Contents

Introduction .................................................................................................................................................. 2
Strategies .................................................................................................................................................. 2
Active Strategy ...................................................................................................................................... 2
Passive Strategy .................................................................................................................................... 2
State of Economies ................................................................................................................................... 2
Chinese Bonds as Passive Behavior....................................................................................................... 2
U.S Bonds Market ................................................................................................................................. 2
Analysis ......................................................................................................................................................... 3
Chinese Mangers Analytical approaches .................................................................................................. 3
Bottom-up, fundamental credit analysis .............................................................................................. 3
Policy risk analysis ................................................................................................................................. 3
Active Managers analytical approaches ................................................................................................... 3
Fundamental research, quantitative analysis, and trading expertise: ................................................. 3
Additional tools to generate excess returns and manage risk.............................................................. 3
Comparison ................................................................................................................................................... 4
Conclusion ..................................................................................................................................................... 5
Bibliography .................................................................................................................................................. 6
Introduction
This report is the result of a comparative study and analysis of two different bond investing
strategies in two different set of economies.

Strategies

Active Strategy
Experienced active managers, supported by research and trading experts, seek to earn “excess
returns” (returns greater than those of the benchmark index). In simple words Active fund
managers are those who try to beat market in term of return. Active managers can consider a
much broader spectrum of potential investments, and can act on informed assessments and
market outlooks, constructing a portfolio that may differ from that of a passive strategy.

Passive Strategy
passive investment strategies seek only to match a benchmark index, by attempting to mirror the
characteristics of the underlying index and by generally limiting the field of potential investments to
securities that meet the index’s inclusion criteria.

State of Economies

Chinese Bonds as Passive Behavior

China’s economy has delivered average GDP growth of 10% per annum over the past 20 years,
making it one of the key drivers of global economic growth in the same period. While absolute
growth has slowed over the past few years, China is expected to remain one of the most robust
economies in the industrialized world, with growth forecast at around 7% per annum over the
coming five years.

U.S Bonds Market

The United States was the largest market with 33% of the total followed by Japan (14%). As a
proportion of global GDP, the bond market increased to over 140% in 2011 from 119% in 2008
and 80% a decade earlier. The considerable growth means that in March 2012 it was much larger
than the global equity market which had a market capitalisation of around $53 trillion
Analysis

Chinese Mangers Analytical approaches

Two major approaches are followed by most of Chinese managers while investing:

Bottom-up, fundamental credit analysis

This aspect of corporate credit selection is essentially the same in most markets. It involves
carefully analysing issuers to evaluate: a) business risk profile, which encompasses sales and
operating performance as well as primarily qualitative factors such as industry trends, business
strategies, corporate history and management quality; and b) financial risk profile, which takes
into account quantitative factors such as leverage, liquidity, debt maturity profile and cash flow
projections.

Policy risk analysis

While the state may continue to play a “decisive” role in China’s economy, the market dynamic
is changing relatively rapidly. Indeed, 10 years ago no one could have imagined the level of
influence that market forces currently have in China. Thus, as the Great Upgrade and concurrent
economic, social and political reforms progress, we expect policy risk to decline in China. As
mentioned above, we see the Chinese government allowing bond market defaults in the years
ahead while continuing to tighten financial sector regulation, foster more robust corporate
governance standards and tighten disclosure regulations, among other measures.

Active Managers analytical approaches

Fundamental research, quantitative analysis, and trading expertise:

Quality and quantity of fundamental research and quantitative analysis used to find investment
opportunities, and by the trading expertise a fund can bring to bear. The fees that active
managers charge are typically higher than those of passive index funds.

Additional tools to generate excess returns and manage risk

In the current bond market environment, many investors see low yields and the specter of higher
rates as a threat to returns from bond allocations. However, active bond managers can use many
strategies to help investors generate returns and manage risks, even within a rising-rate
environment. The key concept is that active managers have the flexibility to change some
important characteristics of the portfolios they manage, and can also benefit from trading
opportunities.
Comparison
Chinese Bonds (A Passive)
 China doesn’t allow foreign credit rating
agencies to operate directly in mainland
China. Many of the established local rating
agencies are founded as joint ventures with
the “big three” (S&P, Moody’s, and Fitch).
So these agencies don’t represent the true
picture in front of investor.
 Interest Rate generally known as coupon
rate in bound market is very high in china
near about 7% in November 2014. This
also produce the behavior of holding
 Currency Volatility is another factor that
helps to choose which strategy is best to
implement. Chinese government give
guarantee to investors regarding appreciate
in Chinese YUAN.
 Roll down As a bond approaches
maturity, it changes position on the
“yield curve” (which is the curve
generated by plotting time-to-maturity
on the x-axis with the market’s required
yield on the y-axis). “NO” they hold till
the maturity.
US Bonds (A Active)
 Credit rating agencies like S&P, Moody’s
are very influencing in us market. They
truly represent the volatility and this is
how they get advantage and earn excess
return over market
 Statistics show that US coupon rate is
about near to 2% max. this will generate
behavior of active manager to buy and sell
the bonds.
 In past few years depreciate in dollar
against worlds larger currencies build the
behavior of investors to not hold the
securities for a longer time period.
 Roll down in general, investors require
higher yields to lend money for longer
periods of time as a bond moves closer
to maturity, it tends to “roll down” the
yield curve as the required yield for that
bond tends to fall. For bonds, a falling
yield means a rising price. An active
manager can generate returns by selling
bonds that have appreciated in price
due to roll down.
  Credit Spread Passive manager’s  Credit Spread opportunity for active
behavior is to hold and just meet the manager.
market.

Conclusion
Before drawing conclusion which strategy is best for managers we will analyze where we are going
invest? And what is the current economy status. Country like Pakistan which is known as emerging
market in world with future expected growth near to 5%. Before selecting best strategy for Pakistan we
need to analyze some factors that mostly influence the bound structure and its market value. Interest
Rate A major factor that affect the bond value. Currently Pakistan’s interest rate is about
approximately 7%. This is in decreasing trend from last 10 years. This indicates not to hold
bonds for a long time. Currency PKR is currently holding the depreciation behavior against major
currencies like U.S.D, G.B.P etc. That indicates investors again not to hold such bonds. We mentioned
Pakistan as a emerging market. The reason behind is some future projects like China Pakistan economic
corridor will help investors to gain high level of profit from buying today bonds and selling in future.
Some political risk also a major reasons for selecting active management strategy.
Bibliography
Ford O’Neil and Pramod Atluri. (2014). Why Bond Investors May Benefit from Actively Managed Mutual
Funds and ETFs. leadership series , p 1-8.

http://www.bloomberg.com/markets/rates-bonds/government-bonds/us. (2016). Retrieved 05 14, 2016,

from www.bloomberg.com: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us

NBSPC. (2014). Chinese bonds: From passive to active investment. manulife Asset Management.