Fixed Income Attribution

Overview

2 day course on fixed income attribution, providing participants with a comprehensive attribution framework to handle portfolios with a full range of simple and complex fixed income instruments

Learning Objectives

How to run fixed income attribution with excess returns decomposed into major components: FX and local currency. Local currency excess return decomposed into: carry, paydown and price. Price excess return decomposed into: term structure returns by key rate and credit spread returns (broken down by DTS market direction, asset allocation, i.e. across corporate sectors, and security selection)
How to incorporate more complex instruments into an expanded fixed income attribution framework covering interest rate swaps, floating rate notes, credit default swaps, inflation-linked bonds, inflation swaps, bond futures, options, callable bonds and perpetuals and ABS
Learn how major off-the-shelf fixed income attribution software do attribution – MSCI Barra One, Bloomberg PORT / Barclays POINT and Blackrock Aladdin
How to use attribution reports to best convey demonstrated strengths in declared core competences to investors

Who the course is for

Performance measurement and attribution analysts
Portfolio managers
Product specialists at asset managers
Fund of funds investors
End investors in funds

Day One

Attribution Basics

Attribution’s role alongside performance measurement in identifying skill-based outperformance as opposed to chance
Attribution for benchmarked portfolios vs performance contribution analysis for absolute return portfolios

Case Study 1 – What an attribution report looks like and how to interpret it

Case Study 2 – Schematic of typical attribution framework for diverse fixed income and multi-asset portfolios. Decomposing excess returns between FX and local currency components and local currency component broken down across key rate durations for interest rate term structure returns and between market directional (DTS or spread duration-based), asset allocation and security selection for credit spread returns

Best practice performance measurement
Basic security selection vs asset allocation attribution models (traditionally used in equity attribution) – Brinson-Fachler (BF) and Brinson-Hood-Beebower (BHB) models. Relevance for credit portfolios

Case Study 3 – Running BF and BHB attributions for an equity portfolio and for a credit portfolio

Arithmetic vs geometric returns, excess returns and attribution
Attribution of multi-currency portfolios – Karnosky-Singer (KS) model

Case Study 4 – Running KS attribution in conjunction with BHB for a multi-currency portfolios

Smoothing algorithms for multi-period attribution – why and how. Carino, Menchero, Frongello and geometric smoothing algorithms

Case Study 5 – Running Carino and Menchero smoothing algorithms

Fixed Income Basics

Modified duration (MD). Key driver of fixed income term structure returns. Computational benefit of using MD in fixed income attribution rather than repricing bonds from first principles
Key sources of fixed income return – term structure, spread, carry, paydown; sub-components thereof
Key rate durations (KRDs). Application for decomposing term structure returns into returns driven by changes in particular key rates

Case Study 6 – Calculating MD and KRDs for a bond portfolio and interpreting them

Spread duration and Duration Times Spread (DTS). Application for decomposing spread returns into component coming from market directional risk, i.e. did portfolio outperform benchmark because it had “higher beta” corporate bonds than benchmark in a spread-tightening environment?

Case Study 7 – Calculating spread duration and DTS for a bond portfolio and interpreting them

Attribution Of “Plain Vanilla” Fixed Rate Bond Portfolios

How most off-the-shelf fixed income attribution systems synthesise Campisi and Lord attribution frameworks with further decomposition of major excess return buckets

Case Study 8 – Running a typical fixed income portfolio attribution. Excess returns decomposed into: FX and local currency. Local currency excess return decomposed into: carry, paydown and price. Price excess return decomposed into: term structure returns by key rate and credit spread returns (broken down by DTS market direction, asset allocation, i.e. across corporate sectors, and security selection)

Van Breukelen as an alternative attribution framework for global macro portfolios where manager’s core competence is in calling interest rate directionality

Case Study 9 – Running Van Breukelen duration attribution

Day Two

Handling More Complex Instruments Within Fixed Income Attribution

Interest rate swaps (IRS)
Floating rate notes (FRNs)
Credit default swaps (CDS) – single names and index
Bond futures
Inflation-linked bonds (ILBs)
Inflation swaps
Options – interest rate swaptions and index CDS options
Callable bonds and perpetuals – bank Tier 2 and Additional Tier 1 (AT1) bonds; insurance Tier 2 and Restricted Tier 1 (RT1 bonds); corporate hybrids; callable high yield bonds
Asset backed securities (ABS) – with prepayment options and / or amortising

Case Study 10 – Running attribution on a complex fixed income portfolio including all above products

Off-The-Shelf Attribution Software

Case Study 11 – MSCI Barra One

Case Study 12 – Bloomberg PORT / Barclays POINT

Case Study 13 – Blackrock Aladdin

Case Study 14 – How to build internal attribution system

Risk Attribution

Risk attribution to answer the question “was skill-based outperformance achieved by taking substantial risk or was outperformance strong relative to risk taken in areas of core competence?”

Case Study 15 – Running risk attribution to assess whether credit asset manager achieved attractive outperformance in their stated area of expertise (security selection within credit spread excess return) relative to credit risk taken

Using Attribution To Best Convey Manager Strengths To Investors

Case Study 16 – Example attribution report and commentary for credit asset manager to convey to investors how its biggest excess return drivers came from security selection, consistent with its targeted core competence of deep fundamental credit analysis

Case Study 17 – Example performance contributions analysis for a credit hedge fund