Week 12 Performance Attribution Model for Bond Portfolios

Week 12 Performance Attribution Model for Bond Portfolios -...

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A PERFORMANCE Attribution Model for FALL 2003 • CANADIAN INVESTMENT REVIEW 11 BY N ABIL K HOURY ,M ARC V EILLEUX & R OBERT V IAU Eleven factors to consider when evaluating bond holdings. Nabil Khoury is professor emeritus at Université Laval’s department of finance and insurance. Marc Veilleux is a portfolio manager at Natcan Investment Management, in Montreal and Robert Viau is director, financial training and client services at CDP du Québec in Montreal. P erformance attribution analysis partitions a port- folio’s ex-post return into specific components associated with particular decisions made during the management process, in order to assess their impact on overall performance. In the case of equity portfolios, attribution analysis typically breaks down ex-post return into three components related to asset allocation deci- sions, industry choice decisions and security selection decisions. The contribution of each component to the overall performance of the portfolio is then determined by calculating the negative or positive departure of its associated return from that of a corresponding bench- mark. This process can shed light on the efficiency of the portfolio’s management process and identify areas where changes could enhance performance. Generally speaking, the ex-post holding period return of a bond portfolio can similarly be broken down into four broad components related to (I) passage of time; (II) yield curve movements (encompassing parallel shifts, changes in curvature and twists); (III) changes in spreads of various categories of bonds; and (IV) securi- ty selection. The model presented in this paper adopts this four-way subdivision of the ex-post return of fixed- income portfolios and differentiates in sufficient detail between the various areas of management expertise within each subdivision in order to give a clear break- down of value added. Another important feature is the model’s multiplicative approach which corresponds to the multiperiod evaluation that portfolio managers and investors are interested in. Indeed, most existing models of performance attribution for fixed-income portfolios rely on an additive approach to sum up the various sources of added value. They may work well when ana- lyzing a single period (such as a month) but fail when performance attribution is done over several consecutive periods (six months, for example). Finally, the subdivi- sion factors are then compared to benchmark returns in order to determine relative value added. A factor model of bond portfolio holding period returns In this study, we break down the ex-post holding period return of a typical bond portfolio into 11 factors. These factors represent a more detailed subdivision of the four components of realized return mentioned above. For each factor we estimate the periodic return attributable; in general, this return is calculated as the change in the market value of the portfolio due to this factor divided by the market value of the portfolio at the start of the period.
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This note was uploaded on 12/20/2011 for the course RSM 330 taught by Professor Stapleton during the Fall '11 term at University of Toronto- Toronto.

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Week 12 Performance Attribution Model for Bond Portfolios -...

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