Gain unique insights with performance contribution

13 Apr Gain unique insights with performance contribution

Evaluating whether a portfolio is meeting expectations often involves a look at a portfolio’s performance over time – good old-fashioned rate of return (ROR). With the transparency initiatives brought about with Client Relationship Model ‒ Phase 2 (CRM2), clients now consistently receive a performance calculation at least once a year.

Without context, these performance numbers are difficult to understand. Some of the factors that the advisor references to explain the results include client specific goals, risk and time horizons, investing style, and economic and political conditions.

One such input is the ability for an advisor to have a clear view of how each position contributed to the performance of the portfolio in a given period. Performance contribution data is available in Croesus Advisor, answering the question: What holdings or asset classes did the return come from?

What is performance contribution and how does it differ from attribution?

Many have heard of performance attribution. It is a method used to evaluate the performance of a portfolio manager against a benchmark, analyzing the result of investment choices for a given asset class or style. In contrast, performance contribution is more helpful to understand the source of the performance since it compares a portfolio against a benchmark with a zero percent return and no positions.

Croesus calculates a portfolio’s performance contribution using each position level return and weighting the return of each position daily, taking into consideration inflows and outflows, impacts of foreign exchange, and more. Performance contribution data can also be displayed at the asset-class level.

Performance contribution gives insights into the following questions:

• What holdings contributed most to (or detracted from) performance of the portfolio?
• Given the portfolio’s asset allocation, was the performance coming from the expected asset classes?
• In times of negative returns, did diversification help to reduce risk and losses?
• During large upswings, was the ROR in line with expectations, or was it that a few outliers had larger-than-expected RORs? This insight provides context and sets appropriate expectations going forward.

Below is a simple example of a portfolio holding three positions:

Fig. 1 View of the position-level performance

First, you might look at the performance of each position held in a portfolio. It is certainly interesting to see the different asset returns held in the life of the portfolio, but how that impacts the client’s portfolio also depends on the following questions:

• When was it held? If ABC company was sold before the recent negative returns, the client would not see the impact of the 6-month loss.
• In what proportion are the positions held over time? If XYZ company was held only in small proportion, the client would not have benefited as much from the large 6-month return.

Performance contribution can put these returns into context for each client portfolio.

Fig. 2 View of the position-level performance contribution

The portfolio contribution view lets you see the actual return from each position in this client’s portfolio. Some conclusions that could be made are as follows:

1. We see in Fig. 1 that ABC Company had a large loss in the last 6 months, but it was fully disposed of prior to that period. As a result, the large loss was not seen in the client’s portfolio in Fig. 2.
2. XYZ Holdings contributed to two thirds of the portfolio return over the last 6 months, even though it constitutes 28% of the portfolio, effectively allowing the client to take advantage of the short-term performance boost.
3. LMN Enterprises has a consistent year-over-year return and has become a more predominant holding in the portfolio.

Portfolio contribution allows advisory teams to have a unique view of how each position and asset class is impacting portfolio returns, demonstrating the value of a well-constructed portfolio.