Presentation on theme: "Attribution Analysis An integral part of the investment management program Simon Willcox Paul D’Ouville."— Presentation transcript:
1 Attribution AnalysisAn integral part of the investment management programSimon WillcoxPaul D’Ouville
2 Presentation Overview A comprehensive suite for asset servicingPlan Sponsors to asset managersThe attribution and data evolutionA generational modelA generational range of issuesThe asset class / market evolutionThe ‘simplicity’ of Equities versus the realities of Fixed IncomeDesire for stock level analysisLinking performance attribution and risk attributionFrom performance Attribution to risk adjusted performance attributionNorthern Trust’s development approachThe core client requirements of an effective attribution toolkitAsset Owner versus Asset Manager needsCurrent 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 ManagerBy consolidation (e.g. total plan / all passive portfolios / all active portfolios)By asset class / region / country / sector / stockWhy have the assets performed that way?Attribution AnalysisAsset ManagersHas asset owner received expected performance, ‘true to label’ validationHow has each investment desk performed, consistency and validation of investment process, where to spend time on processHave the desks interacted effectively (currency management)Asset Ownershow 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 MonitoringExternal investment restrictions (legal/regulatory).Internal investment restrictions – placed on individual managers to limit overall plan riskWhat risks did we take along the way and what type of risks lay ahead?Risk AnalysisEx-Post – Have we taken too much risk, or too littleEx-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 purposeMaps to client’s objectives and fund managers’ investment processAccurate and timely deliveryEasily interpretedBy clients with supplemental and meaningful commentary from fund managersBy fund managers / marketing and salesBy third parties /consultants receiving data from multiple sourcesAn aid to future investment decisionsComplementary to in-house risk models and other front office systemsSupports previous ex-ante analysis and asset / liability modellingAutomatedScalableFlexible
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 reportingMethodology and formulaeNeeded “returns based” approach to compliment existing excess return driven reportingPreferred industry standard methodology but wanted integration into infrastructureAlgorithms programmed directly into core platformDelivery and FrequencyDaily service essential for asset managers – quantitative analysis and speedy turn aroundMonthly / quarterly service to compliment daily information – qualitative analysis with commentarySolution – on line reporting via Northern Trust PassportReview of data integrity – “refining the process”Daily delivery can pinpoint implementation issues prior to month endInvestment goals / processes can be reviewed more frequentlySolution – daily performance, available dailyIntegration in client reporting across segmentsHeadline numbers and impacts needed to be highlighted in client reportingSolution – design and build client reporting blocs, marrying numbers with analysis
7 The Data EvolutionThe 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 LevelPerformance Measurement DetailedAttribution High LevelAttribution DetailedRiskOther Ex AnteGeneration 1Figures ProductionQuarterlyGeneration 2Added ValueMonthlyGeneration 3Global SupportGIPS requirements includedMonthly with more detailQuarterly with more detailGeneration 4Focused Cost CentreMore detailneededWeekly / dailyWeekly / daily with more detailWeekly / daily with more proof of controlsGeneration 5Integrated FeedbackMore interpretation, and link with attribution / riskWeekly / daily -more interpretation than productionMore detailMore frequencyData intensity for all modelsCost of deliveryPerformance and RisknowSource: Investit Intelligence ‘Outsourced Performance Measurement for Investment Managers’
8 Demands on Attribution Models Through ‘Diversification’ Portfolio holdings and pricesDATINEGRYContributionPortfolio, benchmark, broad assets, universesPolicy / BalancedPortfolio, benchmark, broad assets to stock levelEquitiesPortfolio, benchmark, sensitivity to characteristicsFixed Income
9 The Asset Class and Market Evolution Profile of markets are / have changedPeer 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 mandatesEquities v Fixed Income v AlternativesLiability matching pressures have seen a move towards fixed incomeUse of alternative assets is growing significantlyIncreased use of OTC’s – independent models required to derive characteristicsRegulatory RequirementsGlobal Investment Standards are limited with respect to attributionDifficult to point to any one “correct” approach although many are universally standard (eg: stock level equity attribution)Risk awarenessAttribution 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 focusPolicyNo flowsManagerFlows?Country /currencyMore flowsSectorClassificationsStockSynthetictradesCorporate actions and flows between sectorsStart weightsAverage weightsMany 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 intervention7. Apply formulae and deliver results1.Accounting Data6. Index data Sources and mappingData flow,Understandingdependencies2. Portfolio holdings and transactions5. Application of Classification Schemes to produce returns3. Positional and transaction code mapping4. 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 modelFlexibility 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?SimilaritiesBoth are returns based (portfolio vs. benchmark) and look to decompose the excess return into the conscious decisions of the investment processTop Down approach Both look at the impact of investing in specific markets or assets and choice of stocks within the market / categoryDifferencesFixed 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 sensitivityExcess 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 badDuration Positive / negative impact on excess return from a parallel shift in the yield curveYield Curve Positioning Positive / negative impact on excess return from a change in shape in the yield curveSector / Country Yield spread movements between Gov. and Non Gov. Bonds or currencies of issueBond 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 riskCredit rating – official versus impliedSector classification (Government / Corporate etc)
19 Considerations for fixed income attribution - General Different interpretation of added valueYield spread versus total returnBuy & hold versus transaction basedArithmetic versus geometricData integrity and consistencySecurity characteristicsGreater variety of benchmark schema’s/definitionsFront office systems to back office analysis and reportingIndex data requirements – cost, distribution and formattingGreater complexity with derivativesGreater portfolio turnoverGreater 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 factorsEx ante risk attribution normally built from multi factor model approachEx post risk adjusted performance attribution can be built from statistics such as tracking error / information ratio decompositionEx Post Risk AttributionBased on standard deviation of active returnsAttribution 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 assetAllocation impact built from size of asset active weight times active return volatility in asset relative to overall benchmark.Ex Post Risk Adjusted Performance AttributionInformation 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 crucialAnalysis is embedded within Northern Trust infrastructureImportant to ensure that data updates at source flow efficiently through to end analysis and attributionIndustry leading professionals researching new methodologies and approachesActive participation in external performance conferencesClose ties with performance professionals in the industryContinued investment in capital expenditureSenior management continue to comit resources to analysis and decision support capabilitiesDisplined approach to development, testing and implementationStaying on current with new investment approachesWorking with clients and asset managers to ensure new investment strategies are captured within performanceStrategic 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 communityDaily indexes information from all major index vendorsSpecialist benchmark team negotiating and managing index vendor relationshipsDaily benchmark building functionalityBenchmarks feeding attribution can be built daily and rebalanced monthlyStrategic alliances with third party index and characteristic providers
25 Current Trends, Future Needs Absolute / Hedge FundsSome strategies do not lend themselves to relative attribution decompositionContribution analysis is the start…but do need in-depth knowledge of investment decisions (e.g. – pairing)Derivatives – greater complexity and evolution of purposeAttribution ‘methodologies’ have existed for significant periods of timeTreatment of ETD v OTC’sBut again, need in-depth knowledge of investment decisions to ensure attribution reflective of investment processActive vs. passive currency managementNeed to strip out forward contracts between passive and active decisionsNeed to allocate cost of hedging to appropriate investment deskSeparate measurement of currency overlay programsLDIA valuation process – decomposition of asset value versus liability valueNon published benchmarks – derived from asset exposureCharacteristics enhancements and custom indexes development