What is the difference between interest rate effect (expected, unexpected) and interest rate management effect? I know one is active and one is passive but:
For example
Let’s say the economy is strengthening and interest rates decrease/price increase. Yield curve changes and duration fall under management effect. Is that not the same as external movements that fall under expected/unexpected?
Also, what is the difference between expected/unexpected? What categories would fall under them?
Interest rate effect is not under management control.
the other one is due to how well they manage the duration, convexity and yield curve shape. This is based on assumption that you hold default free securities.
Simplified: Expected Interest rate effect is just what the portfolio would have done with its given securities and starting interest rate curves for the period. Unexpected compares what expected predicts vs what actually happend (shifts, twists, turns in the interest rate curve).
The sum of the two is what would have been achieved with passive management.
The Interest rate management effect is just how well the investment manager dealt with changes in interest rates through adjusting convexity and duration of the portfolio. They do this by pricing everything as a default free bond and taking the difference between that and treasuries - something like that.
In Schewser text, in an example, Beta Asset Management states its investment strategy is to immunize against interest rate exposure and to yield positive contribution through bond selection.
To verify Beta Asset Management’s claims, Schewser says to look at the effect of “Interest Rate Management” (an effect where the investment manager adjust convexity and duration of the portfolio) - if it is close to 0%, it means it has immunized against interest rate exposure.
I understand there’s an “Interest Rate Effect” which is not under manager’s control.
Why shouldn’t the “Interest Rate Management” be compared against “Interest Rate Effect” and check whether both effects cancel other, in order to come to the conclusion that the portfolio is immunize against interest rate exposure?