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

"Germany", and "Other countries". For the three country-level reported segments (Japan, Korea, Germany), assigning sales is straightforward. Then, caution is required in assigning sales to countries within Europe. "Germany" is in Europe and sales have already been assigned to it. In assigning sales to countries within "Europe" as per their GDP weight, we exclude Germany from aggregate GDP of "Europe". Next, when we assign sales to countries within "Other Countries" we consider all countries falling in the United Nations' list except the countries that have already been assigned sales (countries in "Europe", "Japan", "Korea" and "Germany". Step 2: Aggregate country-level sales back into sales from the four desired regions and into developed and emerging market. Once a company's sales are disaggregated into various countries, aggregating it into the four regions or Developed vs. Emerging is straightforward. For example, for a given fiscal year, the sales of the S&P 500 index coming from the Americas is the sum of sales of each company coming from countries that fall within the Americas. Similarly, for any particular year, the sales of the S&P 500 index coming from Developed markets is the sum of sales of each company coming from countries that are classified as Developed. Data issues Here we describe the quality of the geographic segment level sales data that we use for this research. To summarise, we dealt with the following issues (see Table 1 for details).

This methodology is similar to the one followed in Tuna, et al. (2014). We acknowledge that this inference from regional sales to country-level sales induces estimation error in reporting but in the absence of country-level sales data, we believe this inference is necessary. Given that the mapped country-level exposures of a firm may be based on our assumption that sales within a region can be mapped in proportion to GDP, we will base our main inferences in our study on high-level exposures to aggregate categories, e.g. to broad regions such as “Europe” or to broad categories such as “Emerging Markets”. There are complex ways in which companies report geographic segments but we design an algorithm in such a way that no country is mapped more than once. The principle we follow is the following: We first look for a reported geography which is most precisely defined and map it to individual countries. Next, we look at that reported geography which is next in order of precision and map it to individual countries. At this stage, if a country is already mapped in the previous stage, we do not map it again to the geography we are considering at the current stage. We then move to the next reported geography in the order of precision and repeat the process of mapping it to different countries (excluding countries already mapped in the previous stage) till all reported geographies are assigned to individual countries. To understand the way we do it, let us consider the following example. A company reports sales for the following five segments: "Europe", "Japan", "Korea", Avoiding multiple assignments of sales to one country

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