1. Attribution Analysis
An integral part of the investment management program
Simon Willcox
Paul D’Ouville

2. Presentation Overview
A comprehensive suite for asset servicing
Plan Sponsors to asset managers
The attribution and data evolution
A generational model
A generational range of issues
The asset class / market evolution
The ‘simplicity’ of Equities versus the realities of Fixed Income
Desire for stock level analysis
Linking performance attribution and risk attribution
From performance Attribution to risk adjusted performance attribution
Northern Trust’s development approach
The core client requirements of an effective attribution toolkit
Asset Owner versus Asset Manager needs
Current trends, future needs

3. A Comprehensive Suite for Asset Servicing
What has been the return on our assets?
Performance measurement (return, excess return, attribution)
By Manager
By consolidation (e.g. total plan / all passive portfolios / all active portfolios)
By asset class / region / country / sector / stock
Why have the assets performed that way?
Attribution Analysis
Asset Managers
Has asset owner received expected performance, ‘true to label’ validation
How has each investment desk performed, consistency and validation of investment process, where to spend time on process
Have the desks interacted effectively (currency management)
Asset Owners
how have their decisions impacted performance, asset v liability monitoring

4. A Comprehensive Suite for Asset Servicing
Asset owners and managers have a fiduciary responsibility to monitor their investments. What analysis is required to enable them to do this?
Was this within our investment guidelines?
Compliance / Risk Monitoring
External investment restrictions (legal/regulatory).
Internal investment restrictions – placed on individual managers to limit overall plan risk
What risks did we take along the way and what type of risks lay ahead?
Risk Analysis
Ex-Post – Have we taken too much risk, or too little
Ex-Ante – Is our current risk exposure in line with our investment requirements

5. Attribution Objectives
Each user may have a different purpose and level of understanding, but the output must be understandable and useful to all parties.
Meets its purpose
Maps to client’s objectives and fund managers’ investment process
Accurate and timely delivery
Easily interpreted
By clients with supplemental and meaningful commentary from fund managers
By fund managers / marketing and sales
By third parties /consultants receiving data from multiple sources
An aid to future investment decisions
Complementary to in-house risk models and other front office systems
Supports previous ex-ante analysis and asset / liability modelling
Automated
Scalable
Flexible

6. Northern Trust’s Approach to Supporting Clients’ Needs
A full suite of attribution capabilities is a “must have” for all of clients from a precise methodology through to timely and meaningful reporting
Methodology and formulae
Needed “returns based” approach to compliment existing excess return driven reporting
Preferred industry standard methodology but wanted integration into infrastructure
Algorithms programmed directly into core platform
Delivery and Frequency
Daily service essential for asset managers – quantitative analysis and speedy turn around
Monthly / quarterly service to compliment daily information – qualitative analysis with commentary
Solution – on line reporting via Northern Trust Passport
Review of data integrity – “refining the process”
Daily delivery can pinpoint implementation issues prior to month end
Investment goals / processes can be reviewed more frequently
Solution – daily performance, available daily
Integration in client reporting across segments
Headline numbers and impacts needed to be highlighted in client reporting
Solution – design and build client reporting blocs, marrying numbers with analysis

7. The Data Evolution
The development of the servicing of program management has been an evolutionary process and can be represented by five key generations.
Delivery implications within a Generational Model of performance delivery:
Performance Measurement High Level
Performance Measurement Detailed
Attribution High Level
Attribution Detailed
Risk
Other Ex Ante
Generation 1
Figures Production
Quarterly 
Generation 2
Added Value
Monthly
Generation 3
Global Support
GIPS requirements included
Monthly with more detail
Quarterly with more detail
Generation 4
Focused Cost Centre
More detail
needed
Weekly / daily
Weekly / daily with more detail
Weekly / daily with more proof of controls
Generation 5
Integrated Feedback
More interpretation, and link with attribution / risk
Weekly / daily -more interpretation than production
More detail
More frequency
Data intensity for all models
Cost of delivery
Performance and Risk
now
Source: Investit Intelligence ‘Outsourced Performance Measurement for Investment Managers’

8. Demands on Attribution Models Through ‘Diversification’
Portfolio holdings and prices D A T I N E G R Y
Contribution
Portfolio, benchmark, broad assets, universes
Policy / Balanced
Portfolio, benchmark, broad assets to stock level
Equities
Portfolio, benchmark, sensitivity to characteristics
Fixed Income

9. The Asset Class and Market Evolution
Profile of markets are / have changed
Peer groups versus custom benchmarks – move to custom allows for more frequent attribution reporting (UK move from 75% peer group to less than 10% in last 5 years)
Peer group comparison more relevant in the U.S. with large markets and similar mandates
Equities v Fixed Income v Alternatives
Liability matching pressures have seen a move towards fixed income
Use of alternative assets is growing significantly
Increased use of OTC’s – independent models required to derive characteristics
Regulatory Requirements
Global Investment Standards are limited with respect to attribution
Difficult to point to any one “correct” approach although many are universally standard (eg: stock level equity attribution)
Risk awareness
Attribution is another useful tool for identifying risk within a policy / mandate

10. Understanding the Inputs to Attribution Analysis
Increased analysis => Increased need for data integrity => Increased focus
Policy
No flows
Manager
Flows?
Country /
currency
More flows
Sector
Classifications
Stock
Synthetic
trades
Corporate actions and flows between sectors
Start weights
Average weights
Many different flavours in FI (eg: maturity bands)
Increased complexity with frequency

11. The Process Needs to be Seemless
A true end to end mechanism is essential such that transactional and accounting data flow through to attribution results with no need for human intervention
7. Apply formulae and deliver results 1.
Accounting Data
6. Index data Sources and mapping
Data flow,
Understanding
dependencies
2. Portfolio holdings and transactions
5. Application of Classification Schemes to produce returns
3. Positional and transaction code mapping
4. Performance calculation Engine

12. Performance Attribution Sample Output (Total Fund)
Total Fund attribution is a tool to quantify the impact of strategic investment decisions and implementation decisions.

