Fixed income attribution is used to measure a fixed income portfolio’s excess returns or absolute returns in terms of various sources of fixed income risks common to most FI investment strategies, and to compare and contrast FIPA results against stated portfolio investment strategies and styles. For large institutional investors, FIPA has increasingly become an integral part of the investment management process. Growing acceptance and advances in the body of knowledge on FIPA have prompted the emergence of several commercial FIPA solutions, as well as reports of successful FIPA implementations. From a FIPA user’s point of view, the strength of a FIPA solution is reflected in the explanatory power of its results; i.e., the unexplained residual of a relevant measuring period must be small relative to a portfolio’s excess return (or, for an absolute return portfolio, total return) over its benchmark, assuming that assets in the portfolio are fairly priced, and that changes in asset value are consistent with changes in the values of key risk factors used by the FIPA. FIPA residual analysis goes a long way toward accomplishing FIPA intended objectives; i.e., providing critical feedback to the investment management process and to investors at large. In addition, discoveries in FIPA residual study provide important insight into other investment processes such as investment policy/benchmark, portfolio construction, performance measurement, fixed income analytics, and market data collection.

Bai Gu, CFA, Investment Measurement Services, Inc.