Multicurrency Performance Attribution Analysis with Currency Overlay Management

Abstract

Portfolio managers attract asset owners by promoting their skills and investment decision process. Performance attribution explains how their decisions add value to portfolios. To be useful, the attribution framework must reflect the decisions made by the managers. Country and currency exposures of global portfolios are often managed with distinct strategies. The author demonstrates that the standard implementation of the Brinson–Fachler attribution framework does not reflect those strategies and produces non-intuitive results. To reflect those strategies, the author shows ways of implementing the Brinson–Fachler framework that incorporate the cost of hedging and the currency surprise and contrasts the results with the standard implementation. He highlights the similarities and the divergences between the Karnosky–Singer and Ankrim–Hensel approaches and proposes a technique to make both approaches equivalent.