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 3: Application to Performance Attribution

whereas that of the low emerging-market -exposure portfolio was 1.49%. In July 2010-June 2011, the contribution of the high emerging-market-exposure portfolio was 12.74%, while that of the low emerging market portfolio was 5.39%. To summarise, we note that there are certain years when the contribution of portfolios with different levels of sales exposure to emerging markets is similar but there are also years when the difference in contributions of high and low emerging market portfolios is large, which highlights the need to analyse the performance of equity portfolios in terms of their geographic exposure. In what follows we analyse the contribution of portfolios formed on the basis of local market exposure to the performance of the three developed market equity indices.

During this period the performance of emerging market stocks was positive whereas that of developed market stocks was negative 11 . Perhaps this explains why companies with high sales exposure to emerging markets managed to contribute positively while companies with high sales exposure to developedmarkets contributed negatively. Table 10 corresponds to performance attribution for FTSE Developed Asia Pacific. The observations are similar to the ones highlighted above. There are years when the contribution of high and low emerging-market-exposure portfolios to the excess return of the FTSE Developed Asia Pacific index is similar (e.g. July 2004-June 2005), but there are years when the difference in contribution is noticeable. For example, in July 2006-June 2007, the contribution of the high emerging- market-exposure portfolio was 6.35%

11 - During July 2007-June 2008, the return on MSCI World and MSCI Emerging index was -10.18% and 4.89%, respectively.

Table 9: Return contribution to STOXX Europe 600 of stocks with varying Emerging Market exposure: The table below reports the breakdown of the annualised excess return of STOXX Europe 600 into the performance of three portfolios formed by sorting stocks based on their sales exposure to emerging markets. To form portfolios, we sort stocks by their emerging markets sales exposures. We then select the top stocks up to 33% of cumulative market cap (High), and the bottom stocks up to 33% cumulative market cap (Low), and form cap-weighted high and low exposure portfolios based on these sorts. Stocks which are not included in either extreme portfolio form the medium portfolio (Mid). The portfolios are formed at the end of June every year, using geographic segmentation data for the previous fiscal year. The statistics are based on daily total return series (with dividends reinvested) in USD. The portfolio constituents are weighted by their total market capitalisation in (USD) at the end of June every year. The figures for High and Low portfolios are highlighted in bold. For performance attribution, we use OLS regression, wherein the dependent variable is excess return on STOXX Europe 600 and independent variables are excess return on High, Mid and Low portfolios. All returns are in excess of the risk-free rate. The risk-free rate in US Dollars is measured using return on the Secondary Market US Treasury Bills (3M). The source of geographic segmentation data is DataStream (Worldscope). In the event that the excess return on the index is negative, we do not calculate % contribution as it gives a less meaningful figure. Such figures are replaced by NA. STOXX Europe 600 High Mid Low Unexplained Contr. % Contr. Contr. % Contr. Contr. % Contr. Contr. % Contr. July 2004 - June 2005 15.19% 4.53% 29.82% 4.03% 26.53% 5.74% 37.79% 0.89% 5.86% July 2005 - June 2006 22.06% 7.92% 35.90% 7.06% 32.00% 5.84% 26.47% 1.24% 5.62% July 2006 - June 2007 28.55% 8.98% 31.45% 9.37% 32.82% 9.71% 34.01% 0.49% 1.72% July 2007 - June 2008 -14.03% 0.06% NA -7.42% NA -6.20% NA -0.46% NA July 2008 - June 2009 -34.35% -7.48% NA -16.60% NA -11.57% NA 1.31% NA July 2009 - June 2010 6.62% 2.92% 44.11% 3.45% 52.11% -0.52% -7.85% 0.78% 11.78% July 2010 - June 2011 37.11% 15.22% 41.01% 14.43% 38.88% 7.81% 21.05% -0.35% -0.94% July 2011 - June 2012 -16.11% -5.32% NA -7.36% NA -4.53% NA 1.09% NA July 2012 - June 2013 20.34% 3.94% 19.37% 11.01% 54.13% 5.90% 29.01% -0.51% -2.51% July 2013 - June 2014 30.35% 8.85% 29.16% 10.78% 35.52% 10.98% 36.18% -0.25% -0.82%

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