Fixed Income Attribution

A 2-day program by Rupesh Tailor covering the latest techniques used for fixed income attribution.

This hands-on course enables participants to get a practical working experience of fixed income attribution, from planning to implementation and analysis. After completing the course you will have developed the skills to:

• Understand how attribution works and the value it adds to the investment process
• Interpret attribution reports from commercial systems
• Assess the strengths and weaknesses of commercially available attribution software
• Make informed decisions about the build vs. buy decision
• Present results in terms accessible to all parts of the business

• Performance analysts
• Fund and portfolio managers
• Investment officers
• Fixed Income professionals (marketing/sales)
• Auditors and compliance
• Quants and IT developers

• A basic understanding of fixed income products
• Microsoft Excel

Laying the groundwork

• Attribution: what it is, why it’s useful
• The basics of performance measurement
• Foreign exchange, hedging, and benchmarks
• Stock selection and asset allocation:
  • Brinson-Fachler and Brinson-Beebower-Hood models
• Why forwards can drastically change an attribution analysis:
  • Brinson and Karnosky-Singer models
• Why smoothing is needed and how to do it:
  • Carino, Menchero, Frongello, geometric, and other models

Exercise: performance, equity attribution, forwards, and smoothing in practice

Review of fixed income fundamentals

• A quick overview of fixed income risk; a bond as a bundle of risks
• Yield curves: par, zero, and real
• Pricing, risk, and the fundamental attribution equation

Exercise: Breaking down the yield curve

Decomposing fixed income return

• Carry and roll-down return
• Risk-free curve return:
  • duration
  • shift/twist/butterfly
  • key rate durations
  • principal components
  • two and three factor models to describe yield curve movements
• Sector and credit return:
  • country spread
  • spread change allocation and selection
  • sector and security-specific returns
• Paydown return for amortizing securities, convexity return, repricing return, trading return
• Widely used attribution models:
  • Campisi
  • Tim Lord
  • Van Breukelen
  • top-down
  • EMD
  • high-yield

Exercise: Different approaches to attribution

Attribution by security type

• Bonds and perpetuals
• Money markets: Cash, bills, discount securities, CDs, FRNs, forwards
• Inflation-linked securities and breakeven return
• Futures and the cheapest to deliver
• Sinkers: amortizing bonds, MBS, and ABS
• Swaps
• Credit derivatives
• Options and callable/puttable bonds

Exercise: Running attribution on a real portfolio

Attribution and risk

• Applying attribution to Value at Risk: calculating VaR and ETL on attribution returns

Bringing it together

• Useful tricks and short-cuts
• Reporting and residuals
• Other attribution models (style attribution, risk attribution, stochastic attribution)

Various other examples will be shown during the course, including:

• Duration attribution
• Assessing curve steepening
• Sector and credit spread analyses
• Breakeven trades in inflation-linked portfolios
• Barbell and other curve positioning strategies
• High-yield attribution
• Top-down attribution
• Handling options

In addition, answers to the following questions will be discussed:

• Curvature versus convexity: what’s the difference?
• What is the right way to measure parallel shift?
• Why a zero coupon bond shows time return without accruing interest?
• How many risk factors has an FRN?
• Modified duration, Fisher-Weil duration or DV01: which risk measure is best for attribution?
• How to handle hedged benchmark issues?