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Re-Engineering Karnosky-Singer: Utility, Versatility and Insight for Practical Multi-currency Management
In 1994, Denis S. Karnosky, Ph.D. and Brian D. Singer, CFA published a monograph entitled “Global Asset Management and Performance Attribution” (KS). They presented the idea that – due to the arbitrage known as interest rate parity – some contribution to the total return of a multi-currency portfolio is known, and ‘baked into’ a foreign-currency investment at the time it is made. Because this contribution is knowable and hedge-able, it should accrue to the currency market allocations of the manager – whether or not these are ultimately hedged.
While hugely influential among asset managers globally, these ideas remain largely unexploited in current performance practice. Though KS fully detail an attribution approach based on an expansion of the Brinson-Fachler method, and though this method is implemented in several commercially available performance systems – it is rarely adopted in the field.
We posit this circumstance to have arisen from several causes: misalignments between the paper’s formulation and practical investing reality, as well as inaccurate readings of, and consequently flawed implementations of the attribution method it sets out. We explore these causes in detail, and how they contribute to attribution results that fail to explain portfolio performance, obscuring the otherwise substantial value of KS’ central premise.
Finally, we develop a re-statement of KS that addresses those issues, producing an accurate decomposition of multi-currency effects that precisely explains the portfolio’s performance, while preserving the original paper’s essential insight. We go further to generalize this method and demonstrate its applicability to any investment attribution methodology.
by Mark R. David, CFA, Director of Performance, Risk and Analytics
What Exactly is a Performance Book of Record (PBOR) and Why is it Important to Next-Level Growth Across the Investment Management Industry?
The asset management industry comprises a diverse group of firms offering countless products, funds and investment vehicles that are traded in forever-evolving financial markets. There was a time when the trading book and accounting book differed by days or weeks and clients received reports quarterly. This is not acceptable for firms today that are facing the need for complex asset administration and daily reporting cycles. Whether a firm invests in public securities or private assets, each come with their own challenges including underlying exposures, lagged pricing or fair value impacts to elicit and compare to a variety of benchmarks.
Today, managers of all investment strategies are compiling massive amounts of daily data. Fund strategies, client holdings, return results and analytics combine to support actionable information for portfolio managers, investment boards, clients and regulatory bodies. Most asset management organizations that support this daily function call it a middle office, and the platform upon which it relies is best described as a Performance Book of Record (PBOR). This paper outlines why developing a reliable PBOR is essential for next-level growth of your investment management organization – growth driven by data and confidence from knowing your organization is taking advantage of all the informational assets it possesses.
by Richard E. Mailhos, Principal
Protect an Organizational Investment by Avoiding Common Mistakes During a System Conversion
Once an organization has decided on a new system, the conversion process follows. Large-scale system conversions are complex, time consuming and expensive; however, they are necessary for investment management companies to tackle sooner or later. Whether the system is a data management tool, portfolio accounting, performance, trading or reporting system, there are key steps an organization should take to ensure both a successful conversion and to avoid risks and pitfalls.
Each implementation is different, and many aspects come into play such as customization, resource availability, volume of data that needs to be converted and hardware requirements. Simply having a plan in place will not ensure success. This paper provides guidance on how to successfully navigate key aspects common to implementation projects.
by John E. Leavy, Principal
Spending Smart Instead of Spending Big: Maximizing Efficiency in Investment Management by Optimizing Legacy Architecture AND Integrating Agile Methodology
The investment management industry – which relies on efficient processes and interdependent digital technology platforms to remain competitive – must keep pace with the perpetual rapid changes to industry standards and requirements and the technology that governs them. The latest innovations could be in any number of arenas: business processes, machine learning, artificial intelligence or blockchain to name a few. Adopting change is compulsory – lions and tigers and bears, oh my! The variables for a firm to consider include:
* Identifying the current drivers to implement changes
* Choosing the ‘right’ next changes considering the drivers
* Optimizing the implementation of the changes by using Agile methodology
Enlisting qualified strategic consulting partners can be instrumental in successfully spending smart instead of spending big when firms seek to maximize their front-to-back efficiency.
by Joshua B. Levitt, Principal
Front Office Technology Transformation Projects Require a Specialized Project Management Approach
Technology transformation projects are inherently challenging – from determining how a specific firm compiles their data and technology, to innumerable decisions to be made, data files to validate, functionality to configure and test, to go-live events. When technology transformation projects impact front office teams, a highly specialized project management approach must be employed to minimize disruptions to uber time-sensitive front office revenue-generating productivity while keeping the project on schedule.
While the definition of ‘front office’ differs among organizations, here within the front office references a few distinct groups: Portfolio Management, Trading, Quantitative Analysts and Risk Managers. These front office groups fulfill critical roles involving time-sensitive initiatives. They represent investment management firms’ strategy and intellectual capital, and directly generate revenue for investment management firms. Their skills are the costliest; therefore, their time is at a premium. This paper shares the keys to executing this specialized, non-disruptive approach to managing front office technology transformation projects.
by Elizabeth M. Colebrooke, Principal
The Investment Performance Technology Landscape, 2020
What are the key differences between investment performance measurement systems in the market? How are these tools evolving to better meet industry needs? These are important questions for firms considering significant investment in a new or upgraded toolset. Meradia has first-hand knowledge of many of the top systems in the market accrued from direct implementation efforts and have combined this knowledge with product strategy to provide insights on where the industry is progressing and to highlight disrupting themes. This is useful for investment performance professionals as a precursor to an RFP and/or an aid to firms considering a system change.
by Laurie J. Hesketh, CIPM, PMP, Managing Director
Risk Statistics in Performance Calculators: Suitable and Scalable? – Part 2
Investment performance calculators have witnessed steady growth in functionality during the past couple of decades. Leveraging huge data management platforms that contain exception management and workflow capabilities, calculators provide upstream integration capabilities. By expanding calculation breadth to include attribution effects and risk statistics, they are knocking on front office doors. As vendor consolidation occurs and performance systems endeavor to deliver one-stop solutions, it is important to understand design mechanisms related to each functionality that drives system efficiencies. In this paper, we examine returns and ex-post risk statistics.
Refer to Part 1 of this two-part series which lists the subset of risk statistics with which we are concerned and the benefits of calculating these in a performance calculator.
This Part 2 delves into systemic factors that enable efficient computation of risk statistics and why conventional architectures encounter scaling issues.
by Jose R. Michaelraj, CIPM, Senior Consultant
Risk Statistics in Performance Calculators: Suitable and Scalable? – Part 1
Investment performance calculators have witnessed steady growth in functionality during the past couple of decades. Leveraging huge data management platforms that contain exception management and workflow capabilities, calculators provide upstream integration capabilities. By expanding calculation breadth to include attribution effects and risk statistics, they are knocking on front office doors. As vendor consolidation occurs and performance systems endeavor to deliver one-stop solutions, it is important to understand design mechanisms related to each functionality that drives system efficiencies. In this paper, we examine returns and ex-post risk statistics.
This Part 1 of a two-part series lists the subset of risk statistics with which we are concerned and the benefits of calculating these in a performance calculator.
Stay tuned for Part 2 which delves into systemic factors that enable efficient computation of risk statistics and why conventional architectures encounter scaling issues.
by Jose R. Michaelraj, CIPM, Senior Consultant
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