Macro Performance & Micro Performance Attribution and their components?

CFA Level III
#1

Can someone explain this?

Macro Performance & Micro Performance Attribution and their components?

Thanks!

#2

Macro = NRABIA

#3

Yep, that’s all you need to know.

#4

haha. what the hell does NRABIA stand for?

#5

Net Contributions

Risk Free Asset

Asset Categories

Benchmarks

Investment Managers

Allocation Effects

#6

Now, that’s what I’m talking about.

The problem will be explaining each of these components. Or do you guys have any fast/easy way?

Just benchmark fund returns to:

Net-Contribution = the return of cash amount not invested RF - risk-free return on invested amount

Asset Categories?

Benchmarks?

Investment Mgrs - benchmark against the median returns of a pool of investment mgrs??

Allocation Effects?

#7

Asset categories is if the sponsor invested in each asset category at their strategic asset allocation, B/m is the weighted average returns of each b/m chosen to represent the asset class. You can think of the difference like misfit return (it is the return generated because the benchmark does not exactly match the asset class they are trying to replicate).

Finally, allocation effects is the residual, mostly due to cross products of managers doing poorly/well and changing the allocation of the entire portfolio over the measurement period. (but mostly all you need to know is that it is the residual.

#8

one thing: actual allocation only reflects in ALLOCATION effects…before this its only target allocations…

Net Contributions - here contribution earns zero return…value only increases by this amount

Risk Free Asset - here any intial value+net contributions earns risk free return

Asset Categories - summation of difference btn [asset category return (i.e. equity/bond) - risk free return) X policy weights of asset category]

Benchmarks - summation of difference btn [manager return within asset category benchmarks- asset category return (i.e. equity/bond) ) X policy weights of asset category x policy weight of managers in asset category]

Investment Managers - summation of difference btn [actual manager return within asset category benchmarks- manager return within asset category benchmarks) ) X policy weights of asset category x policy weight of managers in asset category]]

Allocation Effects - residual

#9

I understood these attribution concepts. But is a macro attribution question likely? Schweser says that you’d be probably asked to explain the components but a numerical question is more likely to be on micro attribution. So if there’s any example in CFAI; I’m sure there would be one, is it worth solving?

#10

I was under the same assumption untill i found few questions in SCH practise tests…CFAI always like to test from normally ignored or small text pieces so you never know…

#11

RS. You are brilliant.

I think though before you do Macro attribution you have to remember the inputs from the fund sponsor. I think thse are

  1. policy allocations

  2. benchmark returns

  3. cxpected returns , fund valuations

#12

Micro attribution is at the individual level and is performed on a sector. The total value added in any sector can be decomposed as

  1. Pure Sector Allocation ( weight in sector in portfolio - benchmark weight) x ( return in benchmark - average return in benchmark)

  2. Allocation/ Interaction -( weight in sector in portfolio - benchmark weight) x( return in portfolio - return in benchmark)

3.Within Sector security selection -( benchmark weight) x( return in portfolio - return in benchmark)

Facor based Micro attribution can also be performed where you consider h.ow the active exposure of each factor resulted in over/under performance.