IIPC Cosultig AG IRR Attributio Date: November 2011 Date: November 2011 - Slide 1
Ageda Itroductio Calculatio of IRR Cotributio to IRR IRR attributio Hypothetical example Simple example for a IRR implemetatio Critical aspects Commets ad questios Appedix: Profit ad loss attributio Refereces Cotact details ad disclaimer Date: November 2011 - Slide 2
Itroductio Date: November 2011 - Slide 3
Iitial commets o TWR attributio Decomposig the TWR is commo practice ad the mai method implemeted by performace attributio software providers, meas that: Portfolio ad bechmark returs are TWRs. Segmet ad stock returs are TWRs. Retur cotributios are calculated usig TWRs. Use of TWRs assumes that portfolio maager has o discretio over ay (exteral as well as iteral) cash flows. Impact of iteral as well as exteral cash flows are eutralized. Impact of over- / uderweightig of segmets or stocks is dealt by usig weights istead of cash flows. Date: November 2011 - Slide 4
Iitial commets o MWR attributio Decomposig the MWR is ot commo practice ad ot offered by performace attributio software providers, meas that: Decomposig the MWR or TWR usig the "MWR-cocept" is ot commo practice. The effect of cash flows is ot allocated properly. The maagemet effects may be misleadig. Date: November 2011 - Slide 5
Iitial commets o MWR Moey-weighted rate of retur (MWR) measures the retur of a portfolio i a way that the retur is sesitive to chages i the moey ivested: MWR measures the retur from a cliet s perspective where he does have cotrol over the (exteral) cash flows. MWR does ot allow a compariso across peer groups. MWR does allow a compariso agaist a bechmark (adjusted for cash flows). MWR is best measured by the iteral rate of retur (IRR). Calculatig, decomposig ad reportig MWRs is ot commo practice. MWRs are ot geerally covered by the GIPS Stadards - just for private equity ad closed ed real estate fuds. Date: November 2011 - Slide 6
Decompositio of MWR versus TWR The MWR allows a decompositio of the portfolio retur reflectig the cliet s mai ivestmet decisio: TWR Bechmark effect => reflects the retur cotributio based o the cliet s decisio to ivest his iitial capital ito a specific bechmark strategy (correspods to the TWR bechmark retur). TWR Maagemet effect => reflects the retur cotributio based o deviatig from the bechmark strategy by asset allocatio ad stock pickig (correspods to the TWR attributio effects). MWR Timig effect => reflects the retur cotributio of chagig the iitial ivested capital ito the bechmark strategy ad ito the asset allocatio of the portfolio (correspods to the differece betwee MWR ad TWR). Date: November 2011 - Slide 7
Decompositio of MWR Aother perspective The MWR allows also a decompositio of the portfolio retur without explicitly separatig the timig effect: MWR Bechmark effect => reflects the retur cotributio based o the cliet s decisio to ivest his capital ito a specific bechmark strategy (icludig the effect of chagig the iitial ivested capital). MWR Maagemet effect => reflects the retur cotributio based o deviatig from the bechmark strategy by asset allocatio ad stock pickig (icludig the effect of chagig the iitial ivested capital). Date: November 2011 - Slide 8
