### Fixed Income Portfolio Management – Excel Solver

Let’s try and understand something very basic in Fixed Income Portfolio Management. I am not an expert or a fund manager so it may have some subjective issues.

Area marked in brown is to be edited. Though there is provision for only 9 instruments in attached excel, one can extend the cells to the right making a note that all formulas are then updated respectively. There are income funds which have a mandate to keep the maturity profile of the fund limited to some number. For. E.g. Birla Dynamic normally keeps the duration near to 3. So how does one keep constant watch on it? How does one optimize return with respective duration? How should one allocate his funds to enjoy maximum convexity other things (i.e. duration, yield) remaining constant. How can one optimize returns of the portfolio following risk mandates like maximum allocation to one security should not be more than 30%, maximum in Gsec should not be more than 50%, etc..

Yes excel solves every above mentioned aspect. “SOLVER” is an optimizer tool which helps you generate better results with in hand parameters.

In the attached sheet I have highlighted two tables i.e. “USE SOLVER HERE” and “SOLVER PARAMETERS”. One will have to work on the above tables once bonds/NCDs/other papers information is entered in the brown cells. Let’s try out one case which will help you understand in a better way.

Now using solver tool we are asking excel to return us the best portfolio allocation to get maximum yield keeping some parameters in mind. Just to understand one conditions we have specified is that \$B:\$30:\$F\$30<=\$N\$3 i.e. Any gilt paper should not exceed 30% of the portfolio value.

If I was not using Solver than probably would randomly allocated money to papers available keeping mandate in mind.

This could have been one of the results. Yield here is tad low than optimum yield possible.

Hence one performs optimum adhering to mandates of the scheme using solver.

### Rolling down the yield curve – Fixed Income Strategy

You might have read aforesaid terms in Mutual fund market outlook document and other notes. Let’s understand briefly what exactly the above strategy means…
Rolling down yield curve is return associated with reducing bonds duration which lowers over time. This strategy can increase portfolio income adding capital gains to coupons. This strategy works well only when the curve is steepening. An investor will buy a bond when it is at the highest point of the steepening yield curve and continue to hold it until its yield curve reaches a lower yield yielding point. And at this point the Investor shifts to another bond where the yield curve of that bond is at one of the highest points when that yield curve is steepening, and so on and so forth.

Let’s try out with an example:

Suppose the annualized yields of 1Y Gsec and 2Y G-Sec is 6% and 7 % respectively and both bonds are available at par at 100rs. If an investor buys a 2 year G-sec, he will receive the par value of 100 on maturity and the annualized coupons at 7%. Now let us assume that the yield curve does not change for the next year. After holding the G-sec for a year, the instrument has a year to maturity and is as good as one year g-sec with a coupon of 7% trading at a yield of 6%. Hence, if the investor sells this G-sec now, he will receive a an appreciated price on that instrument as coupon is higher than yield. The investor can now again reinvest the proceeds in a 2 year G-sec to get a coupon of 7% and repeat the same process to earn price appreciation as well as the annualized coupons. Even if the short term i.e. 1Y yield rises 1% capital loss is nil and bond trades approximately near to face value yielding ~7% (coupon). Thus in this manner investor enjoys  capital appreciation with the pre-determined coupon. This strategy is adopted by fund managers to generate alpha for investors when the yield curve is steeply upward sloping.