-
50%
reduction in turnover of credit portfolio due to optimal rebalancing
-
100%
independent implementation by Acuity team
-
2X
productivity achieved
CLIENT CHALLENGES
- A large global asset manager created credit portfolios and rebalanced them periodically. A credit portfolio is a basket of liquid bonds designed to track the excess returns of corporate benchmark indices versus US Treasuries. The basket aims to enable investors to gain beta exposure to the USD corporate bond market.
- The portfolio basket is constructed in a completely transparent, replicable and stratified sampling approach using publicly available information. The standalone product is constructed without the use of sales or trading data.
OUR APPROACH
- The portfolio is rebalanced on a quarterly basis using a set of rules intended to control turnover while ensuring that the basket retains its high liquidity and effective tracking properties.
- Any cash received from interest payments is swept out of the basket at the end of each month and reinvested in the basket.
- The index is divided into N number of buckets using five sectors (such as banking and energy) and five duration categories (such as 0-3 and 3-5).
- For each sector-duration bucket, we calculated a mean OASD. We then picked two bonds around the mean OASD for each bucket based on certain criteria.
- The two eligible bonds were then weighted to match the mean OASD and market value percentage of the respective buckets. The maximum market value weight per issuer was set at the beginning of the quarter.
IMPACT DELIVERED
- Reduced costs for investors: Acuity analysts helped the client minimise turnover of the credit portfolios by optimally rebalancing them each quarter rather than just creating a brand-new version of the portfolio each time. Furthermore, eligibility constraints were relaxed to accommodate last-quarter bonds, if needed.
- The Acuity team directly implemented the client models and solved problems that arose in portfolio construction and rebalancing scenarios.
- Acuity analysts observed low tracking errors for certain portfolios and executed the rebalancing exercise for these credit portfolios on a monthly basis rather than on a quarterly basis, to optimise portfolio returns.
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