13. Performance Attribution Sample Output (Sector Equity)
Sector level attribution is useful for all types of funds, even tracker funds as per this example, to highlight to the manager where extra return is being generated. Was it deliberate?

14. Performance Attribution Sample Output (Stock Level Equity)
Stock level attribution is useful to pinpoint where good stocks were chosen and just as importantly which poor performing stocks were avoided.

15. What Is Fixed Income Attribution Analysis?
Returns-based attribution model
Flexibility to calculate attribution results based on client specific mandate types (eg: Govs. Vs, Corporates)

16. Equity and Balanced vs. Fixed Income Attribution
Should different attribution methodologies exist between equity vs. fixed income strategies?
Similarities
Both are returns based (portfolio vs. benchmark) and look to decompose the excess return into the conscious decisions of the investment process
Top Down approach Both look at the impact of investing in specific markets or assets and choice of stocks within the market / category
Differences
Fixed Income portfolios tend to have a greater degree of currency management within the fund which needs to be measured independently (passive versus active)
Fixed Income models are more risk orientated with the use of duration to measure interest rate sensitivity
Excess returns tend to be smaller, so results in fixed income are much more sensitive to price and characteristic differences

17. Understanding the Effects
If interest rates fall, then the returns are positive so overweight duration in rising markets is good and underweight duration is bad
Duration Positive / negative impact on excess return from a parallel shift in the yield curve
Yield Curve Positioning Positive / negative impact on excess return from a change in shape in the yield curve
Sector / Country Yield spread movements between Gov. and Non Gov. Bonds or currencies of issue
Bond Specific Did we pick good performing bonds along the yield curve? Was credit part of the benchmark?
Currency Did we pick good or poor performing currencies ?

18. Understanding the Data Requirements
Portfolio and index (as per the classification scheme)
Market Value (income accrued versus received)
Effective duration (allows for options on bonds)
Effective maturity bands for classification purposes (callable bonds)
Currency of Issue rather than country of risk
Credit rating – official versus implied
Sector classification (Government / Corporate etc)

19. Considerations for fixed income attribution - General
Different interpretation of added value
Yield spread versus total return
Buy & hold versus transaction based
Arithmetic versus geometric
Data integrity and consistency
Security characteristics
Greater variety of benchmark schema’s/definitions
Front office systems to back office analysis and reporting
Index data requirements – cost, distribution and formatting
Greater complexity with derivatives
Greater portfolio turnover
Greater complexity transitioning historical information

20. Performance Attribution Sample Output (Fixed Income)
Fixed Income Attribution highlights the impacts of effective positions (duration adjusted weights)

21. Risk Attribution / Risk Adjusted Performance Attribution
Decomposition of ex post and ex ante measures into meaningful factors
Ex ante risk attribution normally built from multi factor model approach
Ex post risk adjusted performance attribution can be built from statistics such as tracking error / information ratio decomposition
Ex Post Risk Attribution
Based on standard deviation of active returns
Attribution built from asset volatility and correlation to tracking error (but using traditional performance definitions of selection and allocation)
Selection impact built from asset weight times active return volatility in asset
Allocation impact built from size of asset active weight times active return volatility in asset relative to overall benchmark.
Ex Post Risk Adjusted Performance Attribution
Information Ratio useful (active return / tracking error)
Use of ‘risk weights’ rather than investment weights – how much of risk budget has been spent on asset

22. Risk Attribution / Risk Adjusted Performance Attribution
Sample UK Equity – 1 Year Attribution Results

23. Strategic Approach to Attribution Developments
Full integration within infrastructure remains crucial
Analysis is embedded within Northern Trust infrastructure
Important to ensure that data updates at source flow efficiently through to end analysis and attribution
Industry leading professionals researching new methodologies and approaches
Active participation in external performance conferences
Close ties with performance professionals in the industry
Continued investment in capital expenditure
Senior management continue to comit resources to analysis and decision support capabilities
Displined approach to development, testing and implementation
Staying on current with new investment approaches
Working with clients and asset managers to ensure new investment strategies are captured within performance
Strategic alliances to deliver industry leading capabilities

24. Recent Developments Around Attribution
Daily relative attribution capability through Passport (Fundamentals)
Equity (regional, country, sector and stock level)
Popular with investment management community
Daily indexes information from all major index vendors
Specialist benchmark team negotiating and managing index vendor relationships
Daily benchmark building functionality
Benchmarks feeding attribution can be built daily and rebalanced monthly
Strategic alliances with third party index and characteristic providers

25. Current Trends, Future Needs
Absolute / Hedge Funds
Some strategies do not lend themselves to relative attribution decomposition
Contribution analysis is the start
…but do need in-depth knowledge of investment decisions (e.g. – pairing)
Derivatives – greater complexity and evolution of purpose
Attribution ‘methodologies’ have existed for significant periods of time
Treatment of ETD v OTC’s
But again, need in-depth knowledge of investment decisions to ensure attribution reflective of investment process
Active vs. passive currency management
Need to strip out forward contracts between passive and active decisions
Need to allocate cost of hedging to appropriate investment desk
Separate measurement of currency overlay programs
LDI
A valuation process – decomposition of asset value versus liability value
Non published benchmarks – derived from asset exposure
Characteristics enhancements and custom indexes development

26. Thank You
Simon Willcox
Paul D’Ouville