Compariso of differet decompositio approaches TWR TWR Bechmark effect + TWR + Maagemet effects MWR Timig effect MWR MWR Bechmark effect + MWR Maagemet effects TWR Bechmark effect + Timig TWR Bechmark effect Maagemet effects + Timig Maagemet effects Date: November 2011 - Slide 9
Geeral framework for decomposig returs (1/2) The MWR-calculatio ad MWR-attributio allow to defie a geeral framework for decomposig returs: That combies the differet views o performace (cliet versus portfolio maager). That coects the differet retur measuremet methods (TWR ad MWR). That coects the differet retur attributio methods (TWR ad MWR). That correspods to absolute profit & loss measuremet ad profit & loss attributio. Etc. Date: November 2011 - Slide 10
Geeral framework for decomposig returs (2/2) "Odd" questios ca be better aswered usig the geeral framework for decomposig returs; icludig MWRs! The retur is positive but I lost moey - how come? The segmet retur is positive but its retur cotributio is egative - how come? Multiplyig the weights with the retur does ot lead to my absolute profit - how come? What is my o average ivested capital? Date: November 2011 - Slide 11
Calculatio of IRR Date: November 2011 - Slide 12
First step towards IRR attributio Calculatio of the IRR for the portfolio. Calculatio of the IRR for the bechmark => by simulatig the portfolio's cash i- ad outflows also for the bechmark. Calculatio of the excess IRR. Date: November 2011 - Slide 13
Calculatio of the IRR for the portfolio (1/2) 0 = EMV P 1 + IRR P Y T + T 1 t=1 C P,t 1 + IRR P Y t 0 BMV P To calculate the MWR, i the idustry differet methodologies are used where all but oe are approximatio methods for the true MWR. I the followig the iteral rate of retur methodology (IRR) as the "true" MWR is used because it is ot oly the most precise method for calculatig a MWR but the oe methodology that solves the full calculatio problem. The IRR is the retur / iterest rate that causes the edig market value ad itermediate cash flows to be discouted to the begiig market value. Date: November 2011 - Slide 14
Calculatio of the IRR for the portfolio (2/2) BMV P = Portfolio begiig market value. EMV P = Portfolio edig market value at T. IRR P = IRR of portfolio. C P,t = Portfolio cash flow at t. Y T = Legth of measuremet period (to be measured i years 365). Y t 0 = Legth of time period betwee the begiig of the measuremet period ad the date of the cash flow (to be measured i years 365). Date: November 2011 - Slide 15
Calculatio of the IRR for the bechmark 0 = EMV B 1 + IRR B Y T + T 1 t=1 C B,t 1 + IRR B Y t 0 BMV B where: C B,t = C P,t BMV B = Bechmark begiig market value. EMV B = Bechmark edig market value at T. IRR B = IRR of bechmark. C B,t = Bechmark cash flow at t. Here it is importat that the cash iflows (outflows) are ivested (de-ivested) accordig to the actual bechmark asset allocatio at the time of the cash flow ad that the returs of the moey ivested equal the respective returs of the uderlyig bechmark ivestmets. I additio cash flows have to be simulated for rebalacig activities. Date: November 2011 - Slide 16
Calculatio of the excess IRR EIRR P = IRR P IRR B EIRR P = Excess IRR. Date: November 2011 - Slide 17
Cotributio to IRR Date: November 2011 - Slide 18
Secod step towards IRR attributio Calculatio of the profit ad loss of the differet asset classes. Calculatio of the average ivested capital for the differet asset classes. Calculatio of the asset class cotributio to the IRR for the portfolio. Calculatio of the asset class cotributio to the IRR for the bechmark. Calculatio of the asset class cotributio to the excess IRR. Date: November 2011 - Slide 19
