Morningstar Direct SM Equity Attribution

Transcription

1 Equity attribution, also known as micro attribution, compares a portfolio s performance to that of a benchmark by decomposing the excess return to explain the impact of various investment decisions. Analyze the results by various groupings such as industry classifications, regional classifications, style classifications or custom classifications. Create an equity attribution report in Portfolio Analysis using any portfolio from a user s investment lists or saved search criteria. Outline Access Portfolio Analysis from Direct View Multiple Portfolios in Dashboard Run Single Portfolio Equity Attribution Interpret the Equity Attribution Results Build a new Attribution Template Send Your Reports to Morningstar Direct Colleagues Access Portfolio Analysis from Direct 1. In the Portfolio Analysis folder of Direct, select Portfolio Analysis to open the default template options. Next, click Launch in Web for the Dashboard Template on top of the list Morningstar, Inc. All rights reserved. 1

2 View Multiple Portfolios in Dashboard 1. Your internet browser will open and Portfolio Analysis will load displaying the Dashboard. By default, there will be a sample list of investments displayed in the first column of the grid. Click the dropdown in the top left to change your coverage list. Benchmarks can also be updated for each individual fund by clicking the dropdown arrow in the benchmark cell. By default, the prospectus primary will be chosen as the benchmark, but users can select another benchmark choice including the Morningstar Index Proxy. 2. After you have selected a coverage list and assigned benchmarks, scroll to the right and view the different data points available for your analysis. Attribution has its own section to the far right that displays sector attribution total effects for allocation %, selection % and active return. The Attribution section will display 3 month attribution beginning at last quarter end. The three columns in each section will help give an overview of performance and manager decision making. Active Ret% will you tell by how many basis points did the manager outperform or underperform the benchmark. The Allocation% and Selection% will tell you whether their performance was due to sector weighting decisions or stock picking. As you can see, Putnam Research A fund outperformed the benchmark by 0.93%, and all of that was due to stock picking by the manager, aka Selection Morningstar, Inc. All rights reserved. 2

3 3. Next, you can group the investments in your coverage list by clicking the Group icon in the header. You can choose from any available group option, including Country/Region or any custom database groupings. For this demo select Morningstar Category to group the funds by Large Growth, Small Value, etc. 4. Click the Conditional Format icon in the header to add formatting to the data set. After the conditional format dialog opens, select the dropdown under Field Name to open the data set field options. Next, expand Snapshot and then choose Active Share as the data point. Set the Operator and Value to be greater than 80. Update the Cell Color to green and check off Cell Only. Click Ok when finished and view the active share column which will now have conditional formatting applied Morningstar, Inc. All rights reserved. 3

4 Run Single Portfolio Equity Attribution 1. Next, click on the name of any individual fund in the first column of the investment list in order to drill down and understand what s driving performance -- beyond the data points in your dashboard. After opening the tool mode, click on the profile icon in the footer to activate the Global Settings. Here, users will be able to set up the attribution calculation options such as the investment process, linking method, and other attribution specific settings. Click Ok when complete. 2. Next, click on the Content Management icon to open the attribution template provided by Morningstar. There are many Morningstar Templates to choose from. For demonstration purposes, we will use the Attribution Template. In the dialog, click Morningstar Templates then the pencil icon > Open for Attribution Morningstar, Inc. All rights reserved. 4

5 Interpret the Attribution Results 1. After the template loads, it s time to view the attribution results. You can view highlights, sector, style, region, fair value, and moat results in the pages. The Highlights page will allow you to analyze Allocation Effects, Selection Effects and overall Active Return across a three month time period. This chart displays an overall summary of the results month by month and cumulatively. 2. Time Period options can be set on each specific attribution table or graph. Use the pencil icon located on the far right of the header to select an appropriate time period. Click Ok when complete and the graph will reload. Overall, a positive or negative active return will show whether the portfolio outperformed or underperformed relative to the benchmark Morningstar, Inc. All rights reserved. 5

6 3. After the Highlights page, the next 5 tabs will display detailed attribution results using different Morningstar groupings. Keep in mind, you can use Morningstar Groupings, Non Morningstar Groupings (i.e. GICS), or your own custom Groupings. Let s continue and view the Sector page which will display the attribution results by Morningstar Sector. By clicking the pencil icon next to Data Column, users can choose which columns to display in the table. The default selections are Weights, Return and Attribution. 4. To interpret the table results, first look to Active Return. In this example, we can see that overall the portfolio underperformed the benchmark by -1.42% in the Active Return column where most of the negative impact came from stock selection (-0.82) although Sector Allocation was not too far behind (-0.61). Let s dig in further Morningstar, Inc. All rights reserved. 6

