What is a defining feature of active bond portfolio management?

A defining feature of active bond portfolio management is the existence of larger risk factor mismatches, particularly in duration. Active managers seek to exploit inefficiencies in the bond market through strategic decisions that can include adjusting the duration of their portfolios based on interest rate forecasts, macroeconomic conditions, and credit outlooks. This often leads to higher risk factor mismatches compared to passive management strategies that strictly adhere to the characteristics of a bond market index.

Moreover, active managers may intentionally take on additional duration risk to capitalize on expected changes in interest rates, aiming to enhance returns beyond what the benchmark index would provide. This flexibility and willingness to deviate from the index in response to changing market conditions sets active bond management apart, highlighting the dynamic nature of their investment strategies.

In contrast, the other choices reflect characteristics that are more aligned with passive management or restrictions that may not fit within the philosophy of active management. For instance, maintaining minimum exposure to credit risk or full compliance with bond market indices would imply a more conservative or benchmark-oriented approach, which is contrary to the proactive nature required in active management. Additionally, focusing exclusively on international bonds does not capture the comprehensive strategy involved in active bond management; active managers typically consider a broad array of securities and sectors, not limited to just