Performance Perspectives Blog

“A stunning implication…”

by | Nov 1, 2013

The words in this post’s title appear in Nobel Laureate in Economics Leon Lederman’s The God Particle. I can’t say exactly why, but when I read it those words struck me.

A stunning implication.

I once read that good writers write one word at a time; I believe Lederman does exactly that.

We are, if you will, in the “implication” game. That is, we regularly assess the implications of actions taken by portfolio managers. While we call this “performance attribution,” that is essentially what is being evaluated: the implications of the actions taken.

In their 1986 FAJ paper, Brinson, Hood & Beebower pointed out how while attribution wasn’t new, it was evolving. I’ve commented that it has evolved considerably since then. The question we should ponder: is it still evolving or evolving enough? Have we thought that it’s as good as it gets? I would hope not.

We haven’t seen any many new linking methods introduced of late, nor multicurrency models. Perhaps Menchero, Frongello, Cariño’s, and GRAP’s are adequate for most people’s needs, so it’s possible that no additional linking methods are justified. But I believe that multicurrency should be able to grow beyond what we have today.

At a minimum, we should have a framework around which such models can be used and claimed. For example, one of our clients said they offered Karnosky-Singer, but only produce a single currency effect. We’ve concluded that this cannot legitimately be K-S, as the beauty of the model Denis and Brian crafted is that this effect is bifurcated between what happens in the underlying market and the contribution from the currency forwards that are included.

Perhaps it’s time for another “GRAP.” An initiative to sit back and ask

  • what are we doing right,
  • what are we doing wrong,
  • what don’t we still not understand,
  • what can be improved upon,
  • what is truly lacking,
  • and what else?

Something to reflect upon, perhaps, as we begin to bring to a close another calendar year.

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