Now I get FI

I don’t get everything about FI (still need to study), but I’m really happy to finally see the strategic role of FI in portfolios. I mean, I always understood the diversification argument in asset only portfolios, but I figured that you might as well just have equities (for growth) and treasuries (for diversification). But I always wondered why are there all these FI jobs? Why are companies paying so much for people to manage assets with such (relative to equities) low average returns. Now I see that companies with liabilities (pensions, insurance, and to some extent endowments) are essentially short on FI positions and with FI investments, you can match them up much better than with equities. Yay! It finally makes sense to me (even if some of the details are still a little obscure). Thank you CFA curriculum!

So what about everyone else who owns, say, GNMA mutual funds?

bchadwick Wrote: ------------------------------------------------------- > I don’t get everything about FI (still need to > study), but I’m really happy to finally see the > strategic role of FI in portfolios. I mean, I > always understood the diversification argument in > asset only portfolios, but I figured that you > might as well just have equities (for growth) and > treasuries (for diversification). > > But I always wondered why are there all these FI > jobs? Why are companies paying so much for people > to manage assets with such (relative to equities) > low average returns. Now I see that companies > with liabilities (pensions, insurance, and to some > extent endowments) are essentially short on FI > positions and with FI investments, you can match > them up much better than with equities. Yay! It > finally makes sense to me (even if some of the > details are still a little obscure). > > Thank you CFA curriculum! Also, while ROA may be low, you can throw a lot more leverage on Bonds than you can on stock which can magnify returns substanitally. Especially if you’re talking about a well managed FI portfolio which mixes high yield and investment grade bonds, you can turn that sort of thing into real money…

Great, tell me more! I’ve always found the FI side of things to be a bit mysterious. I mean, I can value various types of bonds and all from my CFA studies, but I’m still a little hazy on what makes for good FI portfolio strategy. ALM seems to be more about managing risk than making profits. Clearly if there are so many FI positions around, people are needing that kind of thing. I’ve thought that FI requires leverage because spreads are comparatively thin, so to make them into something substantial, you have to use leverage. On the other hand, if you’re using borrowed money to magnify the gains from borrowing and lending other people’s money, it sounds like one’s just loaded up on similar risk factors, and so it’s great when it goes your way, and then - POOF - you get LTCM or something like that.

Agree! The part that I enjoyed the most was the study session (I can’t remember the SS number) that acutally break down the liability structure/component of a pension plan. Active participant, deferred participant, new-comer…ect. I really enjoyed the process of breaking down those component and identifiy their characteristics, then try to find solution (nominal bond or inflation-indexed bond) to immunize the liability. To me, THAT was the most exciting part of investment managment, and that is how a FI analyst would earn his money and reputation. Identifiy the problem, then find a finanical instrument/solution.