Calculatio of the profit ad loss PL P = EMV P BMV P T 1 C P,t PL P = Profit ad loss of portfolio. t=1 T 1 PL P = PL P,i = EMV P,i BMV P,i C P,i,t t=i Same formulas apply for the bechmark PL P,i = Profit ad loss of asset class i. EMV P,i = Edig market value of asset class i. BMV P,i = Begiig market value of asset class i. C P,i,t = Cash flow of asset class i at t. = Number of asset classes. Date: November 2011 - Slide 20
Calculatio of the average ivested capital (1/3) AIC P = PL P IRR P AIC P = Average ivested capital of portfolio. AIC P,i = PL P,i AIC P,i = Average ivested capital of asset class i. IRR P,i IRR P,i = IRR of asset class i. Basic idea: Withi the IRR framework every cash flow series ca be trasferred to a cash flow series cosistig of two cash flows - the cash iflow at the begiig of the ivestmet period ad a cash outflow at the ed of the ivestmet period. For such a cash flow series the average ivested capital is equal to the cash iflow at the begiig of the ivestmet period. Same formulas apply for the bechmark Date: November 2011 - Slide 21
Calculatio of the average ivested capital (2a/3) 31.12.2008 31.12.2009 31.12.2010-100.00 = + 5.00-50.00 = - 45.00 + 157.50 P&L = + 12.50 ad IRR = 5.00% 31.12.2008 31.12.2009 31.12.2010-100.00 = + 5.00-50.00 = - 45.00 + 157.50 Compouded with cost of capital - here equals IRR * (1 + 5.00%) - 47.25-100.00 + 110.25 * (- 1) / (1 + 5.00%)^2 IRR = 5.00% Date: November 2011 - Slide 22
Calculatio of the average ivested capital (2b/3) 31.12.2008 31.12.2009 31.12.2010-100.00 P&L = + 10.25 * (- 1) * (1 + 5.00%)^2-1 12.50 / 10.25 = 1.2195... - 121.95 P&L = + 12.50 * (- 1) * (1 + 5.00%)^2-1 Date: November 2011 - Slide 23
Calculatio of the average ivested capital (2c/3) 31.12.2008 31.12.2009 31.12.2010-100.00 = + 5.00-50.00 = - 45.00 + 157.50-100.00 +105.00 + 5.00 / (1 + 5.00%)^1 + 4.76 0.00-50.00-47.62 / (1 + 5.00%)^1 + 52.50-142.86 + 157.50 * (- 1) * (1 + 5.00%)^2-1 Remark: 142.86 is ot the "correct" AIC for the relevat cash flow stream as the P&L is ot 12.50 but istead 14.64. The differece is due to the iterest costs or earigs of the iterim cash flows - here for the first period (- 0.24 ad + 2.38). Iterpretatios: Oe could have eared absolute 2.14 more if 45.00 where also available for ivestmet i the first period (icreasig AIC from 121.95 to 142.86). Date: November 2011 - Slide 24
Calculatio of the average ivested capital (3/3) AIC P 1 = 12.50 1 + 5.00% 2 1 = 12.50 10.25% = 121.95 AIC P 2 = 10.25 1 + 5.00% 2 1 = 10.25 10.25% = 100.00 IRR 1 P = IRR 2 P PL1 P 1 AIC = PL 2 P 2 P AIC AIC P 1 = AIC 2 P PL 1 P 2 P PL P I absolute terms the average ivested capital (AIC) of the two cash flow streams (the origial ad the trasferred oe) are ot idetical but the AIC as well as the absolute profit ad loss are multiples of each other drive by the ratio betwee the differet P&L figures. Date: November 2011 - Slide 25
Calculatio of the cotributio to the IRR for the portfolio IRR P = PL P AIC P = PL P,i AIC P = AIC P,i AIC P IRR P,i = RC P,i RC P,i = Cotributio to IRR of asset class i. It is importat to ote that the average ivested capital of the total portfolio does ot have to be equal to the sum of the average ivested capitals of all asset classes (due to the differet implicit reivestmet assumptios). AIC P or = or AIC P,i Date: November 2011 - Slide 26
