Risk Factor (Fixed Income) Attribution Models

Risk Factor (Fixed Income) Attribution Models

Ali Chabaane

25 years: Investment management

Unlike for equity portfolios, there is no standard model for fixed income portfolios. This is due to the fact that the drivers of total return for fixed income instruments are more complex than in the equity space. However, fixed income attribution models generally fall into three categories: Sector based, factor based and strategy based.

Unlike for equity portfolios, there is no standard model for fixed income portfolios. This is due to the fact that the drivers of total return for fixed income instruments are more complex than in the equity space. However, fixed income attribution models generally fall into three categories: Sector based, factor based and strategy based.

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Risk Factor (Fixed Income) Attribution Models

7 mins 9 secs

Overview

Unlike for equity portfolios, there is no standard model for fixed income portfolios. This is due to the fact that the drivers of total return for fixed income instruments are more complex than in the equity space. However, fixed income attribution models generally fall into three categories: Sector based, factor based and strategy based.

Key learning objectives:

  • Understand why there is no standard fixed income attribution model

  • Outline the three main models for fixed income attribution

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Summary

Why is there no standard fixed income attribution model? 

When it comes to bond returns, the relationship may not be linear and will be affected by multiple factors. Some of the challenges in factor selection include the fact that: 

  • Bonds pay regular coupons, even when market performance is down
  • Bonds are related to one or multiple curves
  • Bonds can default
  • Bonds contain some optionality 

Fixed income portfolios also contain more types of and more complex securities than equity portfolios, containing bonds, bond futures, IRS, CDS and currency forwards. 

For these reasons, there is no standard attribution model for fixed income covering the whole variety of instruments and taking into account all the specific features of the instruments involved. 

What are the main fixed income attribution models? 

  1.  Sector based attribution

    Decomposes active returns into bond market sector allocations and security selections within each sector, similar to the Brinson model for equities. This is the most limited fixed income attribution model.

  2. Factor based attribution

    Covers a wider set of investment decisions than sector based attribution. These factors are usually linked to specific stylised movements of the yield curve driving the performance of the fixed income instruments.

  3. Strategy based attribution

    In this approach, the portfolio manager will group together the instruments that are used for the same objectives or that reflect a specific market view held by the portfolio manager.

    In this type of attribution, every investment decision is recorded in advance. The performance outcome is measured individually. The attribution report will look like a ledger of implemented decisions with their outcomes.

 

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Ali Chabaane

Ali Chabaane

With over 20 years of experience leading investment teams across equity, fixed income and multi-asset portfolios, Ali is now Managing Director at Fastnet Asset Management which provides portfolio managers with insights on how active performance is generated and how to enhance it. Prior to Fastnet, Ali has previously been Global Head of Portfolio Construction at Amundi, and Head of Credit Risk Methodologies at BNP Paribas.

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