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DRAFT
DB AdvisorsDeutsche Bank Group
Fixed Income Attribution
May, 21st 2012
www.dbadvisors.com
Ralf Hudert, CIPM,Head of Performance Analytics and Consulting
DRAFT
DB AdvisorsDeutsche Bank Group
Content
– Company overview– Fixed income attribution methodology
– Advantages/ disadvantages
– Challenging data requirement– Usage of fixed income attribution/ future remains challenging
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DB AdvisorsDeutsche Bank Group
DB Advisors: Global institutional asset management
AssetManagement
Corporate and Investment Bank
GlobalBanking
GlobalMarkets
CorporateInvestments
PrivateWealth
Management
Private &BusinessClients
Private Clients and Asset ManagementTotal AuM: EUR 1.2 trillion
Deutsche Asset ManagementTotal AuM: EUR 550 billion / Fixed income: EUR 341 billion
– Established in over 70 countries worldwide– A+ rated by Standard & Poor's– Tier 1 capital ratio of 12.3%
Deutsche BankOne of the world's largestfinancial services firms withbusinesses that advise andsupport a broad range ofclients
Institutional Insurance Retail Real estate &infrastructure
As of December 31, 2010Source: DB Advisors, Deutsche Bank AGAssets shown in US dollars. Due to rounding, numbers may not add up to total. Fixed income assets shown include liquidity management assets.
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DB AdvisorsA trusted partner forinstitutional investorsworldwide
DB AdvisorsAuM EUR 175 bn
Deutsche InsuranceAsset Management
DWS RREEF
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DB AdvisorsDeutsche Bank Group
Performance Measurement Team
– Productive support from off shoring vendor: 2 offshore and 4 onshore resources– Additional support from external consultants depending on projects
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Number of Performance Measurement staff 17
Thereof CFA (Chartered Financial Analyst) 2
Thereof CIPM (Certificate in Investment Performance Measurement) 2
Thereof participating CIIA program (Certified International InvestmentAnalyst)
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Thereof mathematicians 4
Highly skilled permanent staff
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DB AdvisorsDeutsche Bank Group
StatPro
(Performance, FI attribution,composite)
SimCorpDimension
(portfolio data)Index
data base
Asset DataIntegrator
(business logic)
Performance Measurement System architecture
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FactSet
(Equity and balanced attribution)
Performance database
(Performance analysis,reconciliation, data delivery)
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DB AdvisorsDeutsche Bank Group
Fixed income attribution method
Security level
• Return calculation• Decomposition of returns into risk components (mod. Duration, convexity,…)• Single securities in portfolio and benchmark
Aggregationof returnsources
• Aggregation according to investment process• Various groupings (currency, countries, maturities, duration bands, ratings,
sectors)
Fixed incomemodels
• Total Return model• Attribution excl. allocation• Attribution incl. allocation
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Fixed income attribution method: Basics of returndecomposition
Formulars are modified with additional parameters ("to worse", "next coupon", "spread")depending on security type (floating rate note, embedded options, swaps, …). Below shows theexample for floating rate notes:
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udyCMDdyydtr 2)(5,0 r = Period return
y = Yield to maturity of security
dt = Period
MD = Modified duration of security
dy = Change of yield to maturity of security in period
C = Convexity of security
u = Residual
udyCdSpreadMDdYMDdtyr SpreadCouponNextYCf 2Re )(5,0
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Fixed income attribution method:Return decomposition
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Source: StatPro
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Fixed income attribution method: Change of yield
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Yield curve t
MM - 1
Yield curve t+1
Yield
Time tomaturity
Source: StatPro
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Fixed income attribution method: Explanation of yieldchange
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1 – Carry effect2 – Yield curve effect3 – Spread effect
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3
Yield
Yield curve t
Yield curve t+1
MM - 1
Time tomaturity
