Managing Bonds & Fixed Income Investments

"Very well structured course, great overview" Manager External Portfolios, SAMCO "World class trainer" Head of Operations, Asset Management Corporation of Nigeria Course Description This course provides participants with an in-depth understanding of best practice bond portfolio management techniques and how they can be used to deliver sustainable returns and manage risk. The course combines interpretation of key market pricing and risk data with the implementation of effective investment strategies to maximise risk-adjusted returns over the long term. The primary focus of the programme is to enable delegates to understand the parameters underlying the creation of an effective portfolio management strategy as well as the day to day management of risk and return enhancement opportunities. Particular emphasis is placed on the dynamics and inter-relationships within global bond markets and how these affect the optimal construction of portfolios, particularly where constraints exist in terms of return targets and mandate restrictions. The programme also covers derivatives and structured bond products and their role in contemporary bond portfolio management, thereby enabling participants to determine their suitability for deployment to achieve required returns, generate sustainable cash flows and manage risk. Methodology The training consists of classroom-based teaching combined with computer-based simulations and exercises, using a range of spreadsheet-based software. A comprehensive set of notes will be provided to delegates during the course and interactive participation is strongly encouraged. Simulation Software Delegates will each receive copies of all bond pricing, risk analysis and portfolio optimisation models for their own use after the programme. What will you learn? Attend this comprehensive and highly practical 4–day training course and gain knowledge in contemporary best practice investment strategies and analysis to: Gain an up-to-date picture of the current global bond markets Understand how macroeconomic and other events impact global bond markets Implement effective investment strategies to meet fund objectives Understand and interpret key data relating to bond markets Gain knowledge and confidence in the judicious use of derivatives Identify the most suitable management style to achieve portfolio objectives Understand the structure and dynamics of global bond markets Gain hands-on experience in using key bond pricing and risk metrics Understand portfolio trading strategies to increase returns and reduce risk Gain knowledge of credit analysis techniques and relative pricing metrics Use structured bond products to achieve required risk and return outcomes PLUS: Enhance your practical skills with computer-based simulations and workshop case studies on bond pricing, optimal portfolio construction and risk analysis. Who should attend? This course has been specifically designed for the benefit of: Investment managers Bond analysts Risk managers Quantitative analysts Pension fund trustees and sponsors Bond sales executives The course assumes a basic understanding of bond instruments, interest rate markets and discounted cash flow analysis.
Day 1 Introduction: the Objectives of Bond Portfolio Management Liability funding Total return generation Absolute return driven investment fund products Key challenges facing bond portfolio managers Principal risks and opportunities Case study: Devising a portfolio investment strategy to meet the liabilities of a pension fund. Investment Landscape: Global Bond Markets Issuers’ requirement for longer term funding Investors’ requirement for longer term assets to match liabilities The principal global bond markets - Developed market sovereign - Developed market corporate - Asset backed bond - Emerging sovereign Market operation - Primary market: issuance and market making - Secondary market: trading and liquidity costs Macroeconomics, Geopolitical Trends and Bond Portfolio Strategy Interest rates Inflation Balance of payments Economic growth – the business cycle Globalisation Foreign exchange Demographics Credit conditions Case study: Brazilian government and corporate debt issuance - demand and supply dynamics.Bond Pricing and Risk Analysis Bond prices as a series of cash flows discounted by the bond’s yield Bond duration calculation and use: - Macaulay’s duration - Modified duration Other risk measures, including DV01 Convexity Incorporating optionality - Pricing models - Effective duration - Negative convexity Exercise: Calculation of a bond’s price and duration from first principles. Use duration to predict price changes for given changes in yields and assess the impact of convexity. Day 2 Interpreting Fixed Income Market Data Treasury yields - Theories of the yield curve - Liquidity premium - Safe haven premium Inter-bank rates Credit spreads - Over Treasuries - Over LIBOR Option Adjusted Spreads (OAS) Swap spreads Credit Default Swap (CDS) premia Measuring market sentiment: the Confidence Index Exercise: Calculation and interpretation of credit spreads and swap spreads and comparison to CDS