RT Journal Article
SR Electronic
T1 Value of Skill in Security Selection versus Asset Allocation in Credit Markets
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 20
OP 41
DO 10.3905/jpm.2000.319780
VO 27
IS 1
A1 Lev Dynkin
A1 Jay Hyman
A1 Wei Wu
YR 2000
UL https://pm-research.com/content/27/1/20.abstract
AB The authors of this article simulate several styles of fixed–income portfolio management using a variation of the “perfect foresight“ approach and explore performance at manager skill levels ranging from 0% (random selection) to 100% (perfect foresight). The portfolio strategies are designed so as to isolate the management styles: duration allocation, sector allocation, quality allocation, and security selection. Information ratios are reported for each strategy at various levels of manager skill. At equivalent levels of skill, the strategy based on security selection outperforms duration allocation and sector/quality allocation techniques in terms of information ratios. The number of independent decisions in the allocation process is a key determinant of strategy success. The advantage of security selection lies in the diversification of risk provided by making many security selection decisions simultaneously. This does not negate the importance of duration decision–making in fixed–income portfolio management.