Apollo Case Study – Quantitative Portfolio Strategy You have until Tuesday morning to complete this case study on fixed income portfolio analysis. Please submit your answers in a presentation document and submit together with your underlying analysis (excel / python / ..) via email. If anything is unclear, please ask, otherwise good luck! Portfolio Analysis 1) Describe the main characteristics of the specified benchmark, including (but not limited to) # of bonds, # of issuers, yield, spread, rating, rate duration (sensitivity to a 1bp parallel move wider in rates), spread duration (sensitivity to a 1bp parallel widening in credit spreads), DtS (duration times spread), maturity/rating/sector/country distribution, … . 2) How does the specified benchmark differ from the broad GBP Corporate IG market? What do you consider the most likely drivers of relative performance between the two going forward? 3) Describe the main characteristics of the given portfolio in relation to the benchmark. What do you consider the most likely drivers of relative performance between the two? 4) What do you expect to happen to credit spreads and interest rates broadly in the following scenarios: a. “Soft Landing”: Inflation declines towards 2% and economic growth moderates (but no deep recession) b. “No landing”: Inflation remains sticky at above 3% and growth remains positive c. “Hard Landing”: Growth deteriorates, the economy enters a severe recession and inflation sinks below 2% d. “Stagflation”: Growth stagnates but inflation remains sticky at above 3%. 5) What chances do you attribute to the above scenarios and why? 6) Can you think of countries/sectors/issuers/…. that would likely out- or underperform the broad market in the above scenarios? 7) How would you expect the portfolio to perform (outright and relative to benchmark) on a 1y forward-looking basis in the above scenarios? 8) In light of this, how would you change the characteristics of the portfolio? Optimal Portfolio Construction 1) Given the specified benchmark, the investable universe and the permitted issuer list, construct a portfolio with as high a yield as possible subject to the following constraints: a. GBP only b. Corporates, Quasi&Foreign Government & Sovereign only (Sector Lvl 1) c. Rate-Duration & Spread-Duration matched within +-1y at the portfolio level d. At least as highly rated as the benchmark at the portfolio level e. +-2% of relative ticker exposure vs the benchmark (exception: UKT) f. +-5% of relative sector exposure vs the benchmark (Sector Lvl 3) g. +-5% of relative exposures to maturity buckets vs benchmark (1-3, 3-5, 5-7, 7-10, 10-15, 15-25, 25+) h. +-5% of relative exposures in ratings buckets vs the benchmark (AAA/AA/A/BBB/BB) i. No more than 5% OW to each of AT1, T2 and SNPR vs benchmark 2) Describe the resulting benchmark-relative active risks in your portfolio. Which of them do you like, and which would you aim to mitigate if allowed to deviate from pure yield maximisation? 3) What alternative optimisation target / set-up can you think of that could be useful instead of yield maximisation? 4) How much overlap is there between your portfolio and the portfolio from 1)? Assuming you rotated the portfolio from 1) to your portfolio, how much economic benefit would you generate and how much would you expect to lose to transaction costs (under reasonable assumptions)? 5) What data sources can you think of that would have been useful in further improving the quality of the above portfolio optimisation?