perspectives on portfolio 102727755

8/6/2019 Perspectives on Portfolio 102727755

http://slidepdf.com/reader/full/perspectives-on-portfolio-102727755 1/11

Barclays Capital 2011 PortfolioManagement Conference

Perspectives on Portfolio Management and Fed Policies

Ken Volpert, CFAHead of Taxable Bond Group, Vanguard



> 2

A Three Decade Perspective: Decade 1

• Early 1980’s

– Monroe trader – Stacks of research in the daily mail – Maturity bucketing. Portfolio average maturity – Long callable utility bonds – Dollar value of an .01

– “Inside the Yield Book” – Immunized and cash matched portfolios v liabilities

• Late 1980’s – Barra risk model – Start of option adjusted durations and spreads

– Event risk (RJR), LBOs, rapid growth of the high yield market – Multi factor risk models (ex ante tracking) – Institutional bond indexing – Growth of the mortgage market – Start of move from DB to DC assets under management



> 3


• 1990’s – New tools for managers (PC Product , Yield Book, Wilshire, etc)

– Bloomberg widely used in the market (becomes a standard foranalysis and “messaging” from sell-side to buy-side)

– Key rate durations catch on

– Improved option adjusted measures of risk – Scenario analysis

– Better, broader, and cleaner index data

– Growth of the securitization market

– Growth of bond indexing (retail mutual funds) – Improved risk models (POINT in the late 1990s’)

– Rapid growth of DC assets under management



> 4


• 2000 to 2010 – TRACE (bond price transparency) – Electronic bond trading (TradeWeb, MarketAxess, Bloomberg, etc)

– Growth in TIPS issuance and TIPS bond funds gain popularity – Greater awareness of idiosyncratic risks (2002 credit cycle … Enron, Worldcom, etc) – DTS (duration times spread) risk measure – Research delivered over the internet, improved real-time data – Increased use of derivatives to target risk factors – Separation of alpha and beta

– Hedge fund growth accelerates – Ongoing bond index growth – Bond ETF’s introduced and grow to $150+ billion – Global bond funds, EM bond funds – The “great recession” fallout

– Reaching for yield performance hits (non agcy MBS)

– Security lending investment risks – Consolidation of dealers (2008 mergers) – Consolidation of managers (Blackrock + BGI) and the move to more global reach by the

largest managers – LDI (liability driven investing) comes back again



> 5

Fixed Income: Looking Forward

• 2011-2020 – Less dealer liquidity (heavy regulation and buy-side too big for sell-side) leading to more

agency trading (rewarding those with best distribution networks)

– Global regulatory convergence – Continued growth in bond indexing in US and globally – Central clearing, standardization, and risk management needs will lead to increased CDS and

other derivatives trading – Possible separation of credit and funding in corporate bonds (credit component trading

separate from the libor based funding piece)

– US agency market becomes an “orphan” market … post GSE reform – GSE reform and new legislation leads to rapid growth of the “covered bond” market to supporthousing.

– Continued move toward global benchmarks (reduced single developed market dependence) – Ongoing “sovereign risk” management challenges, especially in the major developed markets – However, ongoing move toward local currency EM bond markets … especially in the largest

EM markets – Continued buy-side mergers/consolidations to facilitate globalization and scale – Bond ETF 3-5x greater growth rate than conventional funds … but with fewer ETF offerings

than exist today and more sophisticated tools to evaluate “total cost” – Risk of “policy of inflating the way out of the debt problems” leading to weak bond returns

relative to equities.



> 6

TIPS Influence on Fed Policy

• Provides more clear “inflations expectations”

• 5 Year 5 year forward BEI is a good policy tool



> 7

Inflation dynamics

Inflation expectations (wages, BEI, Fed credibility) key to stable trend inflation

Source: Vanguard Investment Strategy Group



> 8

Output below trend, but improving Low velocity of money: Hyperinflation fears unwarranted

Wage growth low, but rising

Trend inflation is low, but upside risks rising

Source: Vanguard Investment Strategy Group.For additional information, see Vanguard white paper, Recent policy actions and outlook for U.S. inflation, (Davis and Cleborne, 2009).

Wage inflation (year-over-year percentage)

Output gap

Commodity price shocks

M2/monetary base



> 9

Asymmetric future CPI inflation risk

IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature,do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from Vanguard Capital Markets Model ® (VCMM),derived from 10,000 simulations for U.S. equity returns and fixed income returns. Simulations as of December 31, 2010. Results from the model may vary witheach use and over time. For more information, please see the disclosures slide.

Source: Vanguard Investment Strategy Group. For details, see Vanguard’s Economic and Capital Markets Outlook (Davis et al., 2010).

Market inflationexpectations~2.5%



> 10

A positive long-run outlook for the U.S. stock market

Trailing P/Es and 10–year forward returns

Sources: Shiller, Standard & Poor’s, and Vanguard Investment Strategy Group. For details, see Vanguard’s white paper “What does the crisis of 2008 imply for 2009 and beyond?” , 2009.Note: Trailing P/E ratio reflects the so-called Graham P/E ratio as used by Professor Shiller, calculated as the ratio of the previous year’s price/ten year averageearnings.

Cyclically adjustedP/E

Forward P/E



> 11

Q & A

perspectives on portfolio 102727755

Documents