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Categories
Time to evaluate your core bond managers
Gary Veerman
Head of Institutional Solutions
Anmol Sinha
Fixed Income Investment Director
Irene Chen
Pension Solutions Analyst

 


Today’s higher bond yields have institutional investors taking a closer look at both the size and composition of their core bond allocations.  While this is an important asset allocation exercise, we believe that investors need to go beyond their core bond allocations and carefully assess their core bond managers as well.

 

In many cases, active core bond managers are taking significant systematic credit risk rather than relying on idiosyncratic investment choices to generate excess returns. While this can be beneficial when financial markets are humming, it can produce poor results during financial market declines, when investors need their core bond allocation to provide diversification and downside resilience.

 

In a study of more than 80 of the largest U.S. core bond managers, we found that almost all of them took excess systematic credit risk relative to the Bloomberg U.S. Aggregate Index during the past 10 years.

 

In a recently published white paper, we detail this research and present a holistic framework that institutional investors can use to assess their core bond managers. The framework reveals how managers’ excess returns have fared in various market stress scenarios, providing critical insight into whether they are aligned with investors’ strategic reasons for holding core bonds.

  • Mean–variance optimization is a continuing source of new approaches and new tools for investing.

  • One new example is retirement glide-path design, traditionally seen as a multiperiod problem.

  • Another new example analyzes the return premium on illiquid assets in a portfolio context.

 


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READ THE WHITE PAPER

Gary Veerman is head of institutional solutions with 24 years of industry experience (as of 12/31/2024). He holds a master's degree in global financial analysis from Bentley University and a bachelor's degree in business administration with a concentration in finance from West Virginia University.

Anmol Sinha is a fixed income investment director with 17 years of industry experience (as of 12/31/2024). He holds an MBA from Columbia Business School, a master's degree in economics from New York University and a bachelor's degree in economics from University of California, Berkeley.

Irene Chen is a pension solutions analyst with six years of industry experience (as of 12/31/2024). She holds a master's degree in industrial engineering and operations research from the University of California, Berkeley, a master's degree in financial engineering from the University of California, Los Angeles and a bachelor's degree in economics from Wuhan University, China.

Bloomberg U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

 

The return of principal for bond portfolios and for portfolios with significant underlying bond holdings is not guaranteed. Investments are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.

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