Question

FINC 350 – Attribution Assignment

1. What is the purpose of macro-attribution analysis?

2. Identify the categories in the attribution analysis and what they represent.

3. The Fund has a 2% policy-weight to emerging market equities – a sub-category within the international equity bucket. The broad category benchmark is MSCI-EAFE and has a 20% policy weight. MSCI-EAFE returned 2.5% and MSCI-EME returned 3.5% during the last month. What is the style-bias impact? Show calculations.

4. Instead of a passive ETF, we decided to hire an active manager whose objective is to outperform the Barclays Aggregate Index. Given what was just proposed to Advisory Board, what would be the VAM impact if during the first month of live performance the manager outperformed its benchmark by 1.2%? Show calculations.

5. Using the information in #4 above, what is the VAM impact in Allocation Tactics if our actual allocation to fixed income was 3 percentage points below policy? Show calculations.

6. In the Alternatives bucket, we have a custom benchmark. Assume the Fund is at target allocation for Alternatives. The underlying ETFs each has their own custom benchmark. Identify which categories in the attribution analysis would be impacted if the underlying ETFs performed in line with their respective benchmark AND each respective benchmark outperformed the custom Alternatives benchmark. Show calculations using appropriate notation.

Answer 1

1. Macro attribution takes a top-down approach to attribution, rather than the traditional bottom-up approach. Using this method, managers can understand the decisions underlying a strategy. While traditional forms of performance attribution rely on expanding the underlying fund assets, macro attribution lets you appropriately analyze strategic investment decisions for fund of funds portfolios. Other methods cannot calculate performance of the fund as an aggregate; macro attribution treats a fund the same way traditional methods treat securities, so performance is viewed for the fund as a whole rather than its component securities. Macro attribution displays the performance of a particular strategy, manager, or asset class. The main goal is of this analysis to gain insight into the decisions made by the sponsor and measure the effect of those decisions on the portfolio

The inputs to macro attribution analysis are:

*Policy allocations
*Benchmark portfolio returns
*Fund returns, valuations and external cash flows

The level of macro analysis are:

*Net contributions
*Risk-free asset
*Asset categories
*Benchmarks
*Investment managers
*Allocation effects

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