7 5. Let s further interpret the results by decomposing the sector with the most negative impact. Sort by the Active Return column, where you ll see that Technology has the most negative impact with -0.64%. All of that negative impact is coming from Stock Selection (-0.74%), since Allocation % was actually positive 0.10%. Focusing on Technology, the portfolio was over weighted in this sector by 7.21%. Did this hurt them or help them? It actually helped them because Technology overall was a positive performing sector (3.27% vs.1.83%). Since the portfolio had more exposure than the index to this sector, it resulted in a positive 0.10% attribution allocation effect. 6. Let s take it one step further and view the security selection for Technology. As you can see, the portfolio was over weighted in Google by 5.59%. Was this a good or bad call? This was actually a bad call since Google underperformed by 0.55% compared to the Tech sector s return of 3.27%. Therefore, the portfolio over weighted a poor performing stock resulting in a -0.16% attribution selection effect contributing to the overall negative stock section result in Technology of -0.74% Morningstar, Inc. All rights reserved. 7

8 7. Let s proceed and now view the attribution breakdown by Style. Go to the Style tab. Here the grouping on the attribution table is updated to display the Morningstar 3 by 3 Style Box. Notice that no matter which grouping is selected, the Active Return for Portfolio relative to the Benchmark will be the same, as long as the time periods and calculation settings stay unchanged. In this example, -1.42% equals Active Return. 8. Note, at any point, click on the current grouping breakdown choice, using the pencil icon next to the group title, to select another choice including your own custom groupings Morningstar, Inc. All rights reserved. 8

9 9. Let s proceed to analyze the portfolio through other various lenses. Go to the Region tab to view the results. 10. Go to the Fair Value tab to view the results Morningstar, Inc. All rights reserved. 9

10 11. Go to the Moat tab to view the results 12. Keep in mind that all views will have a residual amount, also known as the return gap. This amount explains the portion of the return that cannot be explained by the holdings composition at the beginning of the analysis period, and this gap is usually caused by intraperiod portfolio transactions, security corporate actions, bond holdings that aren t in attribution calculations and so on. Put more simply, the Attribution Total Return is assuming a buy/hold strategy while in reality the Reported Total Return will take into account intra-period portfolio transactions. The residual calculation will show the difference between the Reported Portfolio Return and the Attribution Total Return, plus the expense ratio Morningstar, Inc. All rights reserved. 10

11 Build a New Attribution Template 1. Anytime you make a change to the Morningstar attribution template, a save box is prompted in the top right of the page. Clicking Save As will allow you to save the template as a unique user version and customize the name. 2. You can also delete, rename or add pages to the template at any time. To add a new page either copy the existing page by clicking the page title or for this example we will click the + button located right of all pages. Here you can either add a blank page to create a brand new page or select from the pre-built page choices. Leave the selection as Blank, then click Ok to continue Morningstar, Inc. All rights reserved. 11

12 3. Click Components in the header to open the component library. Choose the Attribution category and then click, drag and drop the specific charts/tables into the page. Select these three components: Historical Contribution, Attribution Detail (By Group), and Contribution Detail. They will populate with the selected portfolio and benchmark. Don t forget to save your changes. Send Your Reports to Morningstar Direct Colleagues 1. Once the attribution templates have been customized and saved, you can share your analysis with other Morningstar Direct Colleagues. Click the content management icon located in the footer. 2. When the content management dialog appears, click on My Templates to view user specific saved templates. Then select the appropriate template and click the pencil icon to send or share with team members Morningstar, Inc. All rights reserved. 12

13 3. Sharing will keep the template live between all parties, so any saved changes will be viewed by all. Sending will allow the recipients to receive the template as a static saved version. After choosing to Send or Share, type in the recipient(s) addresses that are used for their Morningstar Direct accounts. Click Add, then Ok when complete. The recipients will then be able to login to Portfolio Analysis and view these added templates in Content Management under My Templates. 4. This concludes the equity attribution demo in Portfolio Analysis Morningstar, Inc. All rights reserved. 13