Calculatio of the cotributio to the IRR for the bechmark IRR B = PL B AIC B = PL B,i AIC B = AIC B,i AIC B IRR B,i = RC B,i RC B,i = Cotributio to IRR of asset class i. PL B = Profit ad loss of bechmark. PL B,i = Profit ad loss of asset class i. AIC B = Average ivested capital of bechmark. AIC B,i = Average ivested capital of asset class i. Date: November 2011 - Slide 27
Calculatio of the cotributio to the excess IRR EIRR P = IRR P IRR B = RC P,i RC B,i EIRR P = AIC P,i AIC P IRR P,i AIC B,i AIC B IRR B,i = PL P,i AIC P PL B,i AIC B Date: November 2011 - Slide 28
IRR attributio Date: November 2011 - Slide 29
Third ad last step towards IRR attributio Here the excess IRR is decomposed accordig to the Briso, Hood ad Beebower retur attributio methodology ad therefore split up ito the asset allocatio effect, stock pickig effect ad iteractio effect. EIRR P = IRR P IRR B = AAE P + SPE P + IAE P = AAE P,i + SPE P,i + IAE P,i AAE P = Asset allocatio effect of portfolio. AAE P,i = Asset allocatio effect of asset class i. SPE P = Stock pickig effect of portfolio. SPE P,i = Stock pickig effect of asset class i. IAE P = Iteractio effect of portfolio. IAE P,i = Iteractio effect of asset class i. Date: November 2011 - Slide 30
Asset Allocatio Actual Passive IRR Attributio Simple framework for IRR attributio (1/5) Actual Selectio Passive Quadrat IV IRR of actual portfolio Quadrat II IRR of otioal portfolio 1 => active asset allocatio portfolio Quadrat III IRR of otioal portfolio 2 => active stock pickig portfolio Quadrat I IRR of bechmark Date: November 2011 - Slide 31
Simple framework for IRR attributio (2/5) Quadrat IV represets the IRR of the actual portfolio which reflects all passive ad active ivestmet maagemet decisios. The calculatio of the IRR of the actual portfolio is based o the actual weights of the asset classes - expressed as cash flows - ad the respective actual returs. Quadrat III represets the IRR of the otioal portfolio 2 which reflects the active stock pickig of the portfolio assumig o active asset allocatio. The calculatio of the IRR of the otioal portfolio 2 is based o the passive weights of the asset classes - expressed as cash flows - ad the respective actual returs. Quadrat II represets the IRR of the otioal portfolio 1 which reflects the active asset allocatio of the portfolio assumig o stock pickig. The calculatio of the IRR of the otioal portfolio 1 is based o the actual weights of the asset classes - expressed as cash flows - ad the respective passive idex returs. Quadrat I represets the IRR of the bechmark. The calculatio of the IRR of the bechmark is based o the passive weights of the asset classes - expressed as cash flows - ad the respective passive idex returs. Date: November 2011 - Slide 32
Simple framework for IRR attributio (3/5) AAE P = Quadrat II Quadrat I = IRR NP1 IRR B = RC NP1,i RC B,i IRR NP1 = IRR of otioal portfolio 1. RC NP1,i = Cotributio to IRR of asset class i. SPE P = Quadrat III Quadrat I = IRR NP2 IRR B = RC NP2,i RC B,i IRR NP2 = IRR of otioal portfolio 2. RC NP2,i = Cotributio to IRR of asset class i. Date: November 2011 - Slide 33
