What is meant by “Differences between the bond prices used by the manager and the index provider” can limit a manager’s ability to replicate a bond index?
Thanks you!
The difference in bond pricing between the manager and the index will result in different allocations and therefore, different portfolio-level durations. The manager may use IDC or some other pricing service to mark his/her bonds… note that the bond market is OTC and valuations can differ wildly from provider to provider. The Index, let’s the Barclays Agg, uses its own proprietary pricing tool to mark its bonds. Thus, a portfolio with exactly the same bonds as the index can result in different allocations and different durations, hampering a manager’s ability to effectively replicate that index. I’m sure there are other less obvious answers to this, but I think this is the easiest to grasp and illustrate.
yeah, a manager could replicate the consituents and weights of an index but if they use a different pricing source than the benchmark the performance will differ.