22-24 June 2003 The Caledonian Hilton Hotel, Edinburgh abcd Finance & Investment Conference Bond Asset Management – An Overview Paul Sweeting 22-24 June 2003 The Caledonian Hilton Hotel, Edinburgh

Topics Types of bonds and their components Credit ratings Bond pricing Benchmarks and indices Liability-based benchmarks Index-tracking Active management Risk controls Implementation Reporting

Types of bonds and their components Government and credit Fixed interest and index-linked Sterling and non-sterling Actual and synthetic synthetic versions of hard-to-get bonds corporate + inflation bonds = synthetic index-linked corporate ilg + credit default swap = synthetic index-linked corporate gilt + cds = synthetic corporate

Credit ratings Investment grade High yield

Investment grade corporates Sub-investment grade bonds Bond pricing Gilts given by yield Investment grade corporates given by spread Sub-investment grade bonds given by price quoted as p per £ if close to default

Benchmarks and indices Single currency government bond indices Global government bond indices Single currency aggregate/corporate bond indices Barclays Capital iBoxx Merrill Lynch JP Morgan Liability based

Benchmarks – desirable qualities Transparent From an experienced provider Replicable Representative Investible Flexible Reflective of investor needs Consistent

Index-tracking – why No under-performance Low fees Diversification Time-efficient Rule-based decision making but Anomalous index construction Corporate bond market inefficiencies Replication challenges

Index-tracking – how Full replication Stratified sampling

Performance & dispersion Active management Sources of added value market allocation yield curve positioning/duration sector allocation stock selection off-benchmark Relative importance Diversification Performance & dispersion

Risk controls Client restrictions Modelling credit risk duration country credit Modelling credit risk ratings migration contingent claims market based

Implementation Dealing in the market New issues

Reporting Frequency Content Commentary Data Other