Featured in The Traders Magazine US:
Are current Performance and Attribution frameworks fit for a world of hybrid portfolios, structured credit, and derivatives overlays? The answer is not to retreat to simplicity, as markets won’t become less complex, writes Joel Mondon, Head of Client Relationships, NeoXam, Americas. Instead, Asset Managers need to treat performance analytics as a core part of Risk Management and investor communication, Mr. Mondon explains, which means clearer methodologies, better integration of data across asset classes, and a willingness to explain not only returns, but the assumptions behind them.
In the Investment Management world, performance has never been difficult to publish. However, explaining it convincingly has become one of the defining challenges of US Asset Management in the modern era.
Across equities, fixed income, and multi-asset portfolios, the debate is shifting from what did Asset Managers return, to how exactly did they generate the return? That shift goes to the heart of trust, regulation, and capital allocation at a time when markets are more unpredictable than at any point in recent memory.
In US equities, attribution used to be relatively straightforward. Fund Managers broke down returns into sector allocation and stock selection. If technology outperformed and you were overweight, that helped. If the stock picks beat the index within each sector, that was alpha.
Today though, portfolios are rarely so clean. Many equity mandates blend active and passive building blocks. ETFs are used for liquidity, futures adjust exposures quickly, and options hedge downside risk. Factor tilts are also layered on top, and when performance disappoints, it may not be obvious whether the drag came from a defensive overlay, a factor bet, or simple stock selection.
For institutional investors, that really matters. Pension trustees and endowments are under pressure to justify every basis point of fee. If Asset Managers cannot clearly separate skill from structural positioning, capital will move elsewhere.
The complexity deepens in fixed income. Bond returns are shaped by duration, yield curve shifts, credit spreads, and liquidity conditions. Add securitized products such as asset-backed securities and the drivers multiply. Cash flows depend on prepayments and defaults, while structures are divided into tranches with a plethora of different risk profiles. In fact, securitization itself is regaining policy support globally as a way to channel savings into the real economy. In the US, Insurers and Pension Funds are natural holders of these long dated assets. But the memory of 2008 still lingers.
Therefore transparent Performance Attribution is essential to rebuilding confidence in structured credit markets. When a securitized allocation performs well, was it because of tightening spreads, structural leverage, carry, or improving credit quality? If it underperforms, is that due to liquidity stress or deteriorating fundamentals? Without clear answers, structured products risk being misunderstood once again.
Multi-asset portfolios add yet another layer of difficulty. These strategies combine equities, rates, credit, and sometimes private assets. They often use derivatives to shift exposures quickly or manage risk. Correlations can change rapidly, particularly during periods of market stress. A decision in one sleeve can ripple through the entire portfolio.
Attribution across such portfolios requires consistency. Investors want to see how each asset class contributed, how tactical decisions added or detracted, and how much risk was taken to achieve the outcome. They also want comparability across Fund Managers. Yet there is still no universal standard for multi-asset attribution. Methodologies differ drastically, assumptions vary widely, and results can look vastly different depending on the model used.
This is where the issue becomes systemic rather than operational. If performance numbers are not calculated and explained in a consistent way, capital allocation decisions may be distorted. Regulators are increasingly attentive to valuation, Data Governance, and Reporting accuracy.
As portfolios blend public and Private Assets, the line between market price and model price becomes harder to define.
The industry therefore faces a simple but uncomfortable question. Are current Performance and Attribution frameworks fit for a world of hybrid portfolios, structured credit, and derivatives overlays? The answer is not to retreat to simplicity.
Markets will not become less complex. Instead, Asset Managers need to treat Performance Analytics as a core part of Risk Management and investor communication. That means clearer methodologies, better integration of data across asset classes, and a willingness to explain not only returns, but the assumptions behind them.
Ultimately, performance is about more than numbers on a factsheet. It is about credibility. In a competitive US market where fees are under pressure and scrutiny is rising, the investment managers who can explain their results with clarity and discipline will stand apart from those who simply report them.
