The
chart above shows the out-performance allocation between our different
strategies, giving us a total out-performance of 99 bps over the
index for the year 2002. It was prepared from holdings and performance
reports. In many instances the attribution was to more than one
strategy, therefore we have generally rounded the allocation to
5 bps. increments. For instance, an investment in Poland, relying
on its yield curve to dis-invert was very much dependent –
due to currency exposure concerns – on an in-the-money option
structure. This trade’s performance was then due to a combination
of strategies.
Year
2002 was a particularly difficult year to outperform our index.
The year was marked by a series of disappointed expectations that
the US and the global economy would recover. Repeatedly, investors
returned to the safety of government bonds; i.e. those that constitute
our index, and deviations from the index were often punished. Our
outperformance is due to an eclectic style which allowed us to search
for temporary violations of strong long-term relationships in yield
curves shapes, between countries and in related securities. We kept
our tracking error low and took relatively less risk as we dealt
with a bewildering and unpredictable investment environment. We
stuck to tried and true value enhancers like our cash management
and selection of high quality corporate investments. Our ability
to scour the world over for securities with value compared to more
common but similar instruments, including an allocation of 5% to
illiquid securities provided excess yield to the portfolio. Finally,
our allocation to high quality, but shorter maturity debt (to be
safe) of better emerging markets, such as Russia, provided additional
yield. This was a year when we had to be both scrappy and cautious
to succeed.
A
more detailed discussion of attribution, with some examples, follows.
Our annualized monthly-tracking error was 30 bps.
1.
Source: Banc of America Capital Management, LLC. Numbers are AIMR
compliant. The index is the Salomon Brothers World Government Bond
Index, x-US and USD hedged.
Past performance is not a guarantee of future results. International
Fixed Income investment may involve investments in currencies which
may fluctuate in value, and thereby add additional risk to the portfolio.
2
Index + 149 since inception January 2001.
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