Chapter 18 - Chapter 3 Managing Funds Against a Bond Market...

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1 Chapter 3 – Managing Funds Against a Bond Market Index 1. Five approaches to domestic bond management: 1. Pure Bond Indexing 1. Pros – Lowest tracking error 2. Cons – Very difficult to implement 2. Enhanced indexing by matching primary risk factors 1. Pros – Less expensive and easier to implement than full replication 2. Cons – More tracking error risk than full replication 3. Enhanced Indexing by minor risk factor matching 1. Pros – May offset management fees and transaction costs 2. Cons – More tracking error risk than full replication 4. Active management by larger risk factor mismatches 1. Pros – Potential for higher returns than indexing strategies 2. Cons – Increased tracking error and more transactions costs 5. Full-Blown active management 1. Pros – Potential for a significant degree of value added over index approach 2. Cons – Significant tracking error – significant transaction costs and portfolio might not be very liquid 2. Arguments FOR and AGAINST bond investing
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Chapter 18 - Chapter 3 Managing Funds Against a Bond Market...

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