Question-61: What is the use of Backward-looking tracking error for bond portfolios?

Answer:  Backward-looking tracking error is used to assess a portfolio’s performance relative to a benchmark.

Question-62: What is the Forward-looking tracking error for a bond portfolio?

Answer: Forward-looking tracking error for a bond portfolio is used to predict future performance relative to a benchmark.

Question-63: What is the use of bond market indexes?

Answer:  Investors and portfolio managers recently now rely on bond indexes as benchmarks for –

• Performance: Measuring performance
• Fee based portfolio’s: In the case managing portfolios which are performance-fee based, can be used to determining compensation of portfolio managers.

Question-64: Do you see some un-ethical practices as well with the Indexes?

Answer: Yes, some time for performance-based portfolio construction. Portfolio managers ask the companies to make the index which are lower in performance. And portfolio managers benchmarked against this to show higher performance and get the good compensation fee.

Question-65: Why bond index construction/maintenance is considered more complex in fixed income market than the equity market?

Answer: Creating, and maintaining of a bond market index is more difficult because of below reasons

• Broad Universe: Bonds has broader universe and much more diverse than that of stocks. For example bond universe include
  • S. Treasury issues
  • Agency series
  • Municipal bonds
  • Corporate bonds for various segments like
    • Industrials
    • Utilities
    • Financials
  • Ratings like high-quality, AAA-rated bonds to bonds in default.
• Different Coupon: Each bond could have different coupon.
• Different maturity: Each bond have different maturities
• Provisions: Bond has call and put provisions, as well as by sinking funds.
• Change in bond universe: The universe of bonds changes constantly. A company usually will have one common equity stock issue, while, same corporation will have several bond issues outstanding at any point in time, with different characteristics of the issues like maturities, sinking funds, and call features.
• Volatility in price across issues: As same corporation can issue multiple bonds but each can have different prices.