Contingent Immunization Being Profitable While Cutting Losses

What is contingent immunization?

A fund manager uses a contingent immunization if his investment approach involves switching to a defensive strategy once the portfolio returns decline lower than the predetermined point. The terms contingent or contingency may be familiar to you. In general, it refers to something that may happen, but there is no certainty. It is pretty similar to what we will talk about today: contingent immunization.

Contingency immunization refers to a contingency plan applied to specific fixed income portfolios. The fund manager utilizes an active management approach to selected securities. They hope that they can perform beyond the benchmark. On the other hand, the contingency plan gets triggered if a specific and predetermined loss accumulates. This plan will make the asset immune from further losses.

The classic immunization

If this sounds familiar to you, you may have already encountered the “classic immunization.” It might be familiar because contingent immunization is its extension. It is like a classic immunization combined with an active management approach. In this way, there is a chance of getting the best of both methods. But what is classic immunization? It means making a fixed-income portfolio that generates an assured return for a set time. The parallel shifts in the yield curve are not really crucial.

Tell me more about contingent immunization.

Let us say that the investment portfolio’s return declined to a predetermined level. The portfolio manager will let go of the usual active management approach and go with a contingency plan instead. This plan will immunize the assets from having more losses. What can one do to protect the remaining assets and secure a minimum return? One can buy high-quality assets with a low and stable income stream. In this way, the assets will match the liabilities. Hence, the underlying assets remain the same when the interest rate changes. While everything seems great and safe, you should know that it does not guarantee anything because there are still risks, especially regarding market timing.

A dedicated portfolio theory

People say that contingent immunization is a dedicated portfolio theory. What is that? One makes a dedicated portfolio using securities with a predictable income stream. For example, we have high-quality bonds. Usually, we hold on to assets until they mature because we want to make a predictable income that we can use to pay liabilities. Which strategy can help a portfolio with a single asset type? You can make long-term and short-term positions in line with the yield curve.

The cash matching strategy is the simplest of all immunization strategies. Investors buy zero-coupon bonds that match the amount and length of their liabilities. We also have a duration matching strategy, which is a more practical application. Here, the duration of assets is matched to that of the liabilities.

Something too restrictive

We also have a strict minimization approach, but some may find it too restrictive to make enough returns in some situations. A high-yielding portfolio might be a great option if there is a considerable increase in the expected return with minimal immunization risk effect. The cushion spread is the difference between the minimum acceptable performance and the higher probable immunized rate.

Finance

Your Financial Partners: Best Money Lenders in Singapore

From unexpected medical bills to the hopes of finally completing that long-awaited house renovation, Singaporean living is full of unexpected financial twists and turns. A personal loan could be the help you need to get from where you are financially to where you want to be right now. Nevertheless, amidst a multitude of choices, the […]

Read More
Finance

Scott Tominaga Unfolds the Hedge Fund Strategies

  In the world of finance, hedge funds project themselves as incomprehensible structures strongly advocates Scott Tominaga. These are often valued for their ability to produce considerable returns irrespective of market situations. However, behind their character lies different varieties of techniques selected by hedge fund managers to attain their target. The following write-up focuses on […]

Read More
Finance

Trading500: Redefining the Forex Trading Experience

Forex trading presents an enticing pathway to financial diversification and potential earnings through strategic currency exchanges. Amidst a sea of platforms, Trading500 emerges as a beacon of innovation, simplifying and refining the trading journey with its user-centric approach and cutting-edge technology. This platform stands out by enhancing the trading experience, focusing on simplicity, efficiency, and […]

Read More