What is Fixed Income Attribution?

Fixed income attribution is a method for assessing portfolio performance in portfolios relying on fixed income assets. Using this method, an analyst can separate out different sources of returns and evaluate them individually, instead of looking at aggregate performance. This approach can provide people with a more comprehensive view of performance of the portfolio. It also offers insight into the skills of the financial professional in charge of managing it, revealing the effectiveness of investment techniques and decisions. Some firms may use fixed income attribution in annual reports, and investors can also do this on their own, using known data about the composition of a portfolio.

Investment portfolios include a wide array of risks, with the goal of generating good overall returns even if individual investments falter. In a fixed income portfolio, the investment manager relies on assets with a known and reliable rate of return, like bonds, but must consider the fact that they mature at different rates and may carry different levels of risk. When people develop an investment strategy, they can use fixed income attribution to make decisions about where and how to invest, looking at the performance of different assets in the portfolio and making projections about future market movements. By separating out risks, they can also assess their performance to see how many of their decisions were sound.

For investors, fixed income attribution can also provide a tool for understanding areas of strength and weakness in a portfolio. The manager might be very good at investments in some areas, while having weaknesses in others, or overall performance could experience a downward trend because of an unexpected market event. Rather than talking in generalities about performance, the portfolio manager can point to specific areas of risk and show whether they met benchmarks for good performance, and offer an explanation if they failed to perform as expected.

People can use a number of techniques for calculating fixed income attribution. Investment software may offer this as an option and there are also programs available specifically for assessing portfolios using this method. The math can become highly complex and some investors prefer to leave it to the analysts in charge of generating information about portfolio returns. Detailed data, and a discussion of the techniques people use to obtain it, can often be found in an annual report.

Fixed income attribution is only one way of looking at portfolio performance. People may also want to look at overall performance, and can compare different portfolios and mutual funds against each other to see if another company is offering better management and products. When performing such comparisons, it is important to consider factors like the size of a portfolio, as well as the investment approach the manager uses, because these can skew performance results and may make comparisons between some portfolios meaningless.