The vignette,
"Granite adjusts the portfolio’s duration slightly from the benchmark, and attempts to increase relative return by tilting the portfolios in terms of sector weights, varying the quality of issues, and anticipating changes in term structure. The mismatches are expected to provide additional returns to cover administrative and management costs. "
The Question
The style of investing described in Whitney’s presentation is most likely:
A. a full replication approach. B. enhanced indexing by small risk factor mismatches.
C. active management by larger risk factor mismatches.
The Answer
“C is correct because Granite is not only tilting the portfolios with regard to certain sectors, quality, or term structure as an enhanced indexer would, it is also making duration adjustments. An indexer (full replication approach) or enhanced indexer would keep the duration matched to the index.”
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I don’t recall reading this but is it the case that a change to duration - more than any other variable, including term structure - is the defining line between ‘enhanced’ indexing and active management?
I thought active managers were trying to generate alpha whereas enhanced indexers were trying to replicate the index performance and only recover administrative and management costs.