Inaccuracies in attribution can lead to poor investment decisions. And while price-aligned bond analytics has long been accepted as the best way to mitigate errors and achieve accuracy, this approach is in fact time-consuming and prone to error. At CloudAttribution, we think there is a better way: read on to understand more about the challenges and flaws of price-aligned bond analytics, and how a different approach can overcome these issues for greater accuracy and better insights.
Every basis point matters
When calculating the attribution, particularly in Fixed Income, the smallest differences matter. So, removing many, if not all, sources for error in the attribution calculation is an important step to take. Multiple sources of data provide challenges and differing models bring their own solutions.
What does price-aligned bond analytics involve?
Price-aligned bond analytics attempts to eliminate sources of difference in the Fixed Income attribution results by aligning the source prices for the calculation of the analytics. This is a widely deployed approach.
But by conducting a convoluted price matching process for the calculation of the analytics, more sources for error exist, and the ability to extend out the models to incorporate additional assets and user requirements is nigh on impossible. We expand on the issues below.
Problems with the price-aligned approach
There are several fundamental problems with a price-aligned approach to bond analytics:
- It is restricted by the software service provider’s prescriptive performance model. Aligning software and client prices results in clients conducting contortions to get the data in a state that’s a closer ‘match’.
- Clients struggle to align prices for unlisted instruments, making analysis of complex portfolios difficult.
- It is expensive. Analytics sources are costly and require access to terms and conditions calculations for the investable universe.
- It takes a great deal of work to arrive at price-aligned bond analytics. To get a full picture, you would need the client to provide details of corporate bond prices, terms and conditions. Price-aligned bond analytics also assumes that yields and durations can be accurately aligned using price.
- It introduces additional opportunities for error and reconciliation.
- Systems using price-aligned analytics are typically limited to buy and hold analysis.
- Unless the performance calculation for the official return is mirrored, accuracy will never be achieved.
CloudAttribution: the alternative to price-aligned bond analytics
Rather than basing investment decisions on a metric that:
- involves a great deal of time and effort to gather
- is prone to error
- is only capable of providing the simplest insights
- is not useful for a broad set of users
CloudAttribution offers a better way.
Our cloud-based performance attribution software offers sophisticated insights which enhance your explanatory power of your investment decisions.
Here’s how CloudAttribution can overcome the problems of a price-aligned approach:
- Replication of the performance calculation (ABOR / IBOR) ensures accuracy on inputs – why recalculate what is already available?
- Use of the client’s source of bond analytics provides efficiency in use of data and consistency across the business.
- A returns-based approach to attribution provides simplicity but enhances accuracy for a complex problem.
- CloudAttribution ensures accuracy from the performance calculation right through to analysis.
- We extend models to provide additional capabilities for all business units.
- CloudAttribution unifies the source and use of the attribution results across PM, Performance and Client teams .
- Data is suitable for both front and middle office operations.
- Handling attribution in this way elevates the discussion away from data and into return profiling.
- It results in more accurate effects in the return decomposition.