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Executive summary

Many factors can explain return attribution differences in credit portfolio returns – curve, interest rate positioning, sector allocation and security selection. Solid bottom-up fundamental credit research is certainly a cornerstone of any successful corporate bond management strategy, as most credit managers generally achieve a majority of their excess returns through sector allocation and security selection.

But what if we told you that effective portfolio construction is an inexpensive alpha source that can allow a credit manager the opportunity to build portfolios around their best ideas while also producing consistent and uncorrelated excess returns in both bull and bear markets? This paper explores:

  • Why behavioral biases among credit investors may be a hindrance to their risk management process
  • What makes tracking error a useful, but often misunderstood risk metric in relation to portfolio management
  • How effective portfolio construction can uncover alpha sources that help achieve outperformance in up and down bond markets