The objective of this article is threefold: to provide a framework for understanding fixed income performance attribution, to identify and explain important practical issues related to fixed income performance attribution, and to increase the transparency of performance return calculations. The article discusses two types of attribution models: a factor model that captures the impact on the portfolio return of changes in economic variables such as the term structure of interest rates, volatility, and prepayment speed, as well as an allocation model that assesses the excess returns over the benchmark of the allocation strategy across different sectors or market segments. These two models complement each other and together shed light on the investment management process at various levels.

The article is split into two parts: the first part, published in the current issue of The Journal, provides an introduction to and explanation of the performance attribution process. It subsequently describes a generic “topdown” investment process that should fit most fixed income investment strategies - the attribution process should mirror the investment process of an institution. We then proceed to describe the factor model, the first of the two attribution models. The second part of the paper (to be published in the Winter issue of The Journal) discusses the allocation model, some practical issues related to the attribution process, and presents our conclusions.

Fixed Income Attribution: a Unified Framework – Part I