What is the best way to measure fixed income portfolio performance?

However, using total risk as the sole indicator has certain drawbacks. These are: -Limited Insight into Risk: Total return does not provide insights into the risk exposure of the fixed income portfolio, leaving investors without an understanding of possible downsides. -Difficulty in Benchmarking: Benchmarking against specific investment goals or market benchmarks becomes challenging due to the aggregated nature of total return. -Less Informed Decision-Making: Investors may make less informed decisions as total return alone does not offer a detailed breakdown of performance drivers, leading to misguided investment strategies.

Both quantitative and qualitative aspects should be looked at while analysing Total Return from a fixed income portfolio in context of risk adjusted returns... quantitative parameters include coupon, capital appreciation and coupon reinvestment whereas qualitative parameters could be credit ratings and avg maturity/duration of portfolio.

En effet, le ratio de Sharpe est un excellent point de départ mais il est essentiel de le contextualiser. Dans les banques d'investissement, où les portefeuilles sont divers et complexes, ce ratio doit être interprété en tenant compte des spécificités de chaque portefeuille. Par exemple, un ratio de Sharpe élevé pourrait indiquer une excellente gestion du risque, mais il est important de considérer aussi la nature des investissements sous-jacents. Des titres à faible risque avec des rendements modestes pourraient afficher un ratio de Sharpe similaire à des investissements plus risqués mais potentiellement plus lucratifs.

Fixed interest is an anomalous allocation. The usual intentions is as a defensive or negatively correlated allocation to balance equity portfolios. For most of the last 10 years it has been neither of those. Adding fixed rate exposure to equity dominant portfolios does not offset inflationary impulse and usually adds volatility rather than reduce it. We should lose the fixed and just have an income allocation. Guessing future yields can be a successful tactical allocation but as a strategy does not outperform floating rate returns over the medium term with 10 times the volatility. Risk adjusted returns need to consider fixed income as an active contributor to risk budget, floating rates have superior medium term risk adjusted returns.

Au-delà des indices globaux d'obligations de sociétés, il est pertinent de choisir des benchmarks spécifiques à des secteurs ou des segments de marché. Par exemple, pour un portefeuille concentré sur les énergies renouvelables, un indice d'obligations vertes pourrait offrir une comparaison plus adaptée.

Attribution analysis becomes relevant in diversified fixed income portfolio as varied returns are generated from different portfolio allocations due to market dynamics such as interest rate scenario, sector allocation, weightage, currency exposure, geopolitical situations, fiscal n monetory policies etc. To extract optimum performance from such a diversified portfolio all the securities need to contribute and hence attribution analysis becomes relevant.

In acquiring an asset to immunise a liability there are no more closely matched allocations than fixed income (perhaps with credit overlays). Insurers and reserve managers are the natural investors in fixed or inflation linked bonds. The textbook says that a traditional savings portfolio will benefit from fixed income’s negative correlation to equities. This correlation has been neutral to positive for much of the last decade. Portfolio objectives need to be reviewed to ensure allocations are meeting objectives, and if they are not alternatives such as floating rate assets(where valuation changes are negligible) should be sought.

Performance evaluation within defined framework and objective is a practical approach as it helps set expectations from a perticular portfolio based on market outlook and the portfolio performance can be evaluated relative to those expectations.

Utilizing the ‘matching principal’ of income and expenses, combine the constraints assigned…find the real rate return delivered. Much like the old NUVEEN tagline which went something like this…it is what you keep after taxes…..Today it is your ability to keep and exceed your current lifestyle over your inflation.