Can anyone help explain how to calculate the return coming from maturity management , sector management and securities selection in the fix income section ( Performance evaluation). I find it quite foggy :s (Page 89- book 5 schweser notes)
Thanks a lot
That’s fixed income attribution and I would be extrememly surprised if they asked for calculations. This is usually done by specialists with the help of very technical software (Bi-Sam and POINT are the main ones I believe).
They may however ask for a an explanation of the general process, which I’ve tried to outline below:
External interest rate effect: Construct a portfolio that matches the invested portfolio, but using risk-free assets. The return of this portfolio is the external interest rate effect
Interest rate management: Construct another portfolio of risk free bonds, but this time include the shifts in duration and curve positioning the manager enacted during the period. The difference between this portfolio and the previous one is the interest rate management effect (maturity management)
Now look at the sectors that have been invested in. Did spreads widen or narrow for the sector in general? This is the sector management effect
Now look at the individual securities compared to their sectors, did they outperform? This is the security effect.
There are other effects like the carry effect (the accrued yield gained from holding the debt) and curve roll down effect (a 5yr debt becomes a 4yr debt after 1 year, but the coupon still reflects the 5yr debt) but I don’t think they’re included. They do include the trading effect, which is used as a residual (so everything adds up).