Enhanced Indexing Strategy - Small Risks
This strategy allows leverage for minor mismatches in the risk factors except duration to tilt the portfolio in favour of particular areas of relative value like sector, term, structure, quality and call risk etc. In this kind of a bond management strategy, the portfolio manager applies some qualitative discretion or intelligence to compensate for administrative costs by following return enhancing policies, which may have higher risks.
By following this strategy, the managers could hope to enhance the returns of bonds, but keep the duration of bonds at same as that of an index. It also maintains exposure to the primary risk factors of index.
However, by following such a strategy, the tracking error gets enhanced and the exposure to risk also increases. Apart from this, the management fee is higher than that of pure bond indexing, or primary risk indexing strategy.