Multi-Level Attribution

(1)

(2)

Multi-level attribution

Attribution

Multi-level

Explain difference between actual

and benchmark performance

Refers to multiple levels of decision

making in the investment process

Multi-level

Attribution

Explain excess performance based

on investment decision process

(3)

Multi-level attribution - Example

Currency SAA Total Fund Fixed Income APAC Manager Market SAA Market TAA Equities Alternatives UK US Manager Manager … … … USD EUR GBP IG HY Listed Direct Currency Implementation FoF MN Currency TAA

Sovereign Credits Real Estate

Hedge Funds EU

(4)

Bottom up approach



Analyze excess return where securities and classifications are

used as a starting point.

Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Market

Equities Fixed Income

Currency overlay

(5)

Bottom up approach - example



Use Brinson type attribution models

• Assuming we have an index that can be classified accordingly

• Only two decisions; allocation over asset classes and selection

within each asset class

• Instead of grouping over securities, you can group over portfolios

(6)

Top down approach



Analyze excess return where the portfolio hierarchy is used as a

starting point.

Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Security Market

Equities Fixed Income

Currency overlay Alternatives APAC EU US UK Sov Cred RE HF Securities Securities Securities Securities Securities Securities Securities Securities Securities

(7)

Top down approach - example



Consecutive Brinson type attribution models

Scaled

by

Portfolio

Weight

(8)

Top down approach - example



Consecutive Brinson type attribution models



Bottom up attributions create a simple decision hierarchy; only one

allocation and selection decision

(9)

Traditional approach - Limitations



The top down approach is a first step into a decision based

approach.



However it still does not solve some issues that are common in

(institutional) multi-asset class portfolios:

• Strategic asset allocations versus dynamic and tactical asset allocations

• Liability matching versus return portfolios

• Overlay structures: Currency overlay, duration overlay, global TAA

• Allocation to illiquid asset categories

• Benchmark inconsistencies

• Specific investment strategies; absolute return, tilting, smart beta ...

(10)

Decision based approach



Analyze excess return where the decision process is used as a

(11)

Decision based – Strategic decisions



Multiple strategic / tactical asset allocation decisions:

Strategic Asset Allocation

(SAA)

Tactical Asset Allocation (TAA)

Actual Asset Allocation (ACTUAL) Operational Decisions Modified Asset Allocation

(MAA)

Long term (10 year view) asset allocation of pension scheme

Shorter term (3 year view) asset allocation of pension scheme

Short term (1 year view) asset allocation of pension scheme

Allocation based on actual positions

Added Value Board decision

Added Value Investment Committee decision

Added Value Investment Organization decision

Added Value (External) Managers decisions

(12)

Contribution

SAA

TAA

excess

SAA

TAA

excess

total

Equities

40,00%

45,00%

5,00%

4,45%

0,00%

0,15%

Fixed Income

50,00%

45,00%

-5,00%

-0,68%

0,00%

0,11%

Alternatives

10,00%

0,00%

0,28%

0,00%

Portfolio

100,00% 100,00%

0,00%

1,47%

1,73%

-0,26%

0,26%

Weight

Return

Decision based – Strategic decisions



The added value of the TAA decision over the SAA

Market SAA Market TAA

(13)

portfolio benchmark futures portfolio benchmark futures timing futures total Equities 46,60% 45,00% 5,00% 4,27% 4,45% 4,06% 0,05% -0,02% 0,03%

Fixed Income 45,20% 45,00% -5,00% -1,26% -0,68% -1,07% 0,00% 0,02% 0,02%

Alternatives 8,20% 10,00% 0,00% 2,07% 0,28% 0,00% 0,02% 0,00% 0,02%

Weight Return Attribution

Decision based – Implementation decisions



The added value of the TAA implementation decision

Fixed Income Market TAA Equities Alternatives Futures Overlay Direct Investments Futures Overlay Direct Investments

6bp

0bp

(14)

Decision based – Implementation decisions

Fixed Income Market TAA Equities Alternatives Futures Overlay Direct Investments Futures Overlay Direct Investments

In summary:

6bp

0bp

Market SAA Market TAA

26bp

147bp

173bp

179bp

Contribution

All fund level decisions

1,79%

SAA decision

1,47%

TAA decision

0,26%

Implementation TAA decision

0,06%

(15)

Decision based – Illiquid investments



Include illiquid investments such as direct RE in overall analyses

Alternatives Listed Direct FoF MN Real Estate Hedge Funds

portfolio benchmark excess portfolio benchmark excess allocation selection total Real Estate 38,00% 30,00% 8,00% 5,10% 5,10% 0,00% 0,39% 0,00% 0,39% Hedge Funds 62,00% 70,00% -8,00% 0,22% -1,78% 2,00% 0,17% 1,24% 1,41% Alternatives 100,00% 100,00% 0,00% 2,07% 0,28% 1,79% 0,55% 1,24% 1,79%



But is this really an explicit allocation decision?

