Introduction

Performance attribution analysis is a specific discipline in the investment process, with the prime objective to quantify the performance contributions which stem from the active portfolio management decisions and to assign them to exposures towards the various risk factors relative to the benchmark. Typical central bank foreign reserves portfolios are composed of more or less plain vanilla securities and also the levels of market and credit risk taken are naturally low. Despite these characteristics, performance attribution analysis in central banks is much harder than it might be expected. Generally, it can be very difficult to accurately separate the impacts of different fixed-income strategies, because interactions between each of them could exist in several ways. Especially for passively managed investment portfolios with their rather small risk factor-specific performance contributions it has proven in practice to be a difficult task of finding a balance between two of the main features of performance attribution: intuitive clarity and analytical precision.

Over the past several years, based on the collective work of experts involved in both practitioner and academic research, much progress has been made on the key ingredients of modern performance attribution analysis – yet most of the publications concentrated on models tailored to equity portfolios (see the seminal articles of Brinson and Fachler 1985, Brinson et al. 1986 and Brinson et al. 1991).