Group Project – Fixed Income Investment Portfolio
General Description
The project aims to design a simple investment strategy using fixed-income instruments and implement the strategy in a fixed-income investment portfolio that provides the best possible risk-adjusted excess returns measured against a properly designed benchmark.
Students will work collaboratively in small teams to construct the required fixed-income portfolio based on each team’s investment objectives and strategies. Students are required to defend and provide a solid rationale that the portfolio will perform according to their expectations about the global fixed-income market going forward.
Each team is required to present its portfolio in class 7. The instructor, with the rest of the class, will play the role of an investment committee. Each team’s task is to deliver an effective presentation in 10 minutes and write an investment report to persuade the “committee” to pursue your investment ideas.
This project is an important component of the course. It allows you to explore investment ideas and apply the knowledge acquired in this and other relevant courses in a practical way. I recommend that you start trading a portfolio of fixed-income instruments by the end of Module 2 and improve your portfolio as we progress in the course.
2 Deliverables
The project’s overall purpose is to convince an investment committee to accept your investment portfolio in the 7th class. Your group’s presentation should be short and concise, approximately ten minutes. It should follow a real-life investment committee format. Each group presents its investment portfolio and submits a two-page written report explaining the investment idea, the rationale, and the investment recommendation. In order to provide you with early feedback regarding your final project, you will complete by Module 5 a brief overview of your project.
The deliverables for this project are:
1. M5 – An investment summary introducing your investment ideas and your choice’s rationale. This is an opportunity for you to receive feedback early in the development of your group project.
2. M7 – Submit an investment report (a 2-page write-up) and a PowerPoint presentation file, due one day prior to class 7. Also, write down the names of all group members on the submitted materials. An investment report should include the following items:
· Investment Objectives
· Benchmark and ETF selections
· Investment thesis & strategy: what it is and why it works
· Portfolio Construction & Risk Exposures
· Performance results: analyze results and make investment recommendations
3. M7 – A live presentation that each group will use to defend the investment proposal in the 7th module of the class. This presentation is not a summary of your project. Rather, it is your opportunity to pitch your recommendation. You have one shot with a potential client: your opportunity to “sell” your work.
3 Investment Strategy
3.1 Investment universe
The investment universe for the purpose of this project is the global bond markets using ETFs or individual fixed-income securities. You can trade any available ETF in the US, including government bond ETFs, mortgage bond ETFs, etc.
3.2 Investment time-frame
The investment time frame would be for 9 to 12 months. This is the time horizon for which to express your investment outlook. In other words, how would you expect current market conditions to change over the investment horizon?
This time frame is also representative of the holding period for many pension funds and endowments. It is, therefore, a time frame that is reasonable, and it allows to keep the transaction costs low because the turnover of the investment portfolio will be low.
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3.3 Data
You can access public data available for all ETFs. Gathering and cleaning data is an important part of the project. Students are expected to search and gather data from various sources and cross-check the validity of the data that they use to produce investment proposals.
4 Risk Management
For each portfolio proposal, students must elaborate on the proposal’s risk characteristics. Important metrics that should be considered include performance statistics and risk factor exposures.
5 Forward-Looking Design
Students are required to defend and provide a solid rationale that the portfolio will perform according to their expectations going forward. This step is probably the most important piece of the project.
6 Conclusion
In summary, students will be able to build and practically design a fixed-income portfolio that institutional-quality investors would consider for their own investments. The closer one gets to a forward-looking model portfolio with a solid economic rationale to perform, the better the chances of getting an investment from an institution.
In Summary
· The project aims to construct a fixed-income portfolio consisting of fixed-income ETFs or individual securities to outperform a properly designed benchmark and present the portfolio to the class.
· You are expected to deliver an effective investment presentation within 10 minutes to convince your peers to follow your investment recommendations.
· This project will allow you to explore investment ideas and apply the knowledge you have learned in the portfolio and fixed income theories practically.
· It is important to start the project early so that you can keep track of how your portfolio would have performed as we progress in the course.