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

3.2.2 Conditional analysis (bull and bear market) - Performance attribution of local market exposure to the performance of Developed market indices In this section we analyse the performance attribution of local market market exposure to the performance of developed market indices conditioned on the performance of local market equity relative to foreign market equity. In the table below corresponding to the S&P 500, we note that during bull markets, i.e. the performance of local market equity (MSCI USA) is higher than that of foreign market equity (MSCI AC World ex- USA), stocks with high exposure to local markets contributed more (4.63%) than stocks with low exposure to local markets (3.29%). Similarly, during bear markets, i.e. when returns on local markets were lower than foreign markets, stocks with low local market exposure contributed more (1.29%) to the performance of the S&P 500 than stocks with high exposure to local markets (0.15%).

markets, when the return on emerging markets was lower than developed markets, stocks with low emerging market exposure contributed more (-0.25%) to the performance of FTSE Developed Asia Pacific than stocks with high exposure to emerging markets (-4.59%). Overall, the figures reported in the previous three tables suggest that when the emerging markets fare better than developed market equity, the stocks with higher exposure to emerging markets contribute more to the performance of indices than stocks with lower exposure to emerging markets. Similarly, when emerging market equity performs worse than developed market equity, the stocks with higher exposure to emerging markets contribute less to the performance of the developed market indices than stocks with lower exposure to emerging markets. Note that as we measure the exposure of stocks in terms of proportion of sales coming from emerging markets, it highlights the usefulness of using geographic segmentation data in analysing the performance of equity portfolios.

Table 17: Return contribution to S&P 500 of stocks with varying Local Market exposure (Conditional Analysis based on Domestic vs. Foreign market return spread): The table below reports the breakdown of the annualised excess return of the S&P 500 into the performance of three portfolios formed by sorting stocks based on their sales exposure to the United States market. We report performance attribution separately for bull and bear markets, wherein bull (or bear) market is defined as calendar year quarters where the spread between domestic and foreign market return is positive (or negative). The benchmarks for domestic and foreign markets are MSCI USA and MSCI AC World ex-USA, respectively. To form portfolios, we sort stocks by their United States 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 the excess return on the S&P 500 and independent variables are excess returns 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 the 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.

High

Mid

Low

Unexplained

S&P 500

Contr.

% Contr.

Contr.

% Contr.

Contr.

% Contr.

Contr.

% Contr.

4.63% 43.17% 0.15% 4.44%

3.29% 30.68% 1.29% 38.81%

Bull Market

10.72%

2.89% 26.96%

-0.09% -0.81%

Bear Market

3.32%

1.50% 45.16%

0.38% 11.59%

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