PERFORMANCE ATTRIBUTION IN GLOBAL PERFORMANCE EVALUATION A portfolio is broken down into various segments according to type of asset & currency to conduct GPE.. Comparisons with a Globa
Trang 1“GLOBAL PERFORMANCE EVALUATION”
1 PERFORMANCE ATTRIBUTION IN GLOBAL PERFORMANCE EVALUATION
A portfolio is broken down into various segments according to type of asset &
currency to conduct GPE
Return in local currency: =+
where
= capital gains in %
= yield in %
Return in base currency:
= ++ where
= currency component
Total-return decomposition:
= ∑ +∑ +∑
it is simply the weighted average of the return on all segments
Performance Attribution
Comparing all major investment decisions with some passive benchmark
Security Selection
= + − + + Where
= return in local currency for segment j
− = security selection return (assuming the portfolio has market level risk)
The 1st
term measures the performance as the manager invested passively in a local market index
Assumption ⇒ price only indexes
Comparisons with a Global Benchmark
Performance of the total portfolio relative to that of global benchmark
Portfolio return:
= ∑ + − + −∗ + ∑ +∑ − where
1st
term = international benchmark return in base currency
2nd
term = market allocation contribution
3rd
term = currency allocation contribution
4th
term = yield component
Last term = security selection contribution
Manager’s performance can be attributed to:
A market allocation different from that of the index
A currency allocation different from that of the index
Security selection
Risk budgeting ⇒ counterpart of performance attribution in the return dimension
Trang 2Currency Management
Passive currency management ⇒ matching the currency weights in the benchmark
Currency exposure may be managed by currency overlay manager
Two ways to analyze active currency exposure:
Country weights different from those in the benchmark
Active currency bets by the manager
Derivatives can be used to engage in currency hedging with forward/future currency contracts
Multi-period Attribution Analysis
−=
−=
Difference b/w the portfolio & benchmark return can be
attributed to security selections(S)
For two successive periods:
where
R = portfolio return
= benchmark return
These are not simple sum but are linked return
The correct two period attribute is not equal to either simple
sum or compounded return
For each short period, calculate the performance of the portfolio relative to benchmark & decompose it additively
Two period contribution processes is similar as single attribute
Method can generalize over a large number of periods
Risk
Measured by SD over time
Usually annualized & expressed in % per year
Active risk ⇒ deviation from passive benchmark
Usually annualized & expressed in % per year
2.PERFORMANCE APPRAISALS IN GLOBAL PERFORMANCE EVALUATION
Risk-Adjusted Performance
Should only be used for the total global portfolio as it focuses on the total risk of portfolio
Measures whether the alpha is large relative to tracking error incurred
Trang 3Risk Allocation & Budgeting
Risk allocation ⇒ Decomposing total risk into various risk exposures taken
Risk budgeting ⇒ process of allocating active risk among managers
Potential Biases in Risk & Return
Past risk & return figures can be biased estimate of the future because of:
Infrequently traded assets
Option-like investment strategies
Survivorship biased risk & return
Traditional approach to evaluate performance ⇒ compares the return on a managed fund with that of peers
Performance of an asset manager should be judged relative to customized benchmarks
Important issues in constructing customized benchmarks:
Individual country weight
Countries, industries & style
Currency hedging