Performance attribution - when to calculate the notional fund?

[almost_actuary]

I am finding that I always get stuck on the same thing for performance attribution questions - which is annoying because I really want this type of question to be easy marks if it comes up in the exam!

How do you know when to draw out tables for the fund's returns, the benchmark returns AND a notional (actual allocation / benchmark stocks) fund's returns?

My go-to has been to do all three in case I need them all in the questions, but I am getting confused by some of ActEd's ASET solutions. For example...

In Sept 2016 Q7, a notional fund is not calculated in the answer and sector selection for each asset class is calculated as [actual asset allocation - benchmark asset allocation] * [benchmark asset return - total benchmark return for the year]. As such, the notional fund seemingly wasn't required so I wasted 10 mins pulling this together!

However, in April 2016 Q5, a notional portfolio (with actual sector allocation and benchmark returns) is created. And sector selection for each asset class is calculated as [notional asset return - benchmark asset return]

Any help would be most appreciated!

 

[Colin McKee]

Performance attribution questions are quite tricky, and there are a wide range of twists to the standard questions that the examiner can select. As you say, attribution at the asset class level, and attribution at the overall level, and two variations. The first thing I would say is that if you do the actual/actual, actual/notional, and notional/notional approach, you can quite quickly get the overall performance and break it down between sector selection and stock selection. (This is fine for April 2016 for exanmple) But you cant get any information at the asset class (or sector) level. So as soon as the examiner asks for the "sector by sector" detail, I would suggest that you need to use the formulae you have mentioned above and forget actual/notional. If you do the full breakdown at the sector level, you dont need to do the actual/notional because you will be able to find the overall total for sector and stock selection by simply ading together all the profits and losses in each sector. So its usually one or the other. Th only reason for calculating the actual/notional fund if you have completed the calcs sector by sector, is to check your calculations by comparing the results from both approaches, but I suggest you dont really have time for that.