Global Performance Evaluation

Local currency = foreign currency

Domestic currency = base currency

Return in domestic currency = capital gain + cash flow + e *(1+CG+CF) (all in foreign currency)

Global Portfolio Attribution

R(p,d) = Sumj(wj*CGjl)+Sumj(wj*Ijl)+Sumj(wj*Cj)

R(p,d) return of portfolio in domestic currency

wj weight of portfolio in market j

CGjl capital gain in market j in local currency

Ijl income yield in market j in local currency

Cj currency gain of currency j

Cj = ej(1+CGj+Ij)

If we assume the systematic risk of the portfolio in market j is the same as the benchmark in market j (Rb,j), then the effect of security selection is:

R_sel = Sumj(wj*(Rp,j – Rb,j))

Market Allocation effect (in local currency): ability to select outperformaing market (wj)

Sumj((wjp-wjb)*Rbjl)

Currency Allocation effect (accompanying market allocation effect)

Sumj(wjpCjp – wjbCjb)

Combining Everything Together:

R =

Benchmark domestic return + market allocation + currency allocation + security selection + yield component

= Sumj(wbj*Rbjd) (in domestic) + Sumj((wpj-wbj)*Rbjl) + Sumj(wpj*Cpj-wbj*Cbj) + Sumj(wpj*(Rpjl-Rbjl))+Sumj(wpj*Ipj)

*** The currency allocation already captured the effect of principal, dividend and capital gain.

*** Benchmark domestic return captured dividends, capital gains and currency effect of benchmark

Passive currency management:

1)    Hedging Principals

2)    Allowing exposures as determined by investment decision. But since this is different from the exposures of the global benchmark, it is still an active currency management.

RA_total=RP – RB = (1+RP2)*(1+RP1)-1 - ((1+RB1)*(1+RB2)-1)

= (RP2-RB2) + (RP1-RB1) + RP1*RP2-RB1*RB2

= RA2+RA1 + RA1*RB2+RA2*RB1+RA1*RA2

= RA2*(1+RB1+RA1)+RA1*(1+RB2)

=RA2 * (1+RP1)+RA1*(1+RB2)

= period 2 active management on period one total return + period normal benchmark return on period 1 active return

Multiple period Attribute Analysis

1. Cannot by simply adding the attribution from each period
2. Cannot by compounding contribution from each period
3. Cannot assume as proportion each period
4. Each attribute’s 1^st period contribution must be compounded by the benchmark return of the second period
5. Each attribute’s 2^nd period contribution must be compounded with the total

   portfolio return of the 1^st period.

Sector/Market Risk – Measure for passive benchmark portfolio

Selection Risk – risk due to deviation from benchmark