When more than one currency is involved in an investment, there are multiple factors that will each have an effect on its performance: in addition to the securities themselves, it is necessary to take into account how fluctuations in currency are affecting your returns. Multi-currency investing is complicated further in multi-asset investments, where an asset you buy might then buy another asset in a different currency. More complex still are cases where hedging occurs on the benchmark side.
With CloudAttribution, the process of handling multiple sources of currency in performance attribution is simplified, for a clearer picture of exactly what is contributing return from each risk factor.
Breaking down multi-currency investments by currency and source
Where there is both a local element and a client element, because the investment and fund use different currencies, the difference in the exchange rate between the two currencies can create a currency risk that can impact the value.
By breaking down the investments by currency and local, it is possible to understand the impact of your decision, based on both the investment asset (e.g. bond) and the currency. For example, in the case of a portfolio manager investing US dollars in a German government bond denominated in Euros, CloudAttribution’s segregation of those two factors makes it easier to understand the separate effects that the exchange rate and the bond’s performance are having on the investment.
Multi-asset funds involving multiple currencies
Multi-currency investing becomes more complex where multi asset investments are concerned. For example, instead of investing in a German asset, a portfolio manager might buy a US denominated fund that then buys a German asset.
At a simplistic level, this is a US dollar fund with no currency risk. But in fact there is another factor at play because it is buying assets denominated in Euros.
In practice, in a typical multi asset fund there could be as many as 25,000 securities. A multi-asset fund that invests in stocks and bonds may hold individual stocks and bonds from companies and governments around the world. Most performance attribution systems will track the performance of each security, which makes sense, but takes a significant amount of resources and increases sources of error and therefore can only be conducted on an irregular, usually monthly, basis. At CloudAttribution we take a different approach which can be provided on a daily basis.
By disaggregating those two risks – the fund and the currency – it’s possible to determine how much comes from the investment and how much from the currency. CloudAttribution will just break out the currency factors – in this case, Euro exposure is 100% – and correct the fund return for the currency factor return so that its local return is a true local return. We then add in an extra currency exposure asset to bring the currency contribution.
By avoiding the need to deal with thousands of assets, we are able to simplify the process and better understand what is happening within the investment.
Multi-currency investing and hedging on the benchmark side
A scenario which is more complicated again is when there is a benchmark with a hedge in place. This is handled in a similar way to above, but now disaggregated into three: the local currency asset, the currency exposures and fx forwards.
On the portfolio side, we manage this as assets plus a hedge, as usual. By always comparing like with like in the attribution, it becomes obvious where risks or performance changes are coming from – currency versus currency, local versus local, and hedge versus hedge.
Get sophisticated insights with CloudAttribution
Handling currency in performance attribution is a multifaceted challenge, especially when it comes to multi-currency and multi-asset investments. CloudAttribution offers a flexible approach to this complex issue, performance managers and portfolio managers with a sophisticated attribution solution for daily accessible insights.
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For more information on how CloudAttribution can handle multi-currency investing, contact us to discuss your requirements.