Performance Analysis

Brinson sector-based attribution explains active return in terms of intuitive allocation and selection decisions. However, it cannot easily disentangle competing industry and style effects. We introduce a special type of factor model with five defining characteristics that exactly replicates the classic Brinson model. We show that this “Brinson-replicating” factor model easily extends to explain more general types of investment processes. In this extension, returns are decomposed into style effects and pure industry effects, net of styles. Moreover, much of the classic Brinson model “stock selection effect” is attributed to contributions from a handful of style factors. We show that in this framework risk and return can be attributed to the same set of decision variables. This provides a means of comparing return contributions on a risk-adjusted basis.

Publication: MSCI Barra Research Insight
Authors: DAVIS Ben, MENCHERO Jose

Japan’s domestic bonds constitute one of the major asset classes for Japanese pension plan sponsors. In this Research Bulletin, we use the Barra Integrated Model (BIM) to examine the evolution of this market and better understand the relationship between bonds and equities in Japan.

Publication: MSCI Barra Resarch Bulletin
Authors: CHIA Chin-Ping, OWYONG David, SHIMIZU Hidenori

Portfolio analysts often use one set of decision variables for attributing portfolio returns and a different set for attributing risk. This practice obscures the relationship between the sources of risk and return. This article demonstrates how to align the attribution model with the investment process. The attribution methodology can be applied ex ante or ex post. A factor-based investment process illustrates the general framework. Specifically, active return, tracking error, and the information ratio are attributed to a user-defined set of factors that reflect the manager's investment decision-making process. A concrete example with actual market data, a style portfolio, and a parsimonious set of custom factors illustrates how to apply the analysis.

Publication: Financial Analysts Journal
Authors: MENCHERO Jose, PODURI Vijay

In 1994, Denis Karnosky and Brian Singer published the monograph "Global Asset Management and Performance Attribution". It described a method for multicurrency performance attribution that had certain advantages. The principal advantage of the method was demonstrated in several examples that showed that the Karnosky-Singer (or 'KS') model would reward optimal active portfolio 'bets', while more traditional approaches to multicurrency attribution would reward non-optimal bets. This document works through one of those examples with a view to helping performance analysts explain to their colleagues the strengths and weaknesses of the Karnosky-Singer model.

Publication:
Authors: LAKER Damien

The previous article in this series dealt with multiple period attribution. This is an important technical problem for performance analysts, but for the end-users of attribution reports, there are more compelling issues: 'drilling down' into the results and understanding how specific decisions have added or subtracted value for the portfolio. Four of the main active decisions that can affect a portfolio's performance are: 1) Stock selection; 2) Asset allocation; 3) Currency allocation/hedging; and 4) Transaction costs incurred through trading. In the following article, we will consider asset allocation and currency issues. In the one after that, we'll consider transactions costs. In this article, we will consider stock selection, as well as the interaction term that is so frequently lumped in with stock selection. To facilitate the practical application of the techniques presented in this paper, some worked examples are available as spreadsheets.

Publication:
Authors: LAKER Damien

A portfolio's return is a measure commonly used to determine the success of its management. It is not uncommon that a portfolio's performance is compared to that of a benchmark,  typically market indexes like the All Ordinaries and the SBC Bond Index. Most portfolios are actively managed and/or have contributions, withdrawals and income through performance measurement periods, and portfolio valuations are often less frequent (e.g. weekly or monthly); in these circumstances, money weighted return approximations are often used to calculate the portfolio managers return. If these money weighted returns are compared to the benchmark return, which by default is a time-weighted return if one uses the ratio of index values from the start to end of a period, then one is not comparing like with like since the portfolio return is not a time-weighted return. In this paper we consider the errors introduced in calculating portfolio returns using money weighted returns as an approximation to the time weighted return and produce a theoretical estimate of the distribution of errors. These errors depend on three variables, the timing of the cash flow through the performance measurement period, the size of the cash flow and the volatility of the portfolio value. Daily data over the last decade for the Australian and USA equity markets is used to empirically calculate these errors. The empirical results support the theoretical results. We conclude that the use of money-weighted returns can lead to the introduction of significant errors, even for small cash flows. We then provide a simple, practical method to check for the expected size of the errors. These errors have significant consequences when performing performance attribution since the errors can be the same order of magnitude as the asset allocation or stock selection components 'calculated' from the attribution analysis; thus the true attribution components may be buried in the noise resulting from these errors.

Publication:
Authors: VANN Peter

How differently have companies in "sinful" industries (liquor, tobacco, and gambling) behaved? It seems clear that, under the restraints of this study, those institutions that excluded "sinful" stocks from their selection universe have potentially suffered a return shortfall. This is particularly true for the tobacco and liquor industries since 1985. Return differentials suggest that for managers who decide, or are required by their clients, not to invest in a category of stocks, the importance of constructing an appropriate benchmark becomes quite important to properly distinguish active performance.

Publication:
Authors: BECKERS Stan

While Barra's multiple factor approach has gained widespread acceptance among within-country managers, this approach can only explain a part of the puzzle when it comes to international managers and their multiple country and multiple currency portfolios. Barra has developed products to perform a multiple factor performance attribution on a multiple country, multiple currency portfolio. Multiple factor performance analysis of international portfolios can analyze the active performance of international equity managers, and we can analyze multiple country portfolios in much the same way that we have examined the performance of within-country portfolios. Portfolio managers and pension fund sponsors may now  identify the sources of risk and return to their portfolio with greater accuracy.

Publication:
Authors: MEIER John

Performance analysis focuses on the central goal of investment management: achieving superior                                         performance. A rigorous multi-factor approach to bond analysis can identify sources of fixed-income return,  estimate their statistical significance, and analyze manager skill and value added.

Publication:
Authors: KAHN Ronald N.

In Part IV we discussed value added. The two key constructs in that discussion were the use of the expected utility of active return as a measure of value added and the use of a manager's information ratio as an indication of the manager's opportunity to add value. In this article, we investigate the determinants of the information ratio to find the sources of the manager's opportunity and thus the manager's ability to add value. We also propose a formula that can serve as a useful guide when making strategic investment policy decisions.

Publication:
Authors: Source: Barra Newsletter

Publication:
Authors: Source: Barra Newsletter