Written on 25 September 2013.
The paper, “Analysing and Decomposing the Sources of Added-Value of Corporate Bonds within Institutional Investors’ Portfolios,” finds corporate bonds to be attractive additions to investors’ portfolios:
• Introducing corporate bonds in performance-seeking portfolios (PSPs) typically generates positive benefits from an asset-liability management perspective since it will lead to substantial improvements in hedging benefits, which come at the cost of a less-than-proportional reduction in performance compared to equity-dominated portfolios.
• Introducing corporate bonds in liability-hedging portfolios (LHPs) is also found to generate a positive impact on investor welfare since it leads to improvements in both hedging and performance benefits, especially for investors facing liabilities discounted using a credit spread adjustment.
In this context, investors may wish to assess whether a particular proportion of corporate bonds in each portfolio would lead to the highest level of welfare gains.
A copy of “Analysing and Decomposing the Sources of Added-Value of Corporate Bonds within Institutional Investors’ Portfolios” can be downloaded via the following link:
This research was supported by Rothschild & Cie as part of the research chair at EDHEC-Risk Institute on “The Case for Inflation-Linked Corporate Bonds: Issuers’ and Investors’ Perspectives.”