Performance Attribution Solution

INVESTMENTS Performance Attribution Example with Currency Components All returns are calculated back into the domestic currency. The foreign exchange exposures of the different asset classes are not perfectly hedged back into the domestic portfolio currency. The upper part of the table contains the normal weights and normal returns required to calculate the passive strategy of the individual asset categories. In the second part of the table are the effective weights and the current returns of the individual asset categories in the specific quarters. The current weights and returns are adjusted from quarter to quarter to reflect the restructuring of the tactical asset allocation and the stock picking and result in the active over/-underweights. In the lower part of the table are the individual performance compo­ nents resulting in the individual quarters (empty). Applying the same approach as in the class notes enables you to calculate the performance components. x0/3 x1/4 x2/1 entire period normal weights x1/3 FI $ FI Euro Eq $ Eq Euro Fx 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 normal returns x1/2 FI $ FI Euro Eq $ Eq Euro Fx -0.75 1.74 -28.62 -14.46 -8.55 1.26 5.20 1.39 8.81 -1.75 4.53 1.77 16.02 13.78 12.36 2.09 1.52 0.85 -0.21 7.54 0.46 5.86 -1.12 5.27 -7.27 0.91 5.22 -2.18 8.41 -6.23 3.26 -2.54 7.79 -2.39 9.82 current weights x1/1 FI $ FI Euro Eq $ Eq Euro Fx 57.50 12.50 22.50 7.50 10.00 53.70 16.50 22.10 7.70 14.00 55.70 15.80 22.30 6.20 0.00 52.30 16.10 23.60 8.00 5.00 54.50 15.90 23.50 6.10 12.00 53.80 15.70 23.10 7.40 8.00 52.40 16.50 23.20 7.90 15.00 current returns x0/4 FI $ FI Euro Eq $ Eq Euro -0.32 1.03 -26.19 -13.46 0.81 5.45 1.99 7.44 4.22 1.20 16.69 15.82 2.12 0.95 0.97 0.00 1.15 6.02 0.16 4.80 0.78 4.25 -3.89 7.32 2.32 -1.39 10.09 -0.53 strategy markets currency selectivity interaction total realized return from active management Table 1: Example for performance components with currency exposure Problem-statement: Calculate the performance components. Solution: x0/3 x1/4 x2/1 entire period normal weights x1/3 FI $ FI Euro Eq $ Eq Euro Fx 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 57.50 12.50 22.50 7.50 10.00 normal returns x1/2 FI $ FI Euro Eq $ Eq Euro Fx -0.75 1.74 -28.62 -14.46 -8.55 1.26 5.20 1.39 8.81 -1.75 4.53 1.77 16.02 13.78 12.36 2.09 1.52 0.85 -0.21 7.54 0.46 5.86 -1.12 5.27 -7.27 0.91 5.22 -2.18 8.41 -6.23 3.26 -2.54 7.79 -2.39 9.82 current weights x1/1 FI $ FI Euro Eq $ Eq Euro Fx 57.50 12.50 22.50 7.50 10.00 53.70 16.50 22.10 7.70 14.00 55.70 15.80 22.30 6.20 0.00 52.30 16.10 23.60 8.00 5.00 54.50 15.90 23.50 6.10 12.00 53.80 15.70 23.10 7.40 8.00 52.40 16.50 23.20 7.90 15.00 current returns x0/4 FI $ FI Euro Eq $ Eq Euro -0.32 1.03 -26.19 -13.46 0.81 5.45 1.99 7.44 4.22 1.20 16.69 15.82 2.12 0.95 0.97 0.00 1.15 6.02 0.16 4.80 0.78 4.25 -3.89 7.32 2.32 -1.39 10.09 -0.53 -8.59 0.00 0.00 0.78 0.00 -7.81 2.17 0.17 -0.07 -0.20 0.02 2.10 8.70 -0.23 -1.24 0.05 -0.04 7.24 2.32 -0.05 -0.38 -0.01 -0.02 1.87 0.41 0.10 -0.15 0.67 0.00 1.04 0.69 0.11 0.12 -0.66 -0.04 0.23 4.11 -0.22 0.49 0.26 0.12 4.76 9.82 -0.12 -1.21 0.90 0.05 9.43 0.78 -0.14 -2.69 -0.83 0.48 -0.34 1.14 -0.39 strategy markets currency selectivity interaction total realized return from active management Table 2: Example for performance components with currency exposure Over the entire time period, the deviation from the strategic currency exposure reduced the performance by -1.21%. The loss has been partially compensated through stock selection. In the third quarter, the active performance of 0.48% is calculated as following: 1. strategy: (0.575*0.46%)+(0.125*5.86%)+(0.225*-1.12%)+ (0.075*5.27%)+(0.01*-7.27%)=0.41% 2. markets: (0.545-0.575)*0.46%+(0.159-0.125)*5.86%+(0.235-0.225)*-1.12%+ (0.061-0.075)*5.27%=0.10% 3. selectivity: (0.12-0.10)*-7.27%=-0.15 4. total realized: (0.545*1.15%)+(0.159*6.02%)+(0.235*0.16%)*(0.061*4.8%)+ (0.12*-7.27%)=1.04%