ABSTRACT
Tracking a fixed-income index is a very complex task. Indices are composed in a way that is reflective of the overall market. Little consideration is placed on liquidity, diversification, number of securities in the index, and so on. An asset manager, on the other hand, should maintain a well-diversified portfolio of only a few securities. Liquidity is also of primary concern. Furthermore, the composition of an index changes from month to month without incurring any transaction costs. Unfortunately, the same is not true for the indexed portfolio. These problems are com mon for both fixed-income and equities managers. Fixed-income managers face additional difficulties: Cash-spinoffs generated by the securities cannot be reinvested in the same security. They are typically invested in money markets.
