers have more difficulty allocating to credit sectors simply because these sectors make up a much smaller portion of the investment grade universe.
25 billion given the limited size and scale of credit related markets. 17 JPM is the largest US Corporate Issuer Representing 0. Additionally, even the ability to trade substantial amounts of bonds has declined significantly. Bond dealer corporate inventories have withered as a regulatory consequence of the financial crisis. Because dealers have less capital to make markets buying and selling bonds from their customers, trading volumes overall, especially in larger sizes, have contracted. Key Takeaways This analysis has focused on the corporate universe because it is the largest credit related sector.
A similar evaluation of the ABS and CMBS sectors would show even less flexibility given the smaller size of these markets. The industry can sometimes assume that larger managers provide superior returns given their size and market influence. Ultimately, we have shown a connection between the size of a manager’s assets and their portfolio characteristics, which is then reflected in their investment performance. Managers need size to provide the expertise to successfully navigate the market, but being too large can limit execution of investment ideas.
Insurance Asset Risk as a featured post. Securities and Exchange Commission, specializing in fixed-income asset management services for insurance companies. Registration does not imply a certain level of skill or training. This information was developed using publicly available information, internally developed data and outside sources believed to be reliable. Skowronski, CFA is a Principal, Vice President and Senior Portfolio Manager at AAM. He has 21 years of investment experience with 18 years dedicated to fixed income. Prior to joining AAM, Scott worked as a Portfolio Manager and Senior Analyst at Brandes Investment Partners.
And prior to that, he worked as a Fixed Income Portfolio Manager at Country Financial. Please help improve it or discuss these issues on the talk page. This article includes a list of references, but its sources remain unclear because it has insufficient inline citations. This article may need to be rewritten entirely to comply with Wikipedia’s quality standards. A candidate who successfully completes the program and meets other professional requirements is awarded the “CFA charter” and becomes a “CFA charterholder”. As of June 2016, there are approximately 132,000 charterholders around the world.
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