The purpose of a fixed-income attribution solution is to break down the total return of a fixed-income portfolio into returns of risks common across investments, and to compare and contrast fixed-income attribution results against stated portfolio investment strategies and styles.
For large institutional investors, fixed-income attribution has become an increasingly integral part of the investment management process. Growing acceptance and advances in the body of knowledge on FIA have prompted the emergence of several commercial solutions, as well as reports of successful implementations.
However, a number of institutions have rushed to implement FIA projects, only to be disappointed by project delays, higher than expected costs, or both. While fixed-income attribution practitioners invariably point to data quality as the scapegoat for project setbacks, the true causes run deeper and broader. Regardless of firms' differences in investment mandate/strategy, business model, and commercial and regulatory circumstances, those that have stumbled in FIA projects can usually trace mishaps to the early stages during which the business requirements are defined and analyzed, and when implementation strategies are set.
In large institutional investment firms, fixed-income investment management is a complex, multilevel decision-making process. For firms employing structured portfolio management methodology, there are at least two levels of decisions: total portfolio-level decisions, which involve allocating capital and/or risk across strategies, and managing aggregate, portfolio-level risks; and decisions made by individual managers specializing in different fixed-income investment segments or strategies.
In the final analysis, a well-designed, implemented and truly representative fixed-income attribution system should explain a portfolio's excess return in a way that recognizes the discrete responsibilities and strategies allocated among various decision-makers in the firm. Therefore, in presenting FIA results for a fixed-income investment strategy, the returns of aggregate risk factors outside of the manager's return and risk accountabilities should be removed from the total return of that strategy.