Optimizing fixed income portfolio performance through enhanced index tracking: a goal programming approach

Abstract

This study aims to optimize fixed income portfolio performance through enhanced index tracking using a goal programming approach. The research focuses on the fixed income market in developing countries, specifically in the Kenyan capital markets. The study’s findings will provide insights relevant to investors and stakeholders operating in the Kenyan fixed income market and contribute to the literature on fixed income portfolio management. The study employs a quantitative research design, collecting and analyzing numerical data to identify patterns, relationships and optimize portfolio performance. The research design is explanatory in nature, seeking to explain the effectiveness of an enhanced index tracking portfolio management approach in the context of the Kenyan Fixed income market. The study’s population encompasses all government-issued bonds in the Kenyan secondary market which ensures a sufficient representation of treasury fixed income instruments available in the secondary market at the Nairobi securities exchange. The study’s parameters include maximizing returns, controlling risk and minimizing tracking error. By using goal programming model, we effectively handle multiple objectives to improve the portfolio allocation process. The performance of the enhanced index tracking portfolio is then compared against S&P Kenya Sovereign bonds benchmark, highlighting its potential for superior returns balanced risk management and acceptable tracking error levels. The findings show that enhanced index tracking is a promising strategy for managing fixed income portfolios in developing markets. This study underscores the benefits of multi objective optimization strategies, offering a practical and insightful guide for investors navigating the complexities of the Kenyan fixed income market.