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portfolio benchmark excess portfolio benchmark excess allocation selection total Liquid 87,00% 86,00% 1,00% 1,62% -0,50% 2,12% -0,01% 1,85% 1,84%

Illiquid 13,00% 14,00% -1,00% 5,10% 5,10% 0,00% -0,05% 0,00% -0,05%

Alternatives 100,00% 100,00% 0,00% 2,07% 0,28% 1,79% -0,06% 1,85% 1,79%

Decision based – Illiquid investments



Change model to reflect real decisions:

Liquid Alternatives Listed FoF MN Real Estate Hedge Funds Alternatives Direct Real Estate Illiquid Alternatives

portfolio benchmark excess portfolio benchmark excess allocation selection total Real Estate Listed 28,74% 18,60% 10,13% 5,10% 5,10% 0,00% 0,49% 0,00% 0,49%

-6bp

(17)

Decision based – Illiquid investments



Change model to reflect real decisions:

Liquid Alternatives Listed FoF MN Real Estate Hedge Funds Alternatives Direct Real Estate Illiquid Alternatives

Contribution

All alternative decisions

1,79%

-6bp

61bp (

=70bp x

W

eight)

124bp

28bp

207bp

22bp

83bp

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Decision based – Benchmark policy

Equity UK FTSE Manager 1 FTSE Manager 2 MSCI UK Manager 3 FTSE Manager 1 FTSE ex Tobacco Manager 2 MSCI UK SRI Manager 3 FTSE

Manager 1 Manager 2 Manager 3

Added Value Benchmark Inconsistencies Added Value Exclusion Policy Added Value External Managers

Overall Return Manager Return Restricted Return Weight Return Manager 1 FTSE 5,00% FTSE 5,00% FTSE ex Tabacco 4,00% 40,00% 6,20%

Manager 2 FTSE 5,00% MSCI UK 6,00% MSCI UK SI 5,00% 25,00% 4,70%

Manager 3 FTSE 5,00% FTSE 5,00% FTSE 5,00% 35,00% 6,70%

Equity UK 5,00% 5,25% 4,60% 100,00% 6,00%

benchmark portfolio

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Decision based – Benchmark policy

Equity UK FTSE Manager 1 FTSE Manager 2 MSCI UK Manager 3 FTSE Manager 1 FTSE ex Tobacco Manager 2 MSCI UK SRI Manager 3 FTSE

Manager 1 Manager 2 Manager 3

25bp

-65bp

140bp

500bp

525bp

460bp

600bp

Contribution

All Equity UK decisions

1,00%

Benchmark inconsistencies

0,25%

(20)

Decision based – Currency decisions



Use same concepts to model the investment decisions with respect

to the management of foreign currencies.

Currency SAA

Currency Implementation

Currency TAA

Contribution

All currency decisions

0,07%

Currency proxy's

-0,02%

Currency bets

0,07%

Implementation

0,02%

(21)

Decision based – Currency decisions

USD 20% EUR 50% GBP 5% JPY 15% HKD 5% BRL 5% Market Investments Strategic BM USD 10% EUR 85% GBP 5% JPY 0% HKD 0% BRL 0% USD -10% EUR 35% GBP 0% JPY -15% HKD -5% BRL -5% USD -11% EUR 34% GBP 0% JPY -13% HKD -4% BRL -6% USD -21% EUR 34% GBP 0% JPY -13% HKD 0% BRL 0% Currency Overlay Currency Policy Fund Added Value Currency policy Added Value Timing Added Value Proxy Added Value Currency bets

(22)

Decision based – Example

Currency SAA Total Fund Fixed Income APAC Manager Market SAA Market TAA Equities Alternatives UK US Manager Manager … … … USD EUR GBP IG HY Listed Direct Currency Implementation FoF MN Currency TAA

Sovereign Credits Real Estate

Hedge Funds EU

(23)

Decision based – All decisions

Currency SAA Total Fund Market SAA Market TAA Currency Implementation Currency TAA Fixed Income Market TAA Equities Alternatives Futures Overlay Direct Investments Futures Overlay Direct Investments Currency Proxy USD EUR GBP IG HY Sovereign Credits Liquid Listed FoF MN Real Estate Hedge Funds Direct Real Estate Illiquid APAC US … … EU UK …

FTSE MSCI UK FTSE FTSE (R) MSCI (R) FTSE

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Decision based – All decisions



All market and currency decisions put together

Combine the decision based top down

approach with bottom up analytics to

Contribution

Fund Strategy

0,85%

Fund actual performance

1,04%

Added value all decisions

0,19%

Market decisions

0,12%

Currency decisions

0,07%

Contribution

Currency Strategy

-0,62%

Currency proxy's

-0,02%

Currency bets

0,07%

Implementation

0,02%

All currency decisions

-0,55%

Currency Decisions

Contribution

SAA decision

1,47%

All tactical decisions

0,32%

TAA decision

0,26%

Implementation TAA decision

0,06%

All equity decisions

-0,08%

Region allocation decision

-0,08%

Benchmark inconsistency

0,02%

Exclusion policy

-0,04%

Manager decisions

-0,04%

All fixed income decisions

-0,26%

Market allocation decision

-0,10%

Manager decisions

-0,16%

All alternative decisions

0,15%

Liquidity decision

0,00%

Allocation decision

0,05%

(25)

Next step: Improve decision making

Decision based performance attribution should be an integrated step in

the risk management process.



Explain differences between strategy and implementation

based on investment decisions.



Use ex-post results to identify core competences in the

investment decision process.



Monitor utilized risk budgets relative to the allocated risk

budgets.



Identify possible regime shifts; assess whether observed

realizations fall within the range of ex-ante expectations.

Learn from the past to improve decision making!

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Portfolio 1 Portfolio 2 Portfolio 3 … Portfolio XAggregation 1Aggregation 2 … Aggregation Y

Ut ili ze d R is k B ud ge t Ex-Ante Ex-Post

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