Simple framework for IRR attributio (4/5) IAE P = Quadrat IV Quadrat III Quadrat II + Quadrat I IAE P = IRR P IRR NP2 IRR NP1 + IRR B IAE P = RC P,i RC NP2,i RC NP1,i + RC B,i Date: November 2011 - Slide 34
Simple framework for IRR attributio (5/5) O a asset class level: AAE P,i = RC NP1,i RC B,i SPE P,i = RC NP2,i RC B,i IAE P,i = RC P,i RC NP2,i RC NP1,i + RC B,i Date: November 2011 - Slide 35
Hypothetical example Date: November 2011 - Slide 36
Hypothetical example Assumptios (1/8) Sample multi-asset class portfolio is ivestig i two asset classes A ad B. Relevat bechmark is also ivestig i these two asset classes A ad B. The portfolio as well the bechmark are rebalaced o a yearly basis at the begiig of the caledar year. A two year period from 31.12.2006 util 31.12.2008 is cosidered. At the begiig of 2007 EUR 150 are ivested i the portfolio. At the begiig of 2008 additioal EUR 100 are ivested ito the portfolio accordig to the the curret active asset allocatio ad stock pickigs. Date: November 2011 - Slide 37
Hypothetical example Retur calculatios (2a/8) Actual Portfolio (IRR) Period 1 Period 2 Dates 31.12.2006 31.12.2007 31.12.2008 Cash flow at begiig of period Cash flow at begiig of period Market value at the ed of period Asset A -75.0 47.6 36.7 Asset B -75.0-147.6 240.8 Portfolio -150.0-100.0 277.5 Actual weights at begiig of period Actual weights at begiig of period Weights at the ed of period Asset A 50.0% 15.0% 13.2% Asset B 50.0% 85.0% 86.8% Portfolio 100.0% 100.0% 100.0% Actual retur Actual retur Cummulative retur Asset A 15.0% -5.0% 17.9% Asset B -5.0% 10.0% 12.4% Portfolio 5.0% 7.8% 13.8% Remark: egative (positive) cash flow meas cash iflow (outflow). Date: November 2011 - Slide 38
Hypothetical example Retur calculatios (2b/8) Actual Portfolio (IRR) Period 1 Period 2 Dates 31.12.2006 31.12.2007 31.12.2008 Cash flow at begiig of period Cash flow at begiig of period Market value at the ed of period Asset A -75.0 47.6 36.7 Asset B -75.0-147.6 240.8 Portfolio -150.0-100.0 277.5 Actual weights at begiig of period Actual weights at begiig of period Weights at the ed of period Asset A 50.0% 15.0% 13.2% Asset B 50.0% 85.0% 86.8% Portfolio 100.0% 100.0% 100.0% Actual retur Actual retur Cummulative retur Asset A 15.0% -5.0% 17.9% 75 1 + 15% 15% 150 1 + 5% + 100 = 86.25 15% 157.5 + 100 = 86.25 38.625 = 47.625 Asset B -5.0% 10.0% 12.4% Portfolio 5.0% 7.8% 13.8% Remark: egative (positive) cash flow meas cash iflow (outflow). Date: November 2011 - Slide 39
Hypothetical example Retur calculatios (3/8) Bechmark (IRR) Period 1 Period 2 Dates 31.12.2006 31.12.2007 31.12.2008 Cash flow at begiig of period Cash flow at begiig of period Market value at the ed of period Asset A -45.0-39.5 83.0 Asset B -105.0-60.6 167.2 Portfolio -150.0-100.0 250.2 Passive weights at begiig of period Passive weights at begiig of period Weights at the ed of period Asset A 30.0% 30.0% 33.2% Asset B 70.0% 70.0% 66.8% Portfolio 100.0% 100.0% 100.0% Passive retur Passive retur Cummulative retur Asset A -20.0% 10.0% -2.2% Asset B 10.0% -5.0% 1.3% Portfolio 1.0% -0.5% 0.1% Remark: egative (positive) cash flow meas cash iflow (outflow). Date: November 2011 - Slide 40
