PT  - JOURNAL ARTICLE
AU  - Martin Fridson
AU  - Camille Mcleod-Salmon
TI  - Tactical Allocation by Credit Quality
AID  - 10.3905/jpm.2011.38.1.069
DP  - 2011 Oct 31
TA  - The Journal of Portfolio Management
PG  - 69--77
VI  - 38
IP  - 1
4099  - https://pm-research.com/content/38/1/69.short
4100  - https://pm-research.com/content/38/1/69.full
AB  - Tactical asset allocators operate on the assumption that if risk premiums increase, higher-rated bonds will outperform lower-rated bonds, and that if risk premiums decrease, the reverse will happen. Empirical testing shows, however, that about 30% of the time, these expected relationships break down. Drawing on a classic debate among corporate bond market participants, investors might hypothesize that tactical asset allocators can improve their results by classifying bonds according to market-based risk premiums rather than by agency-generated ratings. In the context of tactical asset allocation, however, Fridson and Mcleod-Salmon do not find the market to be a shrewder judge of credit risk than the rating agencies. The solution to the problem of perverse outcomes in credit-oriented tactical asset allocation may be to combine top-down sector selection techniques with bottom-up security selection.TOPICS: Portfolio theory, fixed-income portfolio management, analysis of individual risk factors/risk premia