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<title>Study Session 9 | Reading 24 | Relative-Value Methodologies for Global Credit Bond Portfolio Management</title>
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<h1>Reading 24</h1>
<h3>Relative-Value Methodologies for Global Credit Bond Portfolio Management</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">AlchemistsAcademy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Relative Value</h2>
<p><em>Definition: Refers to the ranking of fixed-income investments by sectors, structures, issuers, and issues in terms of their expected performance during some future period of time</em></p>
<ul>
<li>Top-down approach</li>
<ul>
<li>Focuses on high-level allocations among broadly defined credit asset classes</li>
<li>Attempts to form views on macro economic and industry developments to drive asset allocation decisions</li>
</ul>
<li>Bottom-up approach</li>
<ul>
<li>Focuses on individual issuers and issues that will outperform their peer groups</li>
<li>Attempts to outperform benchmark via superior security selection</li>
</ul>
</ul>
</section>
<section>
<h2>Relative Value Analysis</h2>
<p><em>Definition: Dialectical process combining elements of both top-down and bottom-up approaches to portfolio management</em></p>
<img src="images/24/credit-sector-portfolio-management-process.png" alt="credit sector portfolio management process: classic, dialectical relative-value analysis" />
</section>
<section>
<h2>Relative-Value Methodologies</h2>
<ul>
<li>Total return analysis</li>
<li>Primary market analysis</li>
<li>Liquidity and trading analysis</li>
<li>Secondary trading rationales and constraints analysis</li>
<li>Spread analysis</li>
<li>Structure analysis</li>
<li>Credit curve analysis</li>
<li>Credit analysis</li>
<li>Asset allocation/sector analysis</li>
</ul>
</section>
<section>
<h2>Total Return Analysis</h2>
<p><em>Definition: A process involving the detailed dissection of past returns and a projection of expected returns</em></p>
</section>
<section>
<h2>Primary Market Analysis</h2>
<p><em>Definition: Analysis of supply and demand dynamics</em></p>
<ul>
<li>Market-structure dynamics (i.e. composition of global credit bond market: MTNs, derivatives, HY instruments, etc.)</li>
<li>Product structure effects (e.g. bullet and intermediate-maturity structures
</ul>
</section>
<section>
<h2>Liquidity and Trading Analysis</h2>
<p><em>Definition: A process involving the examination of how short- and long-term liquidity needs influence portfolio management decisions</em></p>
</section>
<section>
<h2>Secondary Trade Rationales</h2>
<ul>
<li>Common rationales:</li>
<ol>
<li>Yield/spread pickup trades</li>
<li>Credit-upside trades</li>
<li>Credit-defense trades</li>
<li>New issue swaps</li>
<li>Sector-rotation trades</li>
<li>Curve-adjustment trades</li>
<li>Structure trades</li>
<li>Cash flow reinvestment</li>
</ol>
<li>Constraints:</li>
<ol>
<li>Portfolio constraints</li>
<li>"Story" disagreement</li>
<li>Buy-and-hold</li>
<li>Seasonality</li>
</ol>
</ul>
<aside class="notes">
There are many reasons to trade securities on the secondary market, including: (1) adding addtional yield within the duration and credit-quality constraints of a portfolio; (2) identifying a potential upgrade before the market; (3) anticipating increased geopolitical or economic headwinds; (4) perceived superior liquidity of new on-the-run issues; (5) shifting from a sector that is expected to underperform to one that is expected to overperform; (6) repositioning portfolio duration in anticipation of changes in the credit term structure or credit curve; (7) swaps into structures that are expected to outperform; (8) reinvesting cash flows from coupons and principal repayments. Additionally, there are several constraints or downsides to trading that should be considered: (1) certain constraints outlined in the IPS that limit trading; (2) Disagreements in expectations regarding a securities performance; (3) accounting constraints may limit ability to buy/sell; (4) seasonal effects
</aside>
</section>
<section>
<h2>Spread Analysis</h2>
<ol>
<li>Mean-reversion analysis - a relative value analysis based on the assumption that the spread between two sectors/issuers will revert to its historical average</li>
<li>Quality-spread analysis - examines the spread differentials between low- and high-quality credits</li>
<li>Percent yield analysis - the ratio of credit yields to government yields for similar duration securities</li>
</ol>
</section>
<section>
<h2>Structural Analysis</h2>
<p><em>Definition: Analyzing the performance of different structures</em></p>
<ul>
<li>Bullets</li>
<ul>
<li>Front-end, intermediate, and back-end</li>
</ul>
<li>Callables</li>
<li>Sinking funds</li>
<ul>
<li>Allow issuers to execute a series of partial calls prior to maturity</li>
</ul>
<li>Putables</li>
</ul>
</section>
<section>
<h2>Credit Curve Analysis</h2>
<ul>
<li>Credit curves typically positively sloped</li>
<li>Spread curve typically steepens when interest rate and general credit risk increases</li>
</ul>
</section>
<section>
<h2>Credit Analysis</h2>
<p><em>Definition: Analysis involving the study of issuers' financial statements and accounting techniques, interviewing issuers' managements, evaluating industry issues, reading indentures and charters, and developing an awareness of the veiws of rating agencies regarding various industries and issures</em></p>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
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