Fixed Income Return Attribution: Decomposition
The following fixed-income exposure decomposition is presented for attribution analysis of a bond fund manager, during a period when the yield curve steepened:
| Duration Effect | Curve Effect | Total Interest Rate Allocation | Sector Allocation | Bond Selection | Total |
|---|:---:|:---:|:---:|:---:|:---:|:---:|
| 0.21% | 0.09% | 0.30% | -0.12% | 0.04% | 0.22% |
The manager *most likely* overweighted:
No, that's not it.
There is no information presented about the sector allocation other than relative performance to the benchmark. Since the yield curve steepened, this suggests something about the duration weighting.
Not exactly.
Had the manager overweighted long-term bonds, the steepening of the yield curve would likely cause a relative underperformance to the benchmark in terms of curve effect. This is not the case here.
Correct!
The steepening of the yield curve would cause relative outperformance of short-term bonds to long-term bonds. Since the performance attribution suggests that the manager earned a positive portfolio contribution for both duration effect and curve effect, it is most likely that the manager correctly anticipated this change and overweighted short-term bonds to reduce the duration of the portfolio.
short-term bonds.
long-term bonds.
corporate bonds.
