May, 21st 2012 DRAFTfinansforeningen.dk/Admin/Public/Download.aspx?file... · Thereof participating CIIA program (Certified International Investment Analyst) 2 Thereof mathematicians

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DB AdvisorsDeutsche Bank Group

Fixed Income Attribution

May, 21st 2012

www.dbadvisors.com

Ralf Hudert, CIPM,Head of Performance Analytics and Consulting

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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 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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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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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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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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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 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

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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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– 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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… 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.

The views expressed in this document constitute Deutsche Bank AG or its affiliates’ judgment at the time of issue and are subject to change. The value of shares/units and theirderived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. Nofurther distribution is allowed without prior written consent of the issuer.

Any forecasts provided herein are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any prediction,projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance.Investments are subject to risks, including possible loss of principal amount invested.

Certain Deutsche Asset Management investment strategies may not be available in every region or country for legal or other reasons, and information about these strategies isnot directed to those investors residing or located in any such region or country.

For investors in the United Kingdom:Issued in the United Kingdom by Deutsche Asset Management (UK) Limited of One Appold Street, London, EC2A 2UU. Authorized and regulated by the Financial ServicesAuthority. This document is a "non-retail communication" within the meaning of the FSA’s rules and is directed only at persons satisfying the FSA’s client categorization criteria foran eligible counterparty or a professional client. This document is not intended for and should not be relied upon by a retail client.

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Disclaimer

When making an investment decision, potential investors should rely solely on the final documentation relating to the investment or service and not the information containedherein. The investments or services mentioned herein may not be appropriate for all investors and before entering into any transaction you should take steps to ensure that youfully understand the transaction and have made an independent assessment of the appropriateness of the transaction in the light of your own objectives and circumstances,including the possible risks and benefits of entering into such transaction. You should also consider seeking advice from your own advisers in making this assessment. If youdecide to enter into a transaction with us you do so in reliance on your own judgment.

For investors in Switzerland:The investment product as set out in this document ("Investment Product") may not, and will not, be publicly offered, distributed or re-distributed in or from Switzerland and neitherthis document nor any other solicitation for investments in the investment product may be communicated or distributed in Switzerland in any way which could constitute a publicoffering within the meaning of Article 3 of the Swiss Federal Law on Collective Investment Schemes of June 23, 2006. The information provided in this document is addressedsolely to qualified investors pursuant to Article 10 paragraph 3 of the Swiss Federal Act on Collective Investment Schemes (CISA) and Article 6 of the ordinance on CollectiveInvestment Schemes (CISO). The investment product has not, and will not, be subject to supervision under the CISA and therefore, the investor protection afforded there underdoes not extend to the acquirers of the investment product. This document is not a prospectus within the meaning of Articles 1156 and 652a of the Swiss Code of Obligations andmay not comply with the information standards required there under. This document may not be copied, reproduced, distributed or passed on to others without the prior writtenconsent of the issuer.

For investors in Australia:In Australia, issued by Deutsche Asset Management (Australia) Limited (ABN 63 116 232 154), holder of an Australian Financial Services License. An investment with DeutscheAsset Management is not a deposit with or any other type of liability of Deutsche Bank AG ARBN 064 165 162, Deutsche Asset Management (Australia) Limited or any othermember of the Deutsche Bank AG Group. The capital value of and performance of an investment with Deutsche Asset Management is not guaranteed by Deutsche Bank AG,Deutsche Asset Management (Australia) Limited or any other member of the Deutsche Bank Group. Investments are subject to investment risk, including possible delays inrepayment and loss of income and principal invested.

For investors in Hong Kong:Interests in the funds may not be offered or sold in Hong Kong or other jurisdictions, by means of an advertisement, invitation or any other document, other than to professionalinvestors or in circumstances that do not constitute an offering to the public. This document is therefore, for the use of professional investors only and as such, is not approvedunder the Securities and Futures Ordinance (SFO) or the companies ordinance and shall not be distributed to non-professional investors in Hong Kong or to anyone in any otherjurisdiction in which such distribution is not authorized. For the purposes of this statement, a professional investor is defined under the SFO.

For investors in MENA region:This information has been provided to you by Deutsche Bank AG Dubai (DIFC) branch, an authorized firm regulated by the Dubai Financial Services Authority. It is solely directedat market counterparties or professional clients of Deutsche Bank AG Dubai (DIFC) branch, which meets the regulatory criteria as established by the Dubai Financial ServicesAuthority and may not be delivered to or acted upon by any other person.

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May, 21st 2012 DRAFTfinansforeningen.dk/Admin/Public/Download.aspx?file... · Thereof participating CIIA program (Certified International Investment Analyst) 2 Thereof mathematicians