MFS Evaluates Multi-Asset-Class Portfolios

Terry Flanagan

An increasing use of multi-asset-class portfolios creates a need for proper attribution models to accurately reflect the behavior of the portfolio and understand and evaluate what the portfolio manager is trying to do.

“This includes evaluating attribution models for multi-asset class portfolios, how to incorporate client reporting and marketing needs into your evaluation, and working with the investment team for insights into portfolio positions and priorities,” said David Plantamura, assistant vice president at MFS Investment Management, which manages $446 billion, during a webinar on Thursday.

A necessary step in the portfolio management process is to allow the investor or manager to monitor the progress being made towards goals, and also to assess the skills of managers being used. This skill assessment has three components: performance measurement, performance attribution, and performance appraisal.

“Performance measurement is simply determining what rate of returns there are on the investment” said Plantamura. “The performance attribution determines the sources of those returns which could include strategic asset allocation, market timing, and security selection. Return attribution includes the source of the return, the decisions made to produce that return, and monitoring the interpretations of the strategy.”

In evaluating attribution models for multi-asset-class portfolios, a number of factors need to be taken into consideration: defining objectives, determining users, identifying options, identifying gaps in data, and prototyping.

“The first thing is to define the objectives,” Plantamura said. “What are you trying to do? The next would be to determine users. Who’s going to use the results and what format is needed? You want to identify the options. What are the pros and cons of each method you use? You need to identify any gaps in the data that might be required in order to make those models work. It’s also important to prototype the process. Will it really do what you want it to do? You want to make sure that you share the results with your users ahead of time while you’re prototyping to make sure that that’s what they want.”

Excel spreadsheets by their nature lack adequate internal controls. “Some of the systems out there, you press a button, you go home for six hours, and hopefully, when you come in in the morning the results would be there,” said Plantamura. “If you want to make a change, you have to do it again. With more advanced systems, you can run them in a very short period of time. You can make changes, and you can re-run them. You can do that over and over before you get the results.”

Flexibility in reporting is a must, Plantamura added. “You want to have more control over the data and reports that are being produced. You want to be able to control the environment for the reports to get more insight into what the attribution is giving you. You want to be able to get this out to your clients, both internal and external. You most likely need the ability to support higher report volumes as your company grows. Being able to schedule batch jobs is also very important.”

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