The challenge

How can I better manage the operational efficiency of a single line bond portfolio?

Many clients opt to allocate towards single bonds in attempt to be selective across duration, credit quality and yield. Yet, managing a number of bonds can lead to operational complexities, and also possible misalignment between the risks intended and that experienced if not monitored in a holistic approach.

The action

BlackRock first analysed the portfolio using Aladdin® risk factor models and found that the level of risk of the portfolio was significantly different to what the insurer expected, with the majority of the unintended risk coming from euro corporate bonds.

BlackRock ran a comprehensive liquidity and trading cost analysis to show to the client that the most liquid corporate bond ETFs offered trading cost advantages over their underlying bonds due to secondary market liquidity.

Risk: While proprietary technology platforms may help manage risk, risk cannot be eliminated.

Liquidity / trading cost analysis

Liquidity / trading cost analysis

Source: BlackRock, Pre-Trade Tool, as at May 2020.
For illustrative purposes only.

Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.

Action characteristics

Bond Port Bond Port + Indexing
Ex-Ante Risk 2.4% 2.2%
Yield-to-maturity 1.1% 1.1%
Duration 3 years 2.9 years
# Holdings 200-300 100-150
Trading cost 25 bps 17 bps

Source: BlackRock, Aladdin® as at 31/01/2020.
For illustrative purposes only. While proprietary technology platforms may help manage risk, risk cannot be eliminated. Risk management cannot fully eliminate the risk of investment loss

The outcome

By partially indexing the portfolio, the client was able to reduce the operational complexity of the portfolio and improve trading costs.

Why indexing?

The increased use of indexing could help decrease portfolio complexity, manage spread and rates risk through diversification as well as potentially decrease trading costs.


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