Quantitative Due Diligence of Fixed Income Portfolios

This research paper provides step-by-step recommendations to assist with implementing quantitative methodologies within a fixed income due diligence framework. Using Oppenheimer Core Bond Fund as a case study, we demonstrate how investment professionals equipped with the proper tools and methodologies could have been alerted to the fund’s risks long before its collapse. Specifically, we illustrate how using returns-based style analysis (RBSA) with high-frequency data can help investment professionals understand risks and improve the speed and accuracy in detecting structural shifts within a complex bond portfolio.
Introduction

Since its introduction in the early 1990’s returns-based style analysis (RBSA) has been mainly applied to equity portfolios with researchers citing high correlation among fixed income factors as the major obstacle in obtaining robust results. In this paper, we demonstrate how using RBSA and high-frequency data can help improve the speed and accuracy of quantitative analysis.¹  The result is a more robust and confident fixed income due diligence process.

An analysis of the Oppenheimer Core Bond Fund is used to introduce each part of the recommended quantitative approach as if it were applied ex ante.² This fund has received considerable public attention due to its poor performance and prevalent use in several 529 college saving plans. As reported in the April 14, 2009, Wall Street Journal article, “Oregon Sues Over Risk Taken in its 529 Fund,” a class action lawsuit was filed against Oppenheimer Funds Inc. charging that the firm understated the risk of the bond fund. Our analysis shows how an investment research analyst equipped with proper tools and methodologies could have been alerted to the fund’s risks long before its collapse.