At last week's Performance Measurement Forum meeting in Rome we briefly discussed the issue of "pricing effects." That is, the effect that can arise when your portfolio's prices don't match what's in the index. Recall that we discussed this on November 4.What I failed to mention earlier is this: what happens if you don't have the index's constituents? For example, what happens if your bond index doesn't give you the securities and the details (such as prices) they include?
A: you obviously won't know whether or not there IS a pricing effect.
B: if there is one, you're out of luck! Unless you can persuade the index provider to give up these details, you can't report on the effect. MEANING that your selection effect will be less than accurate. How "less than"? We just won't know. Sorry :-(
Can you still have attribution if you're missing security details? YES, of course! As long as you have the market values and weights for sectors or subsectors or other groupings you're interested in, you can run attribution! :-)
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Its a common problme in the fixed income and international world where the portfolio prices are different to the benchmark prices. Although prices are different, regardless of the source, the securities rate of growth should be very close. Thus, pricing effect shouldn't be an issue in an attribution report (if we're not looking at a return analysis, one could argue this IS an important factor in the fixed income world).
ReplyDeleteAs I mentioned in the past comment, please keep your analysis simple. A typical fixed income portfolio doesn't generate much excess returns (either positive or negative) when compare to an equity portfolio. If you start slicing and dicing the excess returns, each excess return buckets would show a smaller and smaller numbers. Sure, a fixed income portfolio manager would say its important (even though the users have no clue how the numbers are derive). However, would the client state the same?
In my opinion, if PM can't beat the benchmark, don't show me a report explaining how my money was lost. Save my time and the PM's team efforet and just show me my monthly portfolio market values.
In addition to what was submitted, most of the attribution discussed is baed on an ex-post analysis.
ReplyDeleteMaybe its time the market should be discussing about an "Ex Ante" attribution report. Using a factor base approach (example: for fixed a PCA model) to regress the likelyhood of the performance into the future (between 6 months to 1 year). If there is already a risk based attribution method (I think the proper name should be call a performance attribution), why not an Ex-Ante attribution report?