Asset Management Fixed Income Training Seminar Asset Management Experience Philipp Büchler, Chris Koslowski, Markus Kramer, Manuel Walker Credit Suisse Asset Management Core Fixed Income Group Zurich August 2014
Overview 1 Introduction 2 3 Implementing Active Views CREDIT SUISSE Fixed Income Training Seminar August 2014 2
1 Introduction The idea of this part of the Fixed Income Training Seminar is to provide you with a practical portfolio management experience: You will construct with help of a proprietary Credit Suisse Portfolio Management software and Bloomberg a multi-currency portfolio according to a set of specific investment guidelines and market expectations. Assume a client has given you an amount of USD 500 mln to invest in a multi-currency portfolio according to the following guidelines: Benchmark JP Morgan Government Bond Index Global Traded Portfolioduration +/-2 years vs benchmark Minimum rating at purchase BBB- (Standard and Poor s) or Baa3 (Moody s) Maximum issuer limits maximum 25% per country rated AA/Aa2 or better maximum 25% per international or supranational organization rated AA/Aa2 or better and guaranteed by member countries maximum 10% for other issuers Derivatives exchange traded interest rate & bond futures currency forward agreements interest rate swaps CREDIT SUISSE Fixed Income Training Seminar August 2014 3
In a first step you should invest the USD 500 mln as close to the benchmark as possible in order to build a base portfolio with minimal risk exposures relative to the given benchmark. (1) Market allocation: distribute the USD 500 mln (already injected in the portfolio) on the various markets according to the benchmark weights (given in the tab Overview ) CREDIT SUISSE Fixed Income Training Seminar August 2014 4
by simulating currency spot transactions in the tab FX Forwards & Spot (see below an example of replicating the market weight of 1.2% in AUD by selling USD) (2) Currency allocation: no transactions needed (without active market or currency views the currency allocation is equivalent to the market allocation) CREDIT SUISSE Fixed Income Training Seminar August 2014 5
(3) Duration allocation: Invest the allocated cash in each currency using one bond per currency from the benchmark universe so that the duration is similar to that of the benchmark. CREDIT SUISSE Fixed Income Training Seminar August 2014 6
Try to analyse some of the bonds with help of Bloomberg: By marking a bond in BondWalker and right clicking with your mouse a menu appears with various Bloomberg commands directing you to the relevant bond analytics. Bond Description (DES <Go>) CREDIT SUISSE Fixed Income Training Seminar August 2014 7
Yield and Spread Analysis (YAS <Go>) CREDIT SUISSE Fixed Income Training Seminar August 2014 8
Fixed Income Relative Value (FIRV <Go>) CREDIT SUISSE Fixed Income Training Seminar August 2014 9
Comparable Bond Analysis (COMB <Go>) CREDIT SUISSE Fixed Income Training Seminar August 2014 10
Afterwards try to replicate the duration structure of each market using the duration density ( View -> Duration Density -> choose Currency ). (4) Credit allocation and selection: Since the benchmark consists of government bonds only there is no credit allocation and selection in the base portfolio. CREDIT SUISSE Fixed Income Training Seminar August 2014 11
3 Implementing Active Positions Beginning with the base portfolio you are now asked to implement tactical risk exposures relative to the given benchmark. (1) Market allocation: Several markets have reached extreme interest rate spread differentials. Therefore allocate an overweight of 2% in GBP, 3% in USD and 2% in NOK funded by JPY -7%. Firstly simulate currency spot transactions in the tab FX Forwards & Spot and secondly buy and sell the governments bonds as necessary. For instance, buy approximately GBP 6.6 mln vs JPY and buy additional GBP government bonds while selling JPY bonds. (2) Currency allocation: The Norwegian Krona has potential from a carry perspective. Please overweigh NOK by 4% equally funded through EUR and GBP. As geopolitical risks are rising, the JPY could be supported, especially since so far there are no imminent signs of further monetary stimulus by the Bank of Japan. Please implement a long position of 2% in JPY versus USD. For instance, simulate a currency forward of 1 130 000 000 JPY vs USD. (3) Duration allocation: The recent fall in interest rates could be corrective therefore, stick to a short duration in GBP (-0.75 years), USD (-0.5 years) and NOK (-2.0 years). In order to partially compensate for the underweight in the Japanese market implement a slight long duration in JPY (+0.5 years). As an example, sell some of the longer dated GBP bonds and buy some shorter dated ones. You might also use bond futures or interest rate swaps (see tabs Futures and Swaps ). (4) Credit allocation and selection: Allocate the credit conservatively in liquid credit markets with weights of 15% to USD, EUR and GBP, respectively (see Swap Exposure ). While there is no immediate trigger for a drastic spread widening evident there could be correction in thin markets over the summer months. CREDIT SUISSE Fixed Income Training Seminar August 2014 12
3 Implementing Active Positions (4) Credit allocation and selection: Allocate the credit conservatively in liquid credit markets with weights of 15% to USD, EUR and GBP, respectively (see Swap Exposure ). While there is no immediate trigger for a drastic spread widening evident there could be correction in thin markets over the summer months. CREDIT SUISSE Fixed Income Training Seminar August 2014 13
3 Implementing Active Positions Please choose for each of the three currencies non government bonds with the aim of a diversified credit exposure and considering the following criteria: Time to maturity: between 5 and 10 years Small allocation in the sector Financial and larger allocation the sector Corporate (see table Sector in Risk Report ) credit ratings in the rating bucket A (i.e. A1,A2,A3) and BBB (i.e. BBB1, BBB2, BBB3) (see table Rating in Risk Report ) Analyse the bonds with help of Bloomberg. CREDIT SUISSE Fixed Income Training Seminar August 2014 14
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