premia. Bond Market Structure and Bond Portfolio Diversification Market segmentation - Currency of denomination - Sector - Credit quality - Maturity Structure - Domestic issues - Eurobonds - Sharia compliant Case study: The critical boundary between investment grade and high yield bonds in credit markets for institutional investors. Fundamental Role of Duration Targeting Macaulay’s duration as a quasi-immunisation measure Modified duration and portfolio risk management Asset allocation using weighted duration Exercise: Calculating and using weighted duration for asset allocation and relative risk measurement. Derivatives and their Role in Bond Portfolio Management Introduction to fixed income derivatives Bond futures and options Credit derivatives Swaps Interest rate futures Sale and repurchase agreements (“repos”) Structured products Exercise: Using derivatives to hedge interest rate and credit risk and to lock in capital gains in a portfolio context. Day 3 Bond Portfolio Construction - Introduction Benchmark design - Key role of benchmark setting in portfolio performance monitoring - Risk and return targeting - Market return targeting - Duration targeting - Effective representation of bond markets - Optimisation of benchmark portfolio - Risk / return trade-off - Correlation factors - Incorporating liability-driven constraints into benchmark construction Liquidity management policy Risk management policy setting - Managing duration, optionality and convexity - Key rate duration analysis - Managing call option risk - Risk budgeting - Setting permitted deviation from benchmark neutral positions - Style risk from different factor exposures - Active / alpha risk from security selection - Structuring cash flow patterns Exercise: Constructing a portfolio to meet specific return objectives whilst complying with mandated restrictions. Bond Portfolio Management Styles Total return - Active strategies - Interest rate expectation - Valuation based - Credit analysis driven - Passive strategies - Buy and hold - Indexing Liability funding strategies - Dedicated portfolios and sub-portfolios - Cash flow matching - Domestic currency matching - Horizon based - Immunisation - Perfect immunisation through cash flow matching - Approximation using duration analysis The unified approach - Strategic and tactical asset allocation - Balancing active management benefits versus trading costs - Liquidity management and fund solvency Bond Portfolio Management Strategies Market risk factor strategies - Bullet, barbell and ladder portfolio structures - Flattening yield curve - Steepening yield curve - Butterfly twists - Positive - Negative Exercise: Calculating impact on portfolio value for different portfolio structures given different changes to yield curve shape Other risk factor strategies - Currency - Sector - Credit - Security structure Risk factor synthesis - Understanding inter-relationships amongst risk factors - Developing a cohesive and robust investment strategy Security selection - Estimating fair market value - Deriving the zero coupon curve: which bonds are at fair market value? - Calculating relative value using Z-spreads and Option Adjusted Spreads (OAS) - Other factors - Diversification potential within portfolio - Convexity enhancement Yield enhancement: the “repo” market Exercise: Using the zero curve to analyse relative value of bonds with similar risk profiles. Day 4 Credit Analysis Sovereign issuers Corporate issuers The role of the credit rating agencies - Traditional role - Reinvention since Sub-Prime Credit risk analysis: Theory and Practice - Analysis of the Firm - Industry analysis Industry prognosis Firm’s position within the industry - Financial statement analysis Profit and loss Balance sheet Cash flow statement - Free cash flow Impact of accounting policies - Depreciation - Securitisation - Off balance sheet items - Collateral analysis - Fundamental principles - Credit risk analysis Expected loss - Loss at default - Recovery Credit risk factors Term structure of credit risk - Default correlation analysis - Industry approaches and systems - Credit Metrics - KMV Model - CreditRisk+ - CreditPortfolioView Case study: Worked examples of credit analysis for sovereign and corporate bonds. Bond Portfolio Risk Management Introduction to risk management methodologies and their limitations Risk factors - Short term factors - Interest rate risk Duration gap Portfolio structure - Credit risk Downgrade Default - Medium to long term factors - Inflation risk - Style drift - Liability mismatch Quantifying risk - Scenario testing - Stress testing - Value-at-Risk Risk management tools: a critical review - Diversification - Investment restrictions - Derivatives Case study: Assessing the effectiveness of risk management techniques in extreme events: the Sub- prime crisis 2007-2008 and the Greek default 2012. Advanced Bond Portfolio Management Strategies Convexity maximisation Core-satellite portfolio structuring The role of “Portable Alpha” Contingent liability matching Structured bond products Exercise: Maximising portfolio convexity for a given portfolio duration target Course summary and close