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

index is high. For example, for the S&P 500, the contribution of high and low emerging-market-exposure portfolios in July 2004-June 2005 was -0.70% and 5.04%, respectively. Similarly, in terms of contribution of high and low local market exposure portfolios to the performance of the three developed market indices, we note that the difference in contribution during certain years is high. For example, for the S&P 500, the contribution of high and low local-market-exposure portfolios in July 2004-June 2005 was 4.29% and -1.27%, respectively. We also analysed the performance attribution conditioned on difference market conditions. In particular, we analysed performance attribution of Developed market indices to stocks with different levels of emerging market exposure, depending on the spread in return of emerging and developed market equity. We note that when the spread is positive, the stocks with high exposure to emerging markets contribute more to the performance of the index than stocks with low exposure to emerging markets, and vice-versa. Also, we analysed the performance attribution of Developed market indices to stocks with different levels of local market exposure, depending on the spread in return of local and foreign market equity. Here also, we note that when the spread is positive, the stocks with high exposure to local markets contribute more to the performance of the index than stocks with low exposure to the local markets, and vice-versa. Overall, the results in this section suggest that there is a difference in the contribution of stocks with varying levels of geographic exposure (either emerging/

Similarly, during bear markets, when the return on the local market was lower than that of the foreign market, stocks with low local market exposure contributed more (1.18%) to the performance of FTSE Developed Asia Pacific than stocks with high exposure to local market (-0.69%). Broadly these figures suggest that when the local markets fare better than foreign market equity, the stocks with higher exposure to local markets contribute more to the performance of indices than stocks with lower exposure to local market. Likewise, when local market equity performs worse than foreign market equity, the stocks with high exposure to local markets contribute less to the performance of indices than stocks with lower exposure to local markets. As we measure the exposure of stocks in terms of proportion of sales coming from local or foreign markets, it again underlines the usefulness of using geographic segmentation data in analysing the performance of equity portfolios. Summary In this section, we analysed the contribution of high and low emerging market (and local market) exposed portfolios to the performance of the three developed market indices. As both the high and low portfolios represent equal market capitalisation of the index, any deviation from equal contribution can be interpreted as outperformance/ underperformance of the respective geographically exposed segment. In terms of contribution of high and low emerging-market-exposed portfolios to the performance of the three developed market indices, we note that there are certain years when the difference in their contribution to the performance of the

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An EDHEC-Risk Institute Publication