Value of Security Selection Versus Asset Allocation in Credit Markets

Fixed income investors attempt to outperform their benchmarks by expression views on yield curve allocations, sector and quality allocations and security selection. This article presents a quantitative study based on a perfect foresight world assumption of the relative merits of the various forms of fixed income research as applied to portfolio management. The conclusions could help investors to define a successful strategy for credit investing in indexed portfolios. In the article the authors draw the conclusion that an index-matched strategy based on security selection within each market cell is the most risk-efficient path to index outperformance in a perfect foresight world