Corporate bonds are an attractive addition to investors’ performance-seeking portfolios, according to a new paper by Paris-based EDHEC-Risk Institute.
This is because corporate bonds help with asset-liability management through the improvements in hedging benefits they provide. They come with a less-than-proportional reduction in performance compared with equity-dominated portfolios.
The introduction of corporate bonds to liability-hedging portfolios is also beneficial for investors since it leads to improvements in both hedging and performance benefits, especially for investors facing liabilities discounted using a credit spread adjustment.
“Bonds are useful ingredients in the speculative component of investors’ portfolios, where they bring excess performance with respect to cash and diversification benefits with respect to equities, and they are also useful in the hedging component of liability-driven long-term investors’ portfolios, where they allow for protection against unexpected changes in interest rates,” the paper said.
The EDHEC-Risk paper, which is entitled Analysing and Decomposing the Sources of Added-Value of Corporate Bonds within Institutional Investors’ Portfolios, can be downloaded here: www.edhec-risk.com
Sally Percy is editor of The Treasurer