Performance Perspectives Blog

“New” attribution effects

by | Sep 8, 2009

From an equity perspective most practitioners are familiar with the allocation, selection, and interaction effects, while from a fixed income perspective they’re familiar with the treasury (aka duration or yield curve management), spread, income, parallel, non-parallel, twist, shift, and again, selection effects. But there are other effects which are sometimes considered.

What happens, for example, when your index prices securities differently than you do? If, for example, you have a bond priced at 99.25 while the index has it at 99.00? If we ignore these differences, then your selection effect might look better when in reality the only thing you did is price your bonds higher (and obviously the opposite can occur, too). And so, what do you do? Well, you could reprice the index with your prices, but then you’d end up with a different result for the index. Or, you could reprice your portfolio with the index’s prices, but now your market value and return would change. An alternative would be to break out this difference and report it as a “price effect.” While the math behind this hasn’t been clearly stated, and there are no doubt various approaches, it’s something to consider and explore with your software vendor or development team, especially if you’re in the world of bonds or global equities, where there is a greater possibility of having pricing differences.

Okay, so what if you decide to invest in a sector that isn’t in the benchmark? How do you handle this? If you use a standard “Brinson” model (i.e., the Brinson, Hood, Beebower or Brinson, Fachler) as it’s written, the results may be somewhat nonsensical. There are ways to adjust these models so that the results are better, by incorporating the sector you’re in into the index. Personally I prefer breaking this out completely and showing the results as “off” or “out of benchmark results,” to give greater emphasis to the fact that you decided to invest in a sector which isn’t in the benchmark. There are alternatives here, too, as to how you’d show these results.

Some like to see a “trading effect,” which captures your trading activity during he period. One approach to derive this is to calculate your effects using both a holdings and transaction based approach, with the difference being the trading effect. There again are probably other approaches.

Attribution remains a dynamic area. That’s one reason we conduct our one day symposium each Fall to specifically deal with this important topic. To learn more please contact Patrick Fowler (PFowler@SpauldingGrp.com) or Chris Spaulding (CSpaulding@SpauldingGrp.com).

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