Fixed income attribution- Interest Rate management effect

CFA Level III Portfolio Management
#1

Can somebody explain the interest rate management effect? The material says that each asset in portfolio is priced as if it were a default-free bond and the Interest rate management contribution is calculated by subtracting the return of entire treasury universe from aggregate return of repriced securities.

How does this measure a manager’s abiltiy to anticipate changes in interest rates and adjust portfolio duration and convexity accordingly?

Thanks in advance.

#2

By repricing securities as if they were default-free , you consider only duration / convexity of the bonds in the portfolio. Now how do we know if the manager performed better than treasuries ? Take the benchmark as the aggregate treasury universe and get its performance . This represents a neutral view where every treasury is held . Now the difference is the tilts applied by the manager to select and weight specific maturities , which should show his skill in duration management

#3

Thanks that makes sense.

#4

Schweser says: " Each portfolio asset is priced as if it were a default free bond (i.e. price each using Treasury forward rates). This is compared to another simulation, still using Treasury interest rates but including changes the manager made to duration and positioning on the yield curve. The difference is the interest rate management effect."

Its like comparing manager assets with his own. Can someone please clearify what the book is trying to say. As it contradicts with the curriculum text. I understand what is written in the curriculum and it makes sense to me, but i just want to clearify whether my concept is still unclear as i am unable to understand the difference mentioned in the schweser text. Thanks in advance.

#5

Replicate a portfolio with treasuries using the same durations.

Then do another simulation with that portfolio, but with changing the durations like the manager did, the net effect between this and the first, is the interest rate management component.

#6

You see this the same line in curriculum. According to this it reflects the manager adjustments because the assets of the portfolio are repriced. Now compare it with schweser.