Monthly archives: January, 2009

The Bond Book (Annette Thau)

A splendid introduction to bonds. The book is well structured and makes a great reference.

This text provides the essentials for understanding bonds: yield calculation, interest rate risk, credit risk, and the pros and cons of most bond investments: treasuries, munis, GNMAs, corporates, zeros, bond funds, money market funds.

Quantitative equity portfolio management (Chincarini & Kim)

Covers both financial theory and real-world practice.

Interesting chapters on factor models, taxes, leverage.

Closet index funds

Is a closet index fund hiding in your portfolio ?

This would be costly! These funds mimic indexes, yet they have higher expense fees (typically between 1% and 2%) than index funds or index ETFs (0.1% to 0.5%). The accumulation of expense fees compounded over the years is significant. If you hold a closet index fund in your portfolio, you could -at no additional risk – increase your return by replacing this fund with a mutual index fund, or an ETF.

Fortunately, closet index funds can be exposed using simple statistical analysis. Closet index funds are likely to show:

  • A high correlation with the index
  • A lower performance relative to the index

In Kwanti Portfolio Lab, define a portfolio with a single holding (that of the fund to analyze), and select the ‘index correlation’ function, which will correlate the fund to a broad range of standard indexes.