Given that bond investments are one of the key components in strategic asset allocation, management of interest rate risks is regarded by most investors as being vital to the success of a portfolio. Consequently, tactical changes to the duration of the bond portfolio can make a crucial contribution to the overall performance of the investment. The aim of such tactics is to profit both from changes in interest rates and from the steepness of the term structure of interest rates.
FINCA, which stands for Fixed INCome Allocator, is a model for forecasting the structure of the yield curve. The model was developed by Vescore in 1999 for advisory projects conducted at major German and Swiss banks, and has since been used for managing the duration of asset management mandates. Since 2009, FINCA has also been used by an institutional public fund.
FINCA uses proven multivariate analysis processes to identify the most important drivers of the fundamental yield curve – level, slope and shape – on an ongoing basis. For these drivers, autoregressive models are then used to forecast changes in the term structure, which in turn make it possible to optimise the structure of the portfolio. The advantage of this process is that decomposition down to the fundamental drivers allows us to model the yield curve with virtually no "noise". Each individual yield driver can be addressed separately as a yield source. Both, the underlying data basis and the forecasting model, are undergoing further proprietary development at Vescore.