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 measured against the benchmark Typical fixed income sectors include, but are not limited to, cohorts such as investment grade credit, U.S., European and
Asian high yield debt, U.S. Treasuries and inflation-protected securities, municipals, sovereigns, emerging market debt, real estate and other asset-backed securities, covered bonds, liquid loans, mezzanine debt, commercial mortgage loans and private placements. Each cohort will behave slightly differently in various economic growth, interest rate and inflationary environments.
Importantly too, some fixed income sectors will be more or less sensitive to business cycle factors.
These cyclical factors are important when driving sector allocations, but a Buy and Maintain fund manager also needs…
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