RT Journal Article
SR Electronic
T1 Tactical Allocation by Credit Quality
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 69
OP 77
DO 10.3905/jpm.2011.38.1.069
VO 38
IS 1
A1 Martin Fridson
A1 Camille Mcleod-Salmon
YR 2011
UL https://pm-research.com/content/38/1/69.abstract
AB Tactical asset allocators operate on the assumption that if risk premiums increase, higher-rated bonds will outperform lower-rated bonds, and that if risk premiums decrease, the reverse will happen. Empirical testing shows, however, that about 30% of the time, these expected relationships break down. Drawing on a classic debate among corporate bond market participants, investors might hypothesize that tactical asset allocators can improve their results by classifying bonds according to market-based risk premiums rather than by agency-generated ratings. In the context of tactical asset allocation, however, Fridson and Mcleod-Salmon do not find the market to be a shrewder judge of credit risk than the rating agencies. The solution to the problem of perverse outcomes in credit-oriented tactical asset allocation may be to combine top-down sector selection techniques with bottom-up security selection.TOPICS: Portfolio theory, fixed-income portfolio management, analysis of individual risk factors/risk premia