What does the interest rate management effect primarily measure?

The interest rate management effect primarily measures the predictive accuracy of interest rate changes. This concept is essential in understanding how well a portfolio manager is able to forecast movements in interest rates and adjust the portfolio accordingly to optimize returns. The focus is on the ability to anticipate changes in interest rates, which can significantly impact the performance of fixed-income investments.

When a portfolio manager accurately predicts interest rate changes, they can position the portfolio to benefit from those anticipated movements, such as adjusting the duration of bonds held or reallocating to different types of fixed income securities. This effect is a critical component in the assessment of active fixed-income management and demonstrates the value added by the manager's interest rate forecasts.

In contrast, overall portfolio performance encompasses a broader view that includes factors beyond just interest rate management, such as stock picking or sector allocation. The impact of inflation on returns pertains specifically to how inflation erodes purchasing power and affects real returns, rather than the predictions regarding interest rates. Lastly, investor sentiment towards interest rates relates to general market perceptions and attitudes rather than specific predictive capabilities about interest rate changes.