Performance analytics - helping to bring transparency to the FX pricing process
“We’d think about performance attribution in a global context as coming from two main sources. 7KH ÀUVW LV WKH SULFH DSSUHFLDWLRQ RI WKH DVVHW LQ WKH local currency of denomination, the other comes from converting local asset values back to the base currency of the investor,” outlines Jose Menchero, executive director, MSCI.
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He points out that this approach basically follows the Singer-Karnosky framework. ´:H KDYH PDGH FHUWDLQ UHÀQHPHQWV WR WKH Singer-Karnosky methodology, however, such as including a cross product term that explains the compounding effect EHWZHHQ FXUUHQFLHV DQG HTXLWLHV µ H[SODLQV Menchero.
7KH FRPELQHG FXUUHQF\ DQG HTXLW\ relationship is something that Neil Record believes is not considered properly in either understanding returns or pricing
JIMMY MCGEEHAN
“Despite being an OTC market with little WUDQVSDUHQF\ LQYHVWRUV FDQ JHW VWDWLVWLFDOO\ VLJQLÀFDQW execution cost results in the absence of time-stamps,” explains McGeehan. “Based upon the clients’ WUDGLQJ SURÀOH DQG GDWD ZH WKHQ FDQ FKRRVH WKH ULJKW EHQFKPDUN WKDW UHSOLFDWHV WKHLU XQLTXH H[HFXWLRQ process,” he adds.
The more recent result of these discoveries has been an increasing number of clients pressuring investment managers to show best practice and incorporate TCA into trading currencies whether dealing through an agency or a custodian.
Currency performance
attribution The core of transaction cost analysis has developed other areas of price performance analytics, which remains specialised in gaining portfolio value.
Understanding the relationship between what securities a manager decides to invest in and the currency in which they are denominated can go deeper into performance analytics and the investment decision made.
32 Currency Investor | Autumn 2011
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in the correct risk premia: “More fundamental at the moment is that few managers strip out in the correct way the currency effect from their underlying HTXLWLHV WKH\ VLPSO\ EHQFKPDUN SHUIRUPDQFH DJDLQVW something like the S&P,” he says.
“Performance measurement is a long way behind the right way to value and net off your true currency risk,” he warns.
PETER EGGLESTON
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