Hypothetical example Retur calculatios (4/8) Notioal Portfolio 1 (IRR) Period 1 Period 2 Dates 31.12.2006 31.12.2007 31.12.2008 Cash flow at begiig of period Cash flow at begiig of period Market value at the ed of period Asset A -75.0 23.6 40.0 Asset B -75.0-123.6 195.8 Portfolio -150.0-100.0 235.8 Actual weights at begiig of period Actual weights at begiig of period Weights at the ed of period Asset A 50.0% 15.0% 17.0% Asset B 50.0% 85.0% 83.0% Portfolio 100.0% 100.0% 100.0% Passive retur Passive retur Cummulative retur Asset A -20.0% 10.0% -18.2% Asset B 10.0% -5.0% -2.0% Portfolio -5.0% -2.8% -7.0% Remark: egative (positive) cash flow meas cash iflow (outflow). Date: November 2011 - Slide 41
Hypothetical example Retur calculatios (5/8) Notioal Portfolio 2 (IRR) Period 1 Period 2 Dates 31.12.2006 31.12.2007 31.12.2008 Cash flow at begiig of period Cash flow at begiig of period Ivestmet at the ed of period Asset A -45.0-23.7 71.7 Asset B -105.0-76.3 193.7 Portfolio -150.0-100.0 265.3 Passive weights at begiig of period Passive weights at begiig of period Weights at the ed of period Asset A 30.0% 30.0% 27.0% Asset B 70.0% 70.0% 73.0% Portfolio 100.0% 100.0% 100.0% Actual retur Actual retur Cummulative retur Asset A 15.0% -5.0% 5.2% Asset B -5.0% 10.0% 8.7% Portfolio 1.0% 5.5% 7.7% Remark: egative (positive) cash flow meas cash iflow (outflow). Date: November 2011 - Slide 42
Hypothetical example Maagemet effects (6/8) Actual Portfolio (IRR) P&L AIC IRR RC Asset A 9.3 52.1 17.9% 4.7% Asset B 18.1 146.8 12.4% 9.1% Portfolio 27.5 198.4 13.8% 13.8% Bechmark (IRR) P&L AIC IRR RC Asset A -1.5 64.9-2.2% -0.7% Asset B 1.7 135.2 1.3% 0.8% Portfolio 0.2 200.1 0.1% 0.1% Date: November 2011 - Slide 43
Hypothetical example Maagemet effects (7/8) Notioal Portfolio 1 (IRR) P&L AIC IRR RC Asset A -11.4 62.6-18.2% -5.7% Asset B -2.8 137.2-2.0% -1.4% Portfolio -14.2 201.0-7.0% -7.0% Notioal Portfolio 2 (IRR) P&L AIC IRR RC Asset A 3.0 56.7 5.2% 1.5% Asset B 12.4 142.4 8.7% 6.2% Portfolio 15.3 199.1 7.7% 7.7% Date: November 2011 - Slide 44
Hypothetical example Maagemet effects (8a/8) IRR-Attributio Remark: Here high IAE due to the big shifts. i the asset allocatio. AAE SPE IAE Total Asset A -4.9% 2.2% 8.1% 5.4% Asset B -2.2% 5.4% 5.2% 8.3% Portfolio -7.2% 7.6% 13.3% 13.7% Profit ad Loss Attributio Remark: IRR figures are cosistet with the absolute profit & loss figures see appedix. AAE SPE IAE Total Asset A -9.9 4.4 16.2 10.8 Asset B -4.5 10.7 10.3 16.4 Portfolio -14.4 15.1 26.5 27.2 Date: November 2011 - Slide 45
Hypothetical example Maagemet effects (8b/8) IRR-Attributio AAE SPE IAE Total Asset A -4.9% 2.2% 8.1% 5.4% Asset B -2.2% 5.4% 5.2% 8.3% Portfolio -7.2% 7.6% 13.3% 13.7% Profit ad Loss Attributio AAE SPE IAE Total PL NP1 PL B = 11.4 1.5 = 9.9 Asset A -9.9 4.4 16.2 10.8 Asset B -4.5 10.7 10.3 16.4 Portfolio -14.4 15.1 26.5 27.2 Date: November 2011 - Slide 46
Simple example for a IRR implemetatio Date: November 2011 - Slide 47
before cash flow after cash flow IRR Attributio Simple example for a IRR implemetatio (1/3) Asset allocatio i % 31.12.2009 31.03.2010 30.06.2010 30.09.2010 31.12.2010 Cash - 99.50 99.00 98.51 98.01 Bods - 618.00 624.18 314.45 308.17 Equities - 255.00 234.60 918.06 1'009.87 Total portfolio - 972.50 957.78 1'331.02 1'416.05 Cash flows 31.12.2009 31.03.2010 30.06.2010 30.09.2010 31.12.2010 Cash 100.00 - - - - Bods 600.00 - -300.00 - - Equities 300.00-600.00 - - Total portfolio 1'000.00-300.00 - - Asset allocatio i % 31.12.2009 31.03.2010 30.06.2010 30.09.2010 31.12.2010 Cash 100.00 99.50 99.00 98.51 98.01 Bods 600.00 618.00 324.18 314.45 308.17 Equities 300.00 255.00 834.60 918.06 1'009.87 Total portfolio 1'000.00 972.50 1'257.78 1'331.02 1'416.05 Ivestmet returs 31.12.2009 31.03.2010 30.06.2010 30.09.2010 31.12.2010 Cash -0.50% -0.50% -0.50% -0.50% Bods 3.00% 1.00% -3.00% -2.00% Equities -15.00% -8.00% 10.00% 10.00% Total portfolio -2.75% -1.51% 5.82% 6.39% Date: November 2011 - Slide 48
