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Evaluating Portfolio Performance

Evaluating Portfolio Performance. Ch.20b. Universe Comparison. Divide performance of all active managers in the same category (e.g., Canadian equity) into quartiles. . Performance Attribution Analysis. For managers that are benchmarked

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Evaluating Portfolio Performance

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  1. Evaluating Portfolio Performance Ch.20b

  2. Universe Comparison Divide performance of all active managers in the same category (e.g., Canadian equity) into quartiles.

  3. Performance Attribution Analysis • For managers that are benchmarked • Identify sources of relative return: Where did the superior/inferior performance come from? • Can attribute a portfolio’s relative return, rP - rB, to: • Manager’s ability in asset allocation • Ability in sector selection within an asset class • Ability in stock selection within a sector

  4. Performance Attribution Analysis • Let rBi be the return on the ith asset class in the benchmark (e.g. i = equities or bonds) • Let wBi be the weight of the ith asset class in the benchmark, B: • Therefore: • Similarly, for the manager’s portfolio, P:

  5. Example of a benchmark for multi asset class portfolios • Harvard Endowment Fund: The Policy Portfolio... serves as a measuring stick against which we judge the success of our active investment management activities.

  6. Performance Attribution Analysis • The manager’s active return, rP- rB, can be written as: where “i” is an asset class (e.g., equity, fixed income...etc.) • With some manipulation, can be re-written as: Active return due to asset allocation Active return due to security selection within an asset class

  7. Numerical Example Number to be used later Total contribution, rP– rB, is 0.3099% + 1.06% = 1.3699%

  8. Graphical Representation • Provide graph rather than table to clients: Contribution to Relative Return Percent Total portfolio Asset allocation Security selection

  9. Performance Attribution Analysis • Security selection comes from: • Sector selection and • Stock selection within each sector • Can further divide performance into these two categories • Sector selection: • Source of relative return: From over-/under-weighting certain sectors relative to the benchmark

  10. Sector Selection If sector return is high, but you under-weighed that sector  contributed negatively Contribution from stock selection within a sector is: 1.47% – 1.0076% = 0.4624%

  11. Graphical representation • If both numbers are positive, can use a pie chart; else, use bar chart

  12. Chapter 20 • Can exclude pp.729-746

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