Fixed Income Return Attribution: Decomposition
The following fixed-income exposure decomposition is presented for attribution analysis of a bond fund manager:
| Duration Bucket | Duration Effect | Curve Effect | Total Interest Rate Allocation | Sector Allocation | Bond Selection | Total |
|---|:---:|:---:|:---:|:---:|:---:|:---:|
| Short | 0.40% | 0.12% | 0.52% | 0.04% | 0.00% | 0.56% |
| Mid | 0.23% | 0.03% | 0.26% | -0.05% | 0.00% | 0.21% |
| Long | -1.25% | 0.37% | -0.88% | -0.22% | 0.13% | -0.97% |
Which of the following statements is consistent with this performance attribution?
No, that's not right.
By adding up the total return contributions in the right column, it can be seen that the relative performance was -0.20%, or an underperformance relative to the benchmark of 20 basis points.
Actually, no.
Correct positioning relative to yield curve shift would be seen in a positive total value for duration effect. Here, that total is -0.62%, suggesting significant underperformance in this respect.
Right!
It is not known how the manager weighted the portfolio, nor what happened to the yield curve. But correctness in prediction can be seen in terms of curve effect, where the attribution results suggest a total contribution of 0.52%. In contrast, the duration effect is negative in total, and the total portfolio performance lagged behind the benchmark.
The manager outperformed the benchmark
The manager correctly anticipated a yield curve steepening
The manager predicted an upward shift in the yield curve