Simple example for a IRR implemetatio (2/3) Remark: egative (positive) cash flow meas cash iflow (outflow). Cash flows for IRR 31.12.2009 31.03.2010 30.06.2010 30.09.2010 31.12.2010 Cash -100.00 - - - 98.01 Bods -600.00-300.00-308.17 Equities -300.00 - -600.00-1'009.87 Total portfolio -1'000.00 - -300.00-1'416.05 Profit & Loss TWR Timig effect IRR Cotributio to IRR Cash -1.99-1.99% 0.00% -1.99% -0.17% Bods 8.17-1.11% 2.93% 1.82% 0.71% Equities 109.87-5.38% 24.01% 18.63% 9.57% Total portfolio 116.05 7.83% 2.28% 10.11% 10.11% Ivestmet Reportig based o TWR shows wodrous results: Negative TWR but absolute profit for bods ad equities. Negative TWRs for all asset classes but positive TWR for the total portfolio. Date: November 2011 - Slide 49
Simple example for a IRR implemetatio (3/3) 30% 25% 20% 15% 10% 5% TWR Timig effect IRR 0% -5% -10% Cash Bods Equities Total portfolio Date: November 2011 - Slide 50
Critical aspects Date: November 2011 - Slide 51
Critical aspects Urealistic (re-)ivestmet assumptio: => explicit / realistic (re-)ivestmet assumptios (MIRR). Multiple solutios for IRR: => explicit / realistic (re-)ivestmet assumptios. IRR for bechmarks: => public market equivalet (PME) used i private equity idustry. Peer group compariso: => IRR ot desiged for peer aalysis. Risk measuremet: => IRR ot desiged for dispersio aalytics. Implied iterim asset values differ from true iterim asset value... => IRR is desiged as a average retur for the reportig period. Date: November 2011 - Slide 52
Commets ad questios Date: November 2011 - Slide 53
Appedix: Profit ad loss attributio Date: November 2011 - Slide 54
Last step towards profit ad loss attributio Here the excess profit ad loss is decomposed accordig to the Briso, Hood ad Beebower retur attributio methodology ad therefore split up ito the asset allocatio effect, stock pickig effect ad iteractio effect. EPL P = PL P PL B = AAPL P + SPPL P + IAPL P = AAPL P,i + SPPL P,i + IAPL P,i AAPL P = Profit ad loss of portfolio due to asset allocatio. AAPL P,i = Profit ad loss of asset class i due to asset allocatio. SPPL P = Profit ad loss of portfolio due to stock pickig. SPPL P,i = Profit ad loss of asset class i due to stock pickig. IAPL P = Profit ad loss of portfolio due to iteractio. IAPL P,i = Profit ad loss of asset class i due to iteractio. Date: November 2011 - Slide 55
Asset Allocatio Actual Passive IRR Attributio Simple framework for profit ad loss attributio (1/5) Actual Selectio Passive Quadrat IV P&L of actual portfolio Quadrat II P&L of otioal portfolio 1 => active asset allocatio portfolio Quadrat III P&L of otioal portfolio 2 => active stock pickig portfolio Quadrat I P&L of bechmark Date: November 2011 - Slide 56
