Reading 47: Evaluating Portfolio Performance Los o~Q1-3

management, following, interpret, factors

LOS o: Explain the management factors that contribute to a fixed-income portfolio’s total return and interpret the results of a fixed-income performance attribution analysis.

Q1. The following table summarizes the performance attribution analysis for two fixed income managers of the Ashburton Fund for the year ending December 31, 2005:

	Ashley Asset Management	Thierry Asset Management	Bond Portfolio Benchmark
Interest rate effect – expected	0.48	0.48	0.48
Interest rate effect – unexpected	0.64	0.64	0.64
Duration management	0.22	-0.11	0.00
Convexity management	-0.10	-0.10	0.00
Yield-curve change management	0.08	0.23	0.00
Sector management	-0.12	1.23	0.00
Bond selection management	0.18	-0.16	0.00
Trading Activity management	0.07	0.10	0.00
Total Return	1.45	2.31	1.12

Ashley Asset Management states that its strategy is to outperform the index through active interest rate management and bond selection.

Thierry Asset Management states its policy is to immunize against interest rate exposure and to earn positive contribution from bond selection.

The two fund manager’s active management process has yielded excess returns over the benchmark. How much of the excess performance is attributable to interest rate management effects?

Ashley Asset Management Thierry Asset Management

A) 8 bps 23 bps

B) 20 bps 2 bps

C) 22 bps -11 bps

Q2. Given the data in the above table can the manager’s positive performance be attributed primarily to their stated management objectives?

Ashley Asset Management Thierry Asset Management

A) Yes No

B) Yes Yes

C) No No

Q3. Which of the following statements about the interest rate effects on the performance of a fixed-income portfolio is FALSE?

A) The expected return is the return form the on-the-run Treasury spot rate curve.

B) The expected return is the return from implied forward rates.