Fixed Income Portfolio Optimization: Decision Support Tools Modernize Asset & Wealth Management Firms

In the fast-paced world of asset management, where every decision counts and market dynamics are ever-changing, portfolio optimization emerges as a beacon of efficiency and productivity. Imagine a cutting-edge tool that synthesizes data, preferences, and market inventory to unveil the most optimal investment choices across multiple portfolios simultaneously. Portfolio optimization transcends traditional methods, ushering in a new era of data-driven decision-making where precision, speed, and effectiveness converge to revolutionize how asset managers navigate the complexities of fixed income investments. Welcome to the realm of portfolio optimization, where innovation meets intuition, and the future of asset management is defined by the power of intelligent algorithms and dynamic decision support systems.

As the landscape of fixed income investments constantly evolves, the role of portfolio optimization becomes increasingly critical for asset and wealth management firms. Portfolio optimization serves as a dynamic and flexible decision support tool that empowers portfolio managers to make well-informed investment decisions across multiple accounts simultaneously. Let’s delve into what portfolio optimization entails, the issues it resolves, and how IMTC’s software enhances portfolio management efficiency and effectiveness.

What is fixed income portfolio optimization?

Portfolio optimization is an algorithmic engine that identifies optimal buys and sells across multiple portfolios; it should solve for a specific objective while also taking investor preferences – including portfolio strategy, investment targets, compliance rules, and client requests – into account. While many are weary of optimization because it sounds like a black box or automated investment process, such as a robo-advisor, it simply is an engine that processes thousands of calculations simultaneously to identify potential bonds for each portfolio. An optimization engine should be dynamic, transparent, and flexible, allowing for optimal decision-making across various accounts concurrently.

How optimizers address pain points for bond managers

The traditional approach to fixed income portfolio management is manual, time-consuming, and prone to errors. Portfolio managers typically make decisions on one account at a time, involving manual data entry, bond sourcing, and allocation processes, often done in Excel. The sheer volume of data and decisions required to optimize portfolios effectively means portfolio managers aren’t doing it as frequently as they’d like. This manual process is not only inefficient but also introduces risks and biases, such as allocating more to larger accounts or data entry errors. By automating calculations, pre-trade compliance checks, and trade recommendations, optimization engines like IMTC’s software alleviate the burden on portfolio managers, enabling them to focus on strategic decision-making and value creation.

The future of fixed income management lies in streamlining complex processes into efficient workflows that enable portfolio managers to make precise investment decisions rapidly. This advancement transforms a time-consuming process into a swift operation, aligning portfolios with compliance and achieving targeted objectives seamlessly.

Comparing methodologies for portfolio optimization

1. Traditional workflow to allocate a bond optimally across accounts
   • Many portfolio managers currently operate in this traditional workflow of determining a good bond, and then needing to decide which portfolios to allocate it to and in what quantities.
   • An Optimizer speeds up this process by allocating ideal quantities to each account while adhering to unique portfolio guidelines.
     
     
2. Determine optimal bond from an approved list or matchers
   • If a firm operates off their research lists, and a portfolio manager needs to update portfolios with names on this list, an Optimizer can source the ideal bonds from this list to allocate to each portfolio.
   • An Optimizer speeds this process up even more because it both identifies the ideal bond to match your preferences and objectives, and then allocates in an ideal quantity.
     
     
3. Source optimal bonds from live market inventory
   • The most comprehensive optimization methodology allows portfolio managers to connect to live inventory to source optimal bonds that are actually available in the market.
   • An Optimizer is able to sort through thousands of bonds to find the most ideal CUSIP that solves for your preferences and objectives across all your portfolios, and then allocates equitably to each portfolio.
     
     

IMTC’s fixed income portfolio optimizer

IMTC’s optimization prowess leverages data science to provide trade recommendations based on comprehensive data analysis. By synthesizing vast data points and user inputs, the software enables portfolio managers to implement their best ideas quickly and effectively.

IMTC enables portfolio managers to:

• Adhere to investment targets, portfolio strategies, and compliance rules
• Customize investment requests from individual clients
• Verify compliance pre-trade
• Visualize pre- and post- trade impact
• Allocate bonds equitably across accounts

What types of activities are portfolio managers using IMTC’s portfolio optimizer to simplify? They are investing excess cash, raising cash, tax loss harvesting, rebalancing portfolios, creating swaps, shifting strategies, and more. They can use it to project cashflows or propose portfolios to new clients as well.

What types of preferences can users specify?

• Objective: Maximize taxable equivalent yield, get a portfolio closer to its targets, move it more in line with compliance, or select another objective
• Buy list: Choose a specific bond, an approved list, a list of matchers, live market inventory, or other criteria
• Buy criteria: Select factors or preferences for purchases, i.e., sector, rating, analytics, or others
• Sell settings: Incorporate the ability to sell securities and specify criteria for sells
• Cash settings: Determine how much cash should remain in the portfolio
• Compliance: Embed rules at the portfolio or strategy level including investment targets or buckets, compliance rules, or client requests; compliance rules can also be set relative to a model portfolio or index
• Allocation: Set rules to define how to allocate across accounts including pro-rata or customizable waterfall approaches.

Direct and custom indexing with an optimizer

The rise of fixed income direct and custom indexing opens up new possibilities for firms seeking to offer tailored investment solutions and enhanced control over their portfolios. Direct indexing allows investors to construct portfolios of individual fixed income securities, aligning them with specific benchmarks or indices. This approach offers customization and tax benefits, empowering portfolio managers to tailor clients’ holdings based on their objectives, risk appetite, and thematic preferences. Direct indexing enables strategic tax optimization through selective harvesting of losses, enhancing tax efficiency and overall portfolio performance.

While direct indexing may present challenges in terms of complexity and cost, advancements in technology, such as those pioneered by IMTC, are broadening access to direct indexing for a wider range of investors. Using separately managed accounts (SMAs), firms using IMTC can customize accounts at scale while adhering to these specific index parameters. This helps firms to offer personalized and tax-efficient solutions.

The benefits of portfolio optimization

As the fixed income landscape continues to evolve, portfolio optimization plays a pivotal role in driving efficient investment decisions across multiple portfolios. IMTC’s technology offers a robust solution that enables asset managers to automate operations and streamline fixed income workflows. By leveraging IMTC’s optimization engine, portfolio managers can navigate the complexities of fixed income management with ease, ensuring optimal investment outcomes and client satisfaction.

In a world of constant change and increasing competition, IMTC’s portfolio optimization software stands as a beacon of efficiency and effectiveness for fixed income managers seeking to enhance their investment strategies and drive growth in the ever-evolving market landscape.

Want to see our Optimizer in action? Schedule a demo today.