Introduction

Analyzing the performance of an equity portfolio or index may bear some resemblance to the work of a medical diagnostician. The symptoms are clear to see for everyone: a given strategy has either outperformed or underperformed the market over a given historical sample period. What caused the out- or underperformance is a slightly more difficult question to answer, but the investigation generally does not stop there.

To decide whether some capital should be allocated (or remain allocated) to a strategy, an investor will want to address a series of more complex questions which include but are not limited to:

• Is recent outperformance likely to persist in the future?
• Does recent underperformance point to areas of the strategy that require adjustment?
• Are there signs of unintended risks compared to a stated/assumed investment objective?
• In the absence of a long track record, is there a way to put recent performance into a broader perspective?

Additionally, the passive or active nature of the strategy will bring a set of differentiated questions.

For a passively managed strategy, investors want to verify whether performance is mainly driven by systematic sources of risk and which of those risks (if any) have been rewarded lately. The persistence of returns can in turn be assessed by examining the stability of exposures through time and the possible presence of concentrations.

For an actively managed strategy1, the questions aim to separate skill from luck; the focus is therefore more on specific risks and whether their outperformance (if any) displays signs of stability consistent with the presence of “alpha”. The present Case Study aims to answer the above questions by leveraging the analytics and insights available on the Scientific Portfolio platform.

Authors

Matteo Bagnara, PhD
Quant Researcher,
Scientific Portfolio ……………………………………….

Shahyar Safaee
Deputy CEO and Business Development Director,
Scientific Portfolio

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