globalen
Value of security selection versus asset allocation in credit markets

Value of security selection versus asset allocation in credit markets

15-08-1999 | Research

Should credit investors apply a top-down or a bottom-up approach? Here, we present a quantitative study of the relative merits of various forms of fixed-income research, as applied to portfolio management relative to a benchmark.

  • Erik van Leeuwen
    Erik
    van Leeuwen
    Head of FI Business Development
  • Peter  Ferket
    Peter
    Ferket
    CIO Equity & Co-head investment products

Speed read

  • We investigate the value added by security selection and asset allocation
  • Security selection proves most effective to generate steady outperformance
  • Results may be used to justify bottom-up management style

In this article,1 we quantify the relative merits of different styles of credit investing in a limiting ideal case. For portfolios of credit spread securities managed relative to fixed-income benchmarks, we investigate the value added by security selection and various asset allocation strategies based on “perfect foresight.”

In conducting this historical study, we rely on the simulation of such strategies using data for the Lehman Brothers US High Grade Corporate Index. Simulations of a given strategy are matched to the index in every dimension but one. The success of each strategy is evaluated on the basis of the “information ratio” a ratio of the strategy's outperformance of the index to the standard deviation of such outperformance.

Our findings suggest that security selection with “perfect foresight” in a corporate bond portfolio is the single most effective way to generate steady outperformance of the index. This applies to both the “select winners” and the “avoid losers” cases. Yield curve timing, sector rotations, and credit rating selections may deliver more outperformance, but with higher variance.

Results obtained in this study may be used to justify selection of bottom-up versus top-down portfolio management styles and allocation of research efforts and risk budgets.

1 Dynkin, L., Ferket, P., Hyman, J., Van Leeuwen, E. and Wu W., 1999, ‘Value of security selection versus asset allocation in credit markets’, The Journal of Portfolio Management.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates
Subscribe
Disclaimer:

This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US Persons.

Your details are not shared with third parties. This information is exclusively intended for professional investors. All requests are checked.

Logo

Disclaimer

The information contained in the website is solely intended for professional investors. Some funds shown on this website fall outside the scope of the Dutch Act on the Financial Supervision (Wet op het financieel toezicht) and therefore do not (need to) have a license from the Authority for the Financial Markets (AFM).

The funds shown on this website may not be available in your country. Please select your country website (top right corner) to view the products that are available in your country.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports, which can be all be obtained free of charge at this website and at the Robeco offices in each country where Robeco has a presence.

By clicking Proceed I confirm that I am a professional investor and that I have read, understood and accept the terms of use for this website.

Decline