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Before performing the dynamic segment and total rollups from the security level described previously, a "look through" is first performed on any securities held in the portfolios that are actually compound security entities. This fully dynamic segment grouping with recursive portfolio look-through allows you to assess your true exposure.
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The following table defines terms to build up the structure of the Recursive Look Through approach.
Term | Description |
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Asset | An asset is any possession that has value in exchange. |
Simple Asset | A simple asset can be adequately implemented as one dB row in a Security Master and Security Analytics for any given point in time. Examples: Stock, Bond, or Cash |
Compound Asset | A compound asset is created from one or more financial instruments. A compound financial instrument can be composed of any combination and number of simple and/or compound assets. A compound asset is often called or can be thought of as a Derivative (for example, Swap, Mutual Fund), Collection, or Portfolio (for example, ETF, Mutual Fund). Compound financial instruments are often treated as simple financial instruments in current systems. Doing so results in a loss of full analysis capability. |
Positions and Portfolios | Based on the investor's assessment, the investor can take a position in assets - assets that are "trading cheap" are candidates for purchase. Assets that are overvalued, "trading rich" can be considered for sale, or if the asset is not already owned it can be "sold short." Positions can be taken - long or short. When an investor takes a position in one or more assets they create a portfolio. |
Composites | A composite is a collection of portfolios. As such, a composite is also a portfolio. The essential difference with a composite is that the investor (firm) does not actually take positions in the composite. The investor (firm) actually holds the positions that are in the underlying portfolios. |
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Entities are set up for look through using the SECURITY_MASTER_DETAIL table. This table is used to indicate that a security is actually compound (an entity that can have look through applied). To set up an entity as a compound security for look through, the following two columns must be set up in the SECURITY_MASTER_DETAIL table.
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When a portfolio contains other portfolios, the analysis "flattens" the contained portfolios until all of the holdings are simple assets. It is this "flattened" portfolio that shows the true portfolio exposure.
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Look-through is started if the report is dynamic (does not contain a performance model) and has the Portfolio Look Through option in the report profile enabled. This option is disabled if a performance model is specified. See the following figure.
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Look-through recursively flattens portfolios through the information in the SECURITY_MASTER_DETAIL table. It is checked for all securities in the portfolio to see which, if any, have the LOOK_THROUGH_INDICATOR of 'P' (portfolio). For any securities with a LOOK_THROUGH_INDICATOR of 'P', appropriate queries are constructed and executed to select the underlying securities held by ENTITY_ID populated in the LOOK_THROUGH_VALUE for the 'P' security.
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Weights for all portfolios contained within other portfolios are multiplied by the weight of that portfolio in the parent. Returns are combined as a weighted average rollup of contributions divided by weight. All other non-return field such as flows, market value, and gain/loss are added.
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Differences can occur between the holding return and corresponding look-through portfolio return. Consider the example of a portfolio that contains simple assets (stocks) and an ETF that also buys stocks. The return for the ETF is based on the actual position in the portfolio, that is, the ETF return. The return of the ETF position often will not equate to a weighted average roll-up of the look-through stocks held by the ETF. This will be due to security pricing, detailed transaction timing differences, and actual ETF expenses between the ETF and the constituent look-through data (hypothetical portfolio) available in the data hub.
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