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EDHEC-Risk Institute study shows that corporate bonds can be attractive additions to portfolios

Tuesday, October 01, 2013
Opalesque Industry Update - In a paper produced as part of the research chair on “The Case for Inflation-Linked Corporate Bonds: Issuers’ and Investors’ Perspectives” at EDHEC-Risk Institute, supported by Rothschild & Cie, EDHEC-Risk researchers have provided a comprehensive analysis of the sources of added-value of corporate bonds for institutional investors.

The paper, “Analysing and Decomposing the Sources of Added-Value of Corporate Bonds within Institutional Investors’ Portfolios,” finds corporate bonds to be attractive additions to investors’ portfolios:

• Introducing corporate bonds in performance-seeking portfolios (PSPs) typically generates positive benefits from an asset-liability management perspective since it will lead to substantial improvements in hedging benefits, which come at the cost of a less-than-proportional reduction in performance compared to equity-dominated portfolios.

• Introducing corporate bonds in liability-hedging portfolios (LHPs) is also found to generate a positive impact on investor welfare since it leads to improvements in both hedging and performance benefits, especially for investors facing liabilities discounted using a credit spread adjustment.

In this context, investors may wish to assess whether a particular proportion of corporate bonds in each portfolio would lead to the highest level of welfare gains.

A copy of “Analysing and Decomposing the Sources of Added-Value of Corporate Bonds within Institutional Investors’ Portfolios” can be downloaded via the following link: docs.edhec-risk.com/mrk/000000/Press/EDHEC_Publication_Analysing_Added-Value_Corporate_Bonds.pdf

This research was supported by Rothschild & Cie as part of the research chair at EDHEC-Risk Institute on “The Case for Inflation-Linked Corporate Bonds: Issuers’ and Investors’ Perspectives.”

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