Wednesday, April 18, 2012

Don't forget about the benchmark

One thing I will discuss at this year's Spaulding Group PMAR (Performance Measurement, Attribution & Risk) conferences is the impact of benchmark changes to the attribution residual. While we recognize that the holdings-based model suffers from residuals when trades occur, one can easily overlook the contribution that can arise from benchmark turnover.

While doing my research, I initially set out to avoid any months that had any turnover in the index (I'm using, yes you guessed it!, the S&P 500). But finding months like this can be a challenge, and so I decided to ignore this rule. I had temporarily forgotten the basis for my initial plan (to not have to worry about the turnover), but was quickly reminded when I saw a residual with both the holdings and transaction-based approaches, when there was no activity in the period. How could this occur? Only one answer: turnover in the benchmark.

This is an important topic to address with vendors, if you're engaged in an attribution software search, and are looking for a transaction-based model: make sure the system is sensitive to benchmark turnover! Otherwise, you'll occasionally see a residual appear.


  1. David,
    Another reason to use daily attribution if the data is available.
    Then this kind of problem does not arise.

  2. Andre, actually the problem STILL arises (though at a much lower level) with daily holdings; there is no need for daily transaction-based, as its accuracy isn't improved as a result.

  3. Dave,
    I do not see how the problem with benchmark returns “STILL” arises. If a benchmark only readjusts its holdings ‘overnight’ and never trades during the day then going to daily excludes the possibility of benchmark trades in favor of only benchmark rebalancing. So daily calculations seem to me to clearly rid us of any problems with “residuals” from benchmark trades when the benchmark is a standard index as opposed to an actual fund.
    Also, it has been my repeated experience that below the total fund level, going from a buy-and-hold daily return calculation for the fund to a transaction-based daily return calculation makes a big difference in the results below the total fund level.

  4. Andre, I am speaking specifically regarding a monthly application of transaction-based. I will provide more details in a forthcoming article. Thanks, as always, for your comments.


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