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The Dust Has Settled on Fixed Income Attribution

Risk, Performance, and Reporting

By Sean Murray  |  April 4, 2017

Not long ago, the notion of investors requesting multi-factor attribution on their fixed income portfolios was unheard of. To a near lay-person, the concept of explaining the movements of a portfolio sensitive to interest rates was crazy. Multi-factor attribution was for the front office, and its value was hampered by the limitations of the solutions at that time: unofficial results driven by lackluster data quality, without the ability to control data sources (outside of what the vendor chose for you).

At the same time, vendors and solutions providers were working hard to convince the industry that one attribution methodology was better than the other. I’ll let you in on a secret: 90% of the time the same story is told in the same way. 

In the interest of full disclosure, BISAM (like FactSet) has long been a provider to the needs of the fixed income investment management community. We have iterated through several fixed income attribution approaches—those that tried to solve for scenarios that did not provide analytics and others that were specific to the needs of a client. Eventually we settled on three main methodologies designed to pragmatically explain the returns of any instrument sensitive to interest rates (and even those that don’t—but more on that later). This decomposition explains the returns across five main categories: Carry, Currency, Duration, Spread, and Idiosyncratic (essentially non-market forces).

Early in the history of vended solutions for fixed income attribution, the audience was solely internal. A vendor was expected to provide a very detailed analysis of a portfolio, splitting the five categories I mentioned above into dozens. This is where each vendor started to provide what was viewed as a custom model, but in fact was just a series of unique names for the same market phenomenon. In theory, the more effects a vendor had the better the perception. But a funny thing happened: no one firm used every result (or even close to it).

A few years ago, we noticed a shift in the demands of our clients. Internal consumption was still a need, but aligning the results to those of the investors became vitally important. Changes in the market, a reduction in interest rates, the rising complexity of benchmarks all put even more of a spotlight on alpha. Lower alpha, coupled with increased demand from the investor, meant the same result from the same solution was vital. This, along with an acknowledgment that very high quality data was a necessity, drove the biggest shift we’ve seen since BISAM started in this field. As fixed income attribution moved from a front office to an enterprise view, the middle office controls long present in performance applications now became mandatory.

Since then, we have coalesced around a core set of requirements (whether admitted or not):

  • Strong operational controls are key to identifying data problems before they become attribution issues
  • Attribution methodologies should support all asset classes and security types
  • Strong operational functions must align the structure of a portfolio to the attribution results and offer flexibility to adapt to changes
  • Attribution results should be distributed internally and externally and must be consistent

So if we can agree at this point that the dust has indeed settled on a fairly standard set of methodologies, it’s important to remember that there is still more to fixed income attribution. The industry must continue to innovate in order to meet investor demands, and taking a focus on consistent and high quality data will be key. We need a spotlight on the operational controls long championed by the middle office. . .but that’s for another day.

This post originally ran on the BISAM INSIGHTS BLOG. FactSet announced the acquisition of BISAM on March 20, 2017. Read the press release.

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Sean Murray

Vice President, Director Strategy, Performance & Reporting

Mr. Sean Murray is Vice President, Director of Strategy for Performance and Reporting at FactSet. In this role, he is responsible for directing the strategy of FactSet's performance and reporting solutions with the goal of adding rich and robust middle office functionality and services to existing solutions. He joined the company via the acquisition of BISAM in charge of the commercial strategy and sales of FactSet’s Performance and Attribution solutions. Mr. Murray joined BISAM in 2012, first as the Global Head of Sales Engineering and later as the Global Head of Product Strategy. Prior to BISAM, he held commercial, consulting, and strategic account positions at Eagle Investment Systems, DST International (now SS&C), and Misys. Mr. Murray earned a Bachelor of Business Administration from the University of Massachusetts, Amherst.

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