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The local cash return displays the local risk-free cash rate in each currency. In this example, the local cash return you can earn on a USD investment, such as a U.S. Treasury bill, is 7.5%.
The exchange rate return displays the currency appreciation and depreciation rates. Over the period, the EUR investment got stronger. And the JPY and GBP investments got weaker relative to the U.S. dollar.
The Karnosky-Singer attribution process then calculates intermediate returns, which are used to calculate the market selection, security selection, and currency selection effects. The following figure shows four key intermediate returns. These include the local market return premiums for the portfolio and the benchmark, which is the difference between the local return and the local cash return, and the cash return for the portfolio and the benchmark, which is the sum of the local cash return and the exchange rate return.
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Since the manager is not doing any hedging, the hedge returns for the portfolio and the benchmark are the same as the unhedged base currency returns. The total hedge return fund is 8.35% and the total hedge return index is 8.10%. The hedge return difference displays the difference between those returns ─ the excess return. This analysis shows that the manager outperformed the overall benchmark by 0.255% in base currency.
To analyze or measure the results of the manager's actions, the Karnosky-Singer attribution process decomposes the asset returns into three effects. These include the currency selection, market selection, and security selection effects. Once decomposed, the effects can be aggregated to the total level and attributed separately.
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