Business Portfolio Objectives And Constraints

1828 Words Aug 27th, 2014 8 Pages
EXHIBIT 8: CREATING A CUSTOMISED BENCHMARK WITH BUSINESS PORTFOLIO OBJECTIVES AND CONSTRAINTS
• A major stumbling point within benchmark creation is that the mandates of the benchmark must match the mandates of the portfolio; this issue is often raised when a portion of the portfolio is Buy and Maintain
• To control for this, partition the portfolio into two blocks: “Block ND” is Buy and Maintain (Non-Discretionary) and so the portfolio manager should be measured by credit migration and default relative to market over portfolio lifetime • Pass Block ND to the benchmark as is–the effect of this is that changes in these assets are realized identically in both the benchmark and portfolio, and thus net out when relative value performance is
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The recovery phase often sees strong growth, low interest rates and growth in corporate profits. Sectors sensitive to interest rates and to economic growth—such as financials, industrials, information technology, and materials—should do well.
–– In the middle phase of the cycle, positive GDP growth, strong credit growth and healthy corporate profitability tends to still favor more economically sensitive sectors, such as information technology and industrials. In contrast, later in the cycle, building inflationary pressures have often favored the energy and materials sectors, which benefit from rising commodity prices. Defensive oriented sectors, such as healthcare, consumer staples and utilities, have also generally performed well as the economy begins to slow, while economically sensitive sectors such as information technology, begin to struggle.
–– Finally, in a recession the most defensive sectors, such as consumer staples and regulated utilities, should maintain credit ratings better than economically sensitive technology companies. Obviously “risk free” proxies such as various government securities are also preferred.
• Issuer analysis
–– All issuers should be thoroughly analyzed using a common and disciplined process to assess credit worthiness, the relative value of an issuer within its sector, and the concentration limit (or maximum position size) of each issuer.
Issuer limits should be based on the relative
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