Modeling the Performance of Active Managers in the Euroland Bond Market

Abstract

With the advent of the European Monetary Union on January 1, 1999, historical fixed-income management results became irrelevant. To asses the potential of value–added strategies, this article simulates various European bond management strategies using historical returns from a market that is likely to be similar to the new market – the U.S. bond market. The model assesses the ability of an active manger to add value by successfully selecting between different asset classes, represented by indexes. With successful forecasts 55% of the time, both active–duration management and sector rotation strategies add value. The results also provide some ideas for manager risk control and portfolio monitoring.