2.50% in the U.K. and 3.25% in Germany, and Delta’s currency strategists forecast that the euro will
depreciate by 0.35%.
Berg’s committee then asks whether a global portfolio would benefit from the inclusion of emerging
market debt. Delta responds that returns can be attractive in emerging markets during certain periods
but that the following risks of this asset class must be understood:
Risk 1: Returns are frequently characterized by substantial positive skewness.
Risk 2: If a default of sovereign debt occurs, recovery against sovereign states can be very
difficult.
Risk 3: The frequency of default and ratings transition is significantly higher than that of
developed market corporate bonds with similar ratings.
At the conclusion of the presentation, Alpha and Berg’s committee convene to discuss which of the
three managers who presented should be selected for the €100 million mandate. Alpha advises Berg
that the following criteria are important when evaluating fixed income portfolio managers:
Criterion 1: Style analysis will enable us to understand the active risks the manager has taken
relative to the benchmark and which biases have consistently added to performance.
Criterion 2: Decomposing the portfolio’s historical returns will show whether the manager’s skills
will allow him to consistently outperform over time.
Criterion 3: We could select two of the three managers who presented if our analysis shows that the
correlation between their alphas is low.
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