Types of strategies

Passive strategy
Less role expectation
Key inputs are known at the time of
investment analysis
Key inputs such as objective of the investors,
risk taking ability
Type of passive strategy
Buy & hold strategy
Indexing strategy
 Buy & hold strategy
It simply involve buying a bond & holding it
until maturity
A manager selects a portfolio of bonds based
on the objectives of the client with the intent
of holding these bonds to maturity
Investors dont trade actively to maximize the
return
Hold the bond with a maturity or duration
which is close to their investment horizon
 Buy and hold strategy cont
Examine factor such as quality rating, coupon
level, terms to maturity, call features etc.
Only default-free or very high quality securities
should be held
Also, those securities that are callable by firm
(allows the issuer to buy back the bond at a
particular price and time) or putable by holder
(allows bondholder to sell the bond to issuer at a
specified price and time) should not be included
 Buy and hold strategy cont
The buy-and-hold strategy minimizes
transaction costs

Suitable for income maximizing investor with

low level of risk

Applicable for pensioners, endowment funds,

bond mutual funds, insurance companies etc.
 Indexing strategy
The objective is to construct a portfolio of bonds
that will equal the performance of a specifies
bond index
Investment is done only in the bond of specific
bond index
Barclays Capital Aggregate Bond Index, Merrill
Lynch Domestic Master, J.P. Morgan Government
Bond Index, FTSE UK Gilts Index Series, J.P.
Morgan Emerging Markets Bond Index, Merrill
Lynch High Yield Master II
Performance is measured in terms of total return
realized over the investment horizon
Advantages of indexing
strategy
Factors affecting the selection of
the index
 Active management strategies
Take advantage of market scenario
Requires major time to time adjustment or
changes in portfolio
The goal is to maximize total return but at
increased risk
Requires continuous analysis and observation
on the part of portfolio manager
Types of active management
strategies
 Interest rate anticipation
This is the riskiest strategy because the investor
must act on uncertain forecasts of future interest
rates
When interest rate rise bond price drop & when
interest rate drop bond price rise
Increase the investment in long duration bonds
when interest rates are expected to decline &
vice versa
The risk of misestimating interest rate movement
 Valuation analysis
Select the bond on the basis of their intrinsic
values
What are the factors which affect the bonds
intrinsic values?
Bonds rating, call feature, interest rate etc.
Buy the undervalued bond & sell the
overvalued bonds
If bond rating is higher then interest is low and
as result income is low
 Credit analysis
It involves detailed analysis of the bond issuer
to determine expected changes in its default
risk
Internal & external Factors affect the credit
rating of the company such as financial ratios,
inflation, etc.
Higher the risk higher the return
 Yield spread analysis
Yield spread means difference between the
return of two bonds
Factor affecting yield spread:-
Business cycle
Volatility in the market interest rate
 Matched-funding techniques
Mixture of passive buy & hold strategy and
active management strategy
Objective is to get higher return at minimum
risk
Require constant monitoring
Could give more return than buy & hold but
not higher than active management strategy