Simple framework for profit ad loss attributio (2/5) Quadrat IV represets the P&L of the actual portfolio which reflects all passive ad active ivestmet maagemet decisios. The calculatio of the P&L of the actual portfolio is based o the actual weights of the asset classes - expressed as cash flows - ad the respective actual returs. Quadrat III represets the P&L of the otioal portfolio 2 which reflects the active stock pickig of the portfolio assumig o active asset allocatio. The calculatio of the P&L of the otioal portfolio 2 is based o the passive weights of the asset classes - expressed as cash flows - ad the respective actual returs. Quadrat II represets the P&L of the otioal portfolio 1 which reflects the active asset allocatio of the portfolio assumig o stock pickig. The calculatio of the P&L of the otioal portfolio 1 is based o the actual weights of the asset classes - expressed as cash flows - ad the respective passive idex returs. Quadrat I represets the P&L of the bechmark. The calculatio of the P&L of the bechmark is based o the passive weights of the asset classes - expressed as cash flows - ad the respective passive idex returs. Date: November 2011 - Slide 57
Simple framework for profit ad loss attributio (3/5) AAPL P = Quadrat II Quadrat I = PL NP1 PL B = PL NP1,i PL B,i PL NP1 = Profit ad loss of otioal portfolio 1. PL NP1,i = Profit ad loss of asset class i. SPPL P = Quadrat III Quadrat I = PL NP2 PL B = PL NP2,i PL B,i PL NP2 = Profit ad loss of otioal portfolio 2. PL NP2,i = Profit ad loss of asset class i. Date: November 2011 - Slide 58
Simple framework for profit ad loss attributio (4/5) IAPL P = Quadrat IV Quadrat III Quadrat II + Quadrat I IAPL P = PL P PL NP2 PL NP1 + PL B IAPL P = PL P,i PL NP2,i PL NP1,i + PL B,i Date: November 2011 - Slide 59
Simple framework for profit ad loss attributio (5/5) O a asset class level: AAPL P,i = PL NP1,i PL B,i SPPL P,i = PL NP2,i PL B,i IAPL P,i = PL P,i PL NP2,i PL NP1,i + PL B,i Date: November 2011 - Slide 60
Refereces Date: November 2011 - Slide 61
Refereces Determiats of Portfolio Performace ; i: Fiacial Aalysts Joural; July 1986; by G. Briso, R. Hood & G. Beebower. Measuremet ; by Bruce J. Feibel. Decomposig the Moey-Weighted Rate of Retur ; i: Joural of Performace Measuremet; Summer 2003; page 42-50; by Stefa J. ad Wolfgag Marty. Decomposig the Moey-Weighted Rate of Retur ; at the Performace Attributio Risk Maagemet 11th Aual; 5th of November 2003; by Stefa J.. Decomposig the Moey-Weighted Rate of Retur - a Update ; i: Joural of Performace Measuremet; Fall 2009; page 22-29; by Stefa J.. Date: November 2011 - Slide 62
Cotact details ad disclaimer Date: November 2011 - Slide 63
Cotact details Cosultig AG Weibergstrasse 28 CH - 8200 Schaffhause Switzerlad www.iipc-ag.com Dr. Stefa Joachim Tel. +41 / 79 / 962 20 37 Email: stefa.illmer@iipc-ag.com Date: November 2011 - Slide 64
Disclaimer This documet was produced by Cosultig AG (hereafter "IIPC- AG") with the greatest of care ad to the best of its kowledge ad belief. However, IIPC-AG provides o guaratee with regard to its cotet ad completeess ad does ot accept ay liability for losses which might arise from makig use of this iformatio. This documet is provided for iformatio purposes oly ad is for the exclusive use of the recipiet. It does ot costitute a offer or a recommedatio to buy or sell fiacial istrumets or bakig services. It is expressly ot iteded for persos who, due to their atioality or place of residece, are ot permitted access to such iformatio uder local law. Date: November 2011 - Slide 65