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1、Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-1,Chapter 24 Indexing,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-2,Learning Objectives,After reading this chapter, you will understand the objectives and motivation for bond indexing the advantages and d
2、isadvantages of bond indexing the three major broad-based bond market indexes the sectors of the broad-based indexes the three methodologies used for constructing an indexed portfolio,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-3,Learning Objectives (continued),After readin
3、g this chapter, you will understand the difficulties associated with implementing a bond indexing strategy the objectives and motivation for enhanced bond indexing the strategies used in enhanced indexing,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-4,Objective of and Motiva
4、tion for Bond Indexing,Bond indexing means designing a portfolio so that its performance will match the performance of some bond index. In indexing, performance is measured in terms of total rate of return achieved (or simply, total return) over some investment horizon. Total return over some invest
5、ment horizon incorporates all sources of return from holding a portfolio of bonds.,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-5,Objective of and Motivation for Bond Indexing (continued),Several factors explain the popularity of bond indexing. First, the empirical evidence
6、suggests that historically the overall performance of active bond managers has been poor. Second is the reduced advisory management fees charged for an indexed portfolio compared to active management advisory fees. Lower nonadvisory fees are a third explanation for the popularity of indexing.,Copyri
7、ght 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-6,Objective of and Motivation for Bond Indexing (continued),Advisory fees charged by active managers typically range from 15 to 50 basis points. The range for indexed portfolios, in contrast, is 1 to 20 basis points, with the upper rang
8、e representing the fees for enhanced and customized benchmark funds, discussed later in this chapter.,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-7,Objective of and Motivation for Bond Indexing (continued),Sponsors have greater control over external managers when an indexin
9、g strategy is selected. For example, in an actively managed portfolio, a sponsor who specifies a restriction on the portfolios duration still gives the manager ample leeway to pursue strategies that may significantly underperform the index selected as a benchmark. In contrast, requiring an investmen
10、t advisor to match an index gives little leeway to the manager and, as a result, should result in performance that does not significantly diverge from a benchmark.,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-8,Objective of and Motivation for Bond Indexing (continued),Critic
11、s of indexing point out that although an indexing strategy matches the performance of some index, the performance of that index does not necessarily represent optimal performance. Moreover, matching an index does not mean that the manager will satisfy a clients return requirement objective. Matching
12、 an index means that a money manager is restricted to the sectors of the bond market that are in the index, even though there may be attractive opportunities in market sectors excluded from the index.,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-9,Objective of and Motivation
13、 for Bond Indexing (continued),At the theoretical level, there are the well-known benefits of diversification as set forth in the Markowitz mean-variance portfolio theory. Capital market theory tells us a market portfolio offers the highest level of return per unit of risk in an efficient market. Th
14、e market portfolio is a capitalization-weighted (value-weighted) portfolio of all risky assets. Exhibit 24-1 (see Overhead 24-10) summarizes the advantages and disadvantages of bond indexing.,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-10,Exhibit 24-1 Advantages and Disadva
15、ntages of Bond Indexing,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-11,Factors to Consider in Selecting an Index,A money manager who wishes to pursue an indexing strategy must determine which bond index to replicate. There are a number of bond indexes from which to select,
16、and several factors influence the decision. The first is the investors risk tolerance. The second factor influencing the selection of an index is the investors objective.,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,24-12,Bond Indexes,The wide range of bond market indexes available can be classified as broad-based market indexes and specialized market indexes. Broker/dealer firms developed and aggressively marketed their bond indexes becaus
