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active value management

English translation: discretionary management of relative value positions

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19:55 Jan 5, 2003
English to English translations [PRO]
Bus/Financial
English term or phrase: active value management
Successful active value management
(subject: fixed income portfolios management)
Does it have to do here with value vs growth investing?
Laura Vinti
United States
Local time: 21:09
English translation:discretionary management of relative value positions
Explanation:
I would need to see the entire paragraph to be 100% certain, but here's my take on it:

There are two concepts involved here: *active* management and *value* management.

Active management describes an investment strategy where the portfolio manager has discretion to depart from the agreed benchmark (as opposed to a "passive" mandate, where his/her job is simply to track the benchmark). There's a lot of varation here: active mandates can range from a restricted departure from the benchmark (i.e. over- or underweighting of certain positions relative to the benchmark) to full freedom in structuring the portfolio (rather rare these days, though).

"Value" management in a fixed-income context is very likely related to the concept of *relative value* (the concepts of "growth" vs. "value" issues only makes sense when referring to equities). Relative value usually describes positions comprising a spread between two markets, or market segments (e.g. Long US 10-year bonds vs. short 10-year Bunds, or short UK Gilts vs. Long Japanese Govt. Bonds). The motivation is to benefit from a relative move between different assets, such as a steepening or flattening of a yield curve, or a shift in the spread between two different markets. More recently, this concept has been expanded to include strategies involving corporate bonds: these strategies also look at the creditworthiness of issuers (hence the term "credit spreads"). Relative value might exist, for example, where a given issuer's creditworthiness is undervalued by the market.

An example for this: Let's assume the current 10-year rate for Elbonian government bonds (those who have never heard of the Republic of Elbonia should urgently read Dilbert...) is 7% p.a. Given the bad business outlook for Elbonia Telecom, a bond issued by the company trades at a yield of 25% p.a. - IOW the company has to pay a credit spread of 18 percentage points (to compensate investors for the higher probability of never seeing their money paid back).

Let's now assume that an investment bank's credit analysis model finds that the market fears are exaggerated, and that the "fair" yield should be closer to 20%. In that case, they would buy Elbonia Telecom bonds and sell Elbonian government bonds short, hoping to "lock in" the 5% yield exaggeration. That's relative value...

Contact me directly if that isn't clear.
Selected response from:

Ralf Lemster
Germany
Local time: 03:09
Grading comment
Hi Ralf,
Thank you very much for your exhaustive answer!
The final Italian translation was "gestione attiva dei portafogli orientata al valore".

4 KudoZ points were awarded for this answer

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Summary of answers provided
4 +1discretionary management of relative value positions
Ralf Lemster


  

Answers


37 mins   confidence: Answerer confidence 4/5Answerer confidence 4/5 peer agreement (net): +1
discretionary management of relative value positions


Explanation:
I would need to see the entire paragraph to be 100% certain, but here's my take on it:

There are two concepts involved here: *active* management and *value* management.

Active management describes an investment strategy where the portfolio manager has discretion to depart from the agreed benchmark (as opposed to a "passive" mandate, where his/her job is simply to track the benchmark). There's a lot of varation here: active mandates can range from a restricted departure from the benchmark (i.e. over- or underweighting of certain positions relative to the benchmark) to full freedom in structuring the portfolio (rather rare these days, though).

"Value" management in a fixed-income context is very likely related to the concept of *relative value* (the concepts of "growth" vs. "value" issues only makes sense when referring to equities). Relative value usually describes positions comprising a spread between two markets, or market segments (e.g. Long US 10-year bonds vs. short 10-year Bunds, or short UK Gilts vs. Long Japanese Govt. Bonds). The motivation is to benefit from a relative move between different assets, such as a steepening or flattening of a yield curve, or a shift in the spread between two different markets. More recently, this concept has been expanded to include strategies involving corporate bonds: these strategies also look at the creditworthiness of issuers (hence the term "credit spreads"). Relative value might exist, for example, where a given issuer's creditworthiness is undervalued by the market.

An example for this: Let's assume the current 10-year rate for Elbonian government bonds (those who have never heard of the Republic of Elbonia should urgently read Dilbert...) is 7% p.a. Given the bad business outlook for Elbonia Telecom, a bond issued by the company trades at a yield of 25% p.a. - IOW the company has to pay a credit spread of 18 percentage points (to compensate investors for the higher probability of never seeing their money paid back).

Let's now assume that an investment bank's credit analysis model finds that the market fears are exaggerated, and that the "fair" yield should be closer to 20%. In that case, they would buy Elbonia Telecom bonds and sell Elbonian government bonds short, hoping to "lock in" the 5% yield exaggeration. That's relative value...

Contact me directly if that isn't clear.

Ralf Lemster
Germany
Local time: 03:09
Native speaker of: German
PRO pts in pair: 377
Grading comment
Hi Ralf,
Thank you very much for your exhaustive answer!
The final Italian translation was "gestione attiva dei portafogli orientata al valore".

Peer comments on this answer (and responses from the answerer)
agree  Anne Lee
14 hrs
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