Term Definition and Theory
The following table defines terms to build up the structure of the Recursive Look Through approach.
Term | Description |
|---|---|
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 or 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. |
Entity Setup
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.
Column | Value | Description |
|---|---|---|
LOOK_THRU_IND | P | Treats the security as a compound security (P == Portfolio) |
LOOK_THRU_VALUE | Entity_id | The identifier of an entity that is set up to hold the components of the compound security. |
A pair of eyeglasses appears next to any security that has a LOOK_THRU_INDICATOR of 'P' set, as shown in the following figure.
Recursive Portfolio Look-Through
All portfolios can be analyzed uniformly regarding look through to underlying components. For example, all of the following can be viewed and analyzed uniformly:
- A portfolio that is a single position in a simple asset.
- A portfolio that contains other portfolios - for example, simple assets plus mutual funds and/or ETFs.
- A portfolio that is a composite – for example, the combination of the above two portfolios.
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.
Invoke Portfolio Look-Through
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.
Flattening Process
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.
If any of the underlying securities are P securities, the query process will continue recursively until all securities to be analyzed are simple securities (not 'P' securities). The dynamic aggregation process commences once the look through query process is complete.
To get a true cumulative exposure to each of the simple securities, any security that is part of more than one look through portfolio or if it is already a member of the parent portfolio, are rolled up together to display as one security. Any particular security in the final flattened portfolio can be from the parent portfolio, one or more of the contained portfolios, or a combination of the two.
Combination Calculation Details
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.
Actual Holding versus Hypothetical Look-Through Portfolio
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.
In this scenario, dynamic performance directly uses the hypothetical portfolio data without making any adjustments for the holding return.
Similarly, differences can occur between the holding non-return fields (such as Market Values) and corresponding look-through non-return fields. In this scenario, dynamic performance directly adds the hypothetical portfolio data without making any adjustments for the holding return.
Currency Conversion for Look-Through Portfolios
Eagle Performance ensures that all holdings reported in a parent portfolio have the same base currency.
When you run a dynamic Performance Analysis report that has the Portfolio Look Through option in the report profile enabled, the system compares the currency of the parent portfolio to the currency of the underlying holdings. If the currencies differ, it uses Eagle's standard FX conversion logic to convert the look-through holdings to the base currency of the parent portfolio. This behavior, which affects all return fields in the report, applies even for nested look-through cases where the underlying entity has an underlying entity.
This currency conversion works in conjunction with the standard currency conversion options in the Performance Analysis report profile. For details, refer to "Select the Currency Tab Fields for On the Fly Currency Conversion." You can use those options to convert report results to a specific currency and/or can convert benchmark results to the portfolio currency. For example, suppose you are reporting on the Global Portfolio (base currency of EUR), which is comprised of three holdings. The first holding is IBM. The second holding is BMW. The third holding is the US Equity Fund. The US Equity Fund has underlying holdings of Apple and HP in USD. The look-through report converts the underlying holdings in the US Equity Fund from USD to EUR, so those holdings match the currency of the other holdings.
For details and general information about setup for currency conversions, refer to "Converting Returns From One Base Currency to Another." To review the FX rates used for currency conversion when reporting on look through portfolios, you can use EagleEye Analysis. For more information, refer to "Viewing the EagleEye Analysis File."
Look-Through Example
In the example shown in the following figure, the report is grouped by entity, then industry. You can see the portfolio holds a number of securities in different industries; however one of them, an ETF, does not have an industry set. This is because the holdings of the ETF fall in many industries. So even though this report appears to be showing the AQNEW portfolio exposure to each industry, the ETF security is hiding the portfolio's true exposure.
If the underlying ETF is modeled as an entity and you enable the look through option, you can see the true exposure, as shown in the following figure.
Notice that the Unknown industry with the ETF has been replaced with the holdings of the ETF, then grouped by industry, and then rolled up. The weight is still 100% and the Loss is still $-245, but the weight of each industry reflects the adjustment of allocating the 15% weight of the ETF to each industry. For example, Industrial increased from 10.89% to 15.51%. Similarly, Oil & Gas was added because the underlying ETF held a security in that industry.
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