Accounting for Geographic Exposure in Performance and Risk Reporting for Equity Portfolios

Accounting for Geographic Exposure in Performance and Risk Reporting for Equity Portfolios — March 2015

Section 1: Data and Methodology

definitions provided by other established organisations. For example, to map countries that constitute the OECD, we rely on the list of OECD members provided by the OECD. We refer readers to Table 1 in the Appendix which lists the source used by us to define geographic regions which are not defined in the United Nations division of regions into sub-regions and countries. Note that even if the definition of special regions overlaps with the United Nations' grouping, we ensure no country is mapped more than once. We explain this in detail in the next sub-section. For a quick overview, assume a company reports its sales for two segments: Nordic and Europe. We design an algorithm in such a way that we first map a geography (into individual countries) which is more precisely defined. In this case, we first map Nordic to its five member countries (Denmark, Sweden, Norway, Finland and Iceland, which are also European countries) and then we map Europe to countries defined by the United Nations but excluding the five Nordic countries already mapped earlier. We note that over our sample period of 10 years, the companies in the S&P 500, STOXX Europe 600 and FTSE Developed Asia Pacific reported 538, 1,251 and 626 unique geographies, respectively. In case the name of a geography does not make any clear sense (such as "mountain"), we assign sales corresponding to that geography as zero. Once each reported geographic segment is mapped to different countries, we break the sales corresponding to that geographic segment into country-level sales within the geography. The proportion of sales assigned to a country within a geography is the same as the weight of the country's GDP in the overall GDP of the geography.

(such as "sales coming from Brazil and North America").

Note that the objective of Section 2 of this paper is to analyse sales of an index coming from the four regions and from developed and emerging markets. Even if we assume a company precisely reports sales breakdown into the four regions mentioned above, we would not be able to map the sales coming from developed and emerging markets within the region. For example, if a company reports sales from Europe, we would need a methodology to break those sales into "Developed Europe" and "Emerging Europe". Therefore, to achieve our objective, which is to report sales from an index into four regions and into developed and emerging market, we broadly follow a two step process. To disaggregate sales of each possible reported geography into countries, first we manually map that geography to individual countries. If the name of the reported geography is same as that provided by the United Nations, it is fairly simple to map that geography to countries that constitute that geography (as per the United Nations grouping). For example, if a company reports sales coming from Central America, we map Central America to the United Nations list of countries which constitute Central America. In the event that a company reports geography such as Eurozone, Balkan and CIS, which are not specified by the United Nations, to identify countries that fall in these groupings we rely on Step 1 : Disaggregate sales for each reported geographic segment into country-level sales

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An EDHEC-Risk Institute Publication