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Bonds

High quality and diversification of interest rate risks

What is the purpose of your bonds? Do you increasingly compromise on borrower quality, maturity, and tradability to try to achieve an extra return or to reject a negative return on expiration? The benefits of bonds lie in a different direction. We focus on first-class creditors and risk-based portfolio optimisation.

The addition of first-class government bonds with low correlations to equities leads to a more robust overall portfolio. The fluctuations in value (volatility) and maximum losses (maximum drawdown) are significantly reduced.

Standard bond indices are not efficient

Standard indices weight bonds by debt (issue volume). The more heavily an issuer is in debt, the greater its weight in the index. Indexing rewards the biggest borrowers, resulting in sub-optimal capital allocation and portfolio composition.

OLZ portfolio optimisation solves this problem

OLZ portfolio optimisation considers all relevant risk factors. Focusing on best credit ratings and highest liquidity minimises credit and liquidity risks. Risk-based optimisation leads to optimised weighting and diversification of interest rate risks. Foreign currency risks are almost completely hedged.

Clear focus on quality: With our risk-based portfolio optimisation, we place clear focus on first-class bonds with: Low credit risk, high liquidity and optimal correlation characteristics to the overall portfolio.

Systematic diversification: We forecast the risk characteristics for eight interest rate zones and derive an optimally diversified portfolio.

Systematic investment process

When constructing a portfolio, we systematically follow a 3-stage investment process with no discretionary leeway for portfolio management.

Why ‘only’ government bonds?

An optimised portfolio of high-quality government bonds may well carry only minimal risks, but currently it also provides a low or even negative return - depending on the interest rate environment. Taken in isolation, this asset class seems rather unattractive. However, from a risk perspective, adding it to an overall portfolio makes sense.

The airbag in your portfolio
  • In the long term, equities offer an excess return compared to bonds (equity risk premium). Investors are therefore well advised to use their risk budget primarily for equity risks rather than less diversifiable credit risk. The bond component of the portfolio should be invested as safely as possible.
  • First-class government bonds boast high diversification potential for equities. Whilst other asset classes - frequently mixed as supposedly diversifying investments - might correlate more strongly than expected with equity markets in times of crisis, first-class government bonds can maintain their negative correlation.

How can I invest with OLZ?

Our global bond strategy, with its focus on first-class government bonds, is available as both a medium-term and longer-term maturity fund. By agreement, client-specific targets and restrictions (investment universe, duration, specific sustainability criteria, maximum weights, etc.) can be integrated into the investment process for direct mandates.

Frequently asked questions (FAQs)

How does optimisation work in the case of CHF bonds?

Minimum variance optimisation is not possible for CHF bonds due to the restricted liquidity and the heterogeneity of the universe. OLZ has therefore decided on semi-passive management and collaboration with an external specialist for CHF bonds. The manager is Loyal Finance AG in Zurich.

Advantages:

  • Target duration: 5 years with a range of +/- 1 year (cf. SBI: ca. 6.5 years)
  • Selection of bonds according to value criteria; Buy-and-hold strategy
  • Systematic improvement of portfolio structure with respect to segments, creditworthiness and durations compared to the Swiss Bond Index AAA-BBB

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