Source: StatPro
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Fixed income attribution method: General fixedincome model
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Excess return
Adjustedexcess-return
Price effect Trading effect
Allocationeffect
Carry Yieldcurve
Spread Convexity Option Residual Currencyallocation
Currencytiming
Inflation Other
Source: StatPro
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Fixed income attribution method: Further split isavailable
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Carry effect Yield curvemovement
Spread effect
Systematiccarry
Specificcarry
Shift Twist Butterfly Roll-down
Ratingchoice
Spreadspecific
Coupon Convergence Durationchoice
Yield curvepositioning
Swapspread
Spreadspecific
Sectorchoice
Spreadspecific
Countrychoice
Spreadspecific
or or or
or
or
Source: StatPro
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Fixed income attribution methodExample: Fixed income attribution by sector
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Multiple teams/ strategies
InstitutionalInsurance Retail Alternative
Global bond Euroland Multi Asset
Emerging markets
High yield
Passive management
Multiple packages, tailored for each individual investment process
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Fixed income attribution methodAlignment of method to investment strategy
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TSAM_0311 14
Σ
Fixed income attribution methodTransformation to equity styled attribution
Comparable to classic equity styled attribution
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Fixed income attribution methodTwo step decision making
Example ESG Rating: Potential alpha can be captured through a fixed income strategy that considerscompanies' environmental, social, governance and carbon-related risks.
Two step decision making: 1. Allocation2. Carry, yield, spread, …
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Fixed income attribution methodTwo step decision making
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Fixed income attribution methodTwo step decision making
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Fixed income attribution methodPros and Cons of the described method
Advantage• Assumes multi step investment process: shows allocation first• Easy to transform to equity styled attribution• Shows pricing and trading effect• Drill down to security level for each effect• Provides effects from yield curve positioning and deviation
from mod. Duration of benchmark
Disadvantage:• Huge data requirement• Model does not work if price function becomes discrete e.g.
changes in cheapest to deliver• Long calculation time• Data need to be available and consistent on daily basis
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Data requirement for fixed income attribution basedon StatPro
Daily– Portfolio holdings
– Closing prices
– Portfolio transactions
– Benchmark constituents (weights and returns)
– Risk numbers (portfolio and benchmark)
– Yield curves (according maturities)
– Spread curves
– Security classification (portfolio and benchmark)
– FX rates
– Cheapest to deliver bond (valuation, risknumbers)
– FX forwards rates (for hedged benchmark)
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Main criterion for meaningful attribution analysis is a high quality of input data
δRisk
numbers
α
Transactions
FX
%
Fixed income attribution
Indexdata
Yieldcurves
Portfolioholding
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Utilization benefits of fixed income attribution
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Portfoliomanager
– Help to understand reasons for out/underperformance– Manager review– Even for passive management: identify pricing mismatch between portfolio
and benchmark
Client – Provide transparency about investment process– Explanations of performance
RFPteam – Support questionairs
Internalcontrol
– Identify data issues in fund accounting– Increase overall quality of investment process
Fixed incomeattribution
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Further development – what will the future bring?
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What do ourclients need ?What do ourclients need ?
Can the IT copewith increaseddata volume?
Can the IT copewith increaseddata volume?
Will data qualitysupport improvinggranularity?
Will data qualitysupport improvinggranularity?
Standardization offixed incomeattribution?
Standardization offixed incomeattribution?
Newinstruments?Newinstruments?
