1. Asset Management Lecture 15

2. Outline for today Performance Attribution

3. Decomposing overall performance into components Components are related to specific elements of performance Example components Broad Allocation Industry Security Choice Performance Attribution

4. For the managed portfolio P, set up a ‘Benchmark’ or ‘Bogey’ portfolio B: Suppose there are n asset classes Select a benchmark index for each asset class B has fixed weights in asset classes Target weights Performance Attribution

5. Calculate the return on the ‘Bogey’ and on the managed portfolio Explain the difference in return based on component weights or selection Summarize the performance differences into appropriate categories Performance Attribution

6. B: Bogey portfolio P: the managed portfolio Formula for Attribution

7. Contribution from asset allocation Contribution from security selection Total contribution from asset class i

8. Performance Attribution Portfolio return from ith asset class = r Pi W Pi

9. Example A portfolio invests in three asset classes Equity Bonds Cash (money market securities) The portfolio return over the month is 5.34%

10. Managed Portfolio PortfolioActualPortfolio ComponentWeightReturn Equity0.77.2800%5.0960% Bonds0.071.8900%0.1323% Cash0.230.4800%0.1104% Return on Managed5.3387%

11. Example The choice of Bogey portfolio: a passive benchmark Passive (index) benchmark in each asset class Passive (“neutral”, “usual”) asset allocation Depends on investor risk tolerance

12. Example Bogey Portfolio WeightReturn onPortfolio ComponentIndexBenchmarkIndexReturn EquityS&P5000.65.8100%3.4860% BondsLehman Index0.31.4500%0.4350% CashMoney Market0.10.4800%0.0480% Return on Bogey3.9690% Excess return of managed portfolio= 5.34%-3.97%=1.37%

13. Performance Attribution Summary Asset Allocation0.3099% Selection EquityReturnsWeights Sector Allocation1.2898%0.70.9029% Security Selection0.1802%0.70.1261% 1.4700%0.71.0290% Fixed Income0.4400%0.070.0308% Total Excess Return on the Portfolio1.3697%

14. Example Actual WeightBenchmarkExcessMarketPerformance in PortfolioWeight ReturnContribution Equity0.70.60.15.8100%0.5810% Fixed Income0.070.3-0.231.4500%-0.3335% Cash0.230.10.130.4800%0.0624% Contribution of Asset Allocation0.3099% Contribution of Asset Allocation

15. Performance Attribution Summary Asset Allocation0.3099% Selection EquityReturnsWeights Sector Allocation1.2898%0.70.9029% Security Selection0.1802%0.70.1261% 1.4700%0.71.0290% Fixed Income0.4400%0.070.0308% Total Excess Return on the Portfolio1.3697%

16. Example Contribution of Security Selection PortfolioIndexExcessPortfolio Performance Weight Contribution Equity7.2800%5.8100%1.4700%0.71.0290% Fixed Income1.8900%1.4500%0.4400%0.070.0308% Contribution of Selection1.0598%

17. Performance Attribution Summary Asset Allocation0.3099% Selection EquityReturnsWeights Sector Allocation1.2898%0.70.9029% Security Selection0.1802%0.70.1261% 1.4700%0.71.0290% Fixed Income0.4400%0.070.0308% Total Excess Return on the Portfolio1.3697%

18. Example Contribution to sector selection

19. Performance Attribution Summary Asset Allocation0.3099% Selection EquityReturnsWeights Sector Allocation1.2898% Security Selection0.1802% 1.4700%0.71.0290% Fixed Income0.4400%0.070.0308% Total Excess Return on the Portfolio1.3697% =1.47%-1.2898%

20. Performance Attribution Summary Asset Allocation0.3099% Selection EquityReturnsWeights Sector Allocation1.2898%0.70.9029% Security Selection0.1802%0.70.1261% 1.4700%0.71.0290% Fixed Income0.4400%0.070.0308% Total Excess Return on the Portfolio1.3697%