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Appendix
TSAM_0311 23
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Choosing a system: Definition of business needs andvendor selection criteria
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Important criteria
System easy to use Fast implementation High quality/ availability of customer support
Very important criteria
High level of flexibility/customized reports
Cash and overlays handledreasonably
Flexible benchmarks andcustomizing
Automation of production anddistribution
Extremely important criteria
Results accurate andcomprehensible
Relevant investmentinstruments covered
Identification ofout/underperformance
Consistent with officialperformance numbers
Good quality andtransparent data interface
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Choosing a system: The evaluation and thus the scoring isbased on both, system and vendor capabilities
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Interviews withreference clients
Vendorpresentations
Review vendormarketing material
DWS / DeAMrequirements
Vendor testattribution results
Decision toimplement StatPro
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Performance Measurement Team
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Performance MeasurementEnsure GIPScompliance
Delivery of datato externalcompanies
Performancereports
Equity styledattribution
Fixed incomeattribution
Compositereports
Ad hocrequest
Out-performance
fee
~ 800 (institutional) ~ 100 (institutional)
~ 150 (retail)
~ 100 (institutional) ~ 150 (institutional)
~ 150 (retail)
Replace old systems with FactSet and a new fixed income system
No. portfolios:
Business requirement to increase number and quality of attribution reports
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DB AdvisorsDeutsche Bank Group
– Missing user rights– Network power– Interface errors– Data storage– Run time– Errors in attribution system
– Other departments processes are affected– Increase of valuation quality– Earlier reconciliations
– Portfolio Manager do not accept transparency– Clients do not understand analysis results– Different views on security classification
(e.g. rating, yield to worst, country of risk)– Configuration of model and definition of
standard packages– Training of staff
Difficulties during the implementation
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IT environmentOrganization
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Difficulties during the implementation
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– Daily prices(underlyings, OTC )
– Risk numbers
– Inconsistent data
– Product set up(TBAs, etc.)
– Reversals
Accounting data
– Missing data fields
– Hedged benchmarks
– Different treatmentfor securities enteringor leaving index
– MtD instead of DtDconstituent return
– Variety of sources
Index data
– Constituent return does notexplain total return
– Delivered days do not fit togethere.g treatment of bank holidays
– Yield curve too short
– Security classification
Fixed income attribution identifies all data issues from accounting and index
Acounting + Index data
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DB AdvisorsDeutsche Bank Group
… how to deal with the difficulties
Frequent presenceof Vendor
Consultants
Ensuretransparence for
all involveddepartments
Communicationand training of
upstreamdepartments
Split into multiplesub projectsRegular updates
Establishment ofex ante control
mechanism
Involvement ofpermanent
performance staffin implementation
team
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Contact
DB AdvisorsDeutsche Asset Management Investmentgesellschaft mbHMainzer Landstrasse 178 - 19060327 Frankfurt am Mainwww.dbadvisors.com
Ralf HudertTel. +49 (69) 71 706 - 3524Fax +49 (69) 71 706 - [email protected]
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Disclaimer
DB Advisors is the brand name for the institutional asset management division of Deutsche Asset Management, the asset management arm of Deutsche Bank AG. In the US,Deutsche Asset Management relates to the asset management activities of Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWSTrust Company; in Canada, Deutsche Asset Management Canada Limited (Deutsche Asset Management Canada Limited is a wholly owned subsidiary of Deutsche InvestmentManagement Americas Inc); in Germany and Luxembourg: DWS Investment GmbH, DWS Investment S.A., DWS Finanz-Service GmbH, Deutsche Asset ManagementInvestmentgesellschaft mbH, and Deutsche Asset Management International GmbH; in Denmark, Finland, Iceland, Norway and Sweden, Deutsche Asset ManagementInternational GmbH: in Australia, Deutsche Asset Management (Australia) Limited (ABN 63 116 232 154); in Hong Kong, Deutsche Asset Management (Hong Kong) Limited; inJapan, Deutsche Asset Management Limited (Japan); in Singapore, Deutsche Asset Management (Asia) Limited (Company Reg. No. 198701485N) and in the United Kingdom,RREEF Limited, RREEF Global Advisers Limited, and Deutsche Asset Management (UK) Limited; in addition to other regional entities in the Deutsche Bank Group.
This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It is intended for informationalpurposes only and it is not intended that it be relied on to make any investment decision. It does not constitute investment advice or a recommendation or an offer or solicitationand is not the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank AG and its affiliates to enter into or arrange any type of transactionas a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates, gives any warranty as to the accuracy, reliability or completeness ofinformation which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the Deutsche Bank Group, the Issuer or anyofficer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for anyresulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.
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Disclaimer
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