Calculate Volatility for Market and Life Cycle Funds

Eagle Performance allows you to calculate the volatility of market funds and life cycle funds, which is calculated using the weekly past returns of the fund. The returns relevant for the computation of volatility use a sample period covering the last 5 years of the life of the fund and, in case of distribution of income, are measured taking into account the relevant earnings or dividend payoffs. The volatility of the fund is computed using the following standard method:

where the returns of the fund are measured over T non overlapping periods of the duration of 1/m years. This means m = 52 and T = 260 for weekly returns and where is the arithmetic mean of the returns of the fund over the T periods:

To include this volatility calculation in a Performance Analysis report, you create a Dynamic Mutual Fund Returns field that uses the SRRI category and the Volatility effect. This field specifies the number of weekly observations to include in the calculation. For example, 260 weekly observations is equal to 5 years. When the system processes the Dynamic Mutual Fund Returns field, it uses Daily frequency data to calculate weekly returns on-the-fly to calculate volatility. For more information, see Defining a Dynamic Mutual Fund Returns Field to Calculate Volatility.

You can base the period and corresponding weeks by using the As of date in the Performance Analysis report profile. In addition, you can adjust the end date of the period and corresponding weeks by leveraging a Date Rule in the Period Options in the Dynamic Mutual Fund Returns field. For more information, see Defining a Date Rule for SRRI Reporting.

To include the SRRI in a Performance Analysis report, you create a Rollup Calculation field that identifies the interval associated with the volatility calculated for a fund. For more information, see Defining a Rollup Calculation Field to Calculate and Report SRRI.

Process Volatility Calculations When Full Fund Returns History is Available

To calculate weekly returns needed for the fund's volatility calculation, the system performs the following tasks when the complete 5 year fund history is available for the fund. The system:

1. Retrieves Daily NAVs. The system retrieves the daily NAVs for the fund to complete the 5 year return history for the fund entity and calculate weekly returns. The daily NAVs are stored in the NAV table in the HOLDING database. The system retrieves the NAVs, along with the appropriate distributions, reinvestments, conversion, expenses, and/or waivers specified in the Dynamic Mutual Fund Returns field.

2. Calculates Weekly Returns. The system uses the daily NAVs to calculate weekly returns for the 5 year period as of the effective date specified in the report profile. This calculation reflects the appropriate distributions, reinvestments, conversion, expenses, and/or waivers specified in the Dynamic Mutual Fund Returns field.

The weekly return calculation uses Date Rule specified in the Dynamic Mutual Fund Returns field to determine the ending dates for each week in the 5 year period. For more information, see Defining a Date Rule for SRRI Reporting. When calculating weekly returns based on NAVs, if a NAV does not exist as of a given weekly period end date, the system goes back up to 4 days to find a NAV. If a NAV does not exist as of a given weekly period begin date, the system goes back up to 4 days to find a NAV. The weekly period begin and end date retrievals operate independently. As a result, the week can be less than or greater than 7 days. If a NAV does not exist after the system goes back 4 days, it generates a Missing Record error and ends the calculation process.

The system calculates these weekly returns "on the fly" without storing those returns in the PERFORM database. The system displays the weekly returns in the Level 9 log. It provides the beginning and ending NAVs for each week in the Level 10 log.

When you run the report, the system counts the number of weekly returns it calculated and compares this number to the Number of Weekly Observations specified in the Dynamic Mutual Fund Returns field's SRRI tab (for example, 260). If those two numbers do not match, the Volatility calculation does not complete and a Missing Records message displays in the log.

Process Volatility Calculations When Only Partial Fund History is Available

If a full 5 year returns history for the fund is not available when calculating volatility, the regulations allow you to use representative entities in place of the fund. Eagle's methodology does this, and then concatenates both return series to one series over the full 5 year period.

As a result, the volatility calculation may be based on returns for the fund alone, or based on returns for the fund for part of the 5 year period in combination with returns for the representative entities for the remainder of the period. Eagle's volatility calculation allows you to specify a Benchmark Definition, such as Primary Comparison Index or Comparison Index 5, to identify the specific benchmark to use for each fund.

For some funds, the 5 year returns history may reflect returns for more than 1 representative entity. The system interprets all of the historical effective date assignments and treats the date as the End Date. Note that while Eagle Performance typically interprets the As of date for a benchmark assignment as the Start Date for that assignment, this is not the case when Eagle backfills returns history to calculate volatility for SRRI reporting. Instead, when calculating volatility, the system interprets the As of date for a benchmark assignment as the End Date for that assignment. That date indicates the transition from use of one representative entity's return history to use of the return history for a more recent representative entity or to the return history of the fund itself.

Set Up Sys Item 33

Before you use SRRI Reporting, you must set up Sys Item 33, MFP SRRI Weekly Crossover Condition Methodology. Sys Item 33 determines how the system links data to backfill the history of weekly returns, as follows:

• 0 (use fund as of BEGIN DATE). (Default) Uses a linking process to calculate a weekly return with a single representative fund for any given week.

• 1 (use actual dates). Uses a linking process to calculate a weekly return that can use more than one representative fund in a given week, and can calculate a weekly return using as combination of NAVs and returns.

Crossover Conditions

A crossover condition can occur in SRRI when the representative fund assignment changes at a day that is not the first day in the given week. For example, consider that the SRRI calculation is being run for 260 weeks for Fund 2 and the 5 year history of the representative funds is as follows:

The crossover condition occurs because the End Date in Field derives a given week that goes from 12/27/2007 to 1/2/2008. In this case, Fund 1 is assigned for 12/27 through 12/29, and since 12/29 is the last day of the assignment for Fund 1, the profile fund (Fund 2) is used from 12/30 forward. Currently, the linking process defaults to using Fund 1 for that week because that was representative fund assigned as of the BEGIN DATE in the week.

Eagle provides 2 methods to backfill the history of weekly returns.

Calculate Weekly Returns With a Single Representative Fund Per Week

If you set Sys Item 33, MFP SRRI Weekly Crossover Condition Methodology, to 0 (use fund as of BEGIN DATE), Eagle uses a linking process to calculate a weekly return with a single representative fund for any given week. Eagle initially uses daily NAVs to calculate weekly returns for a fund. If the system identifies at least 1 NAV for the fund, it assumes that all NAVs in the date range are present for that fund.

However, when calculating weekly returns for benchmarks, if daily NAVs in the HOLDING database are not available for the benchmark, the system can use daily returns stored in the PERFORM database. When linking returns stored in the PERF_SEC_RETURNS table, the system retrieves returns that are greater than the begin date and are less than or equal to the end date. The linking process does not compare the number of observations expected for a given weekly calculation.

During processing, the system supports a transition from:

• NAV based fund to NAV based fund

• Returns based fund to NAV based fund

The system does not support a transition from a NAV based fund to a return based fund.

To illustrate this, the five year history can start with NAV based Representative Fund A, continue with NAV based Representative Fund B, and then transition to NAV based Fund 1. Or the five year history can start with returns based Representative Fund C, continue with returns based Representative Fund D, and then transition to NAV based Fund 1. But the history cannot start with NAV based Representative Fund A, transition to returns based Representative Fund C, and then transition to NAV based Fund 1.

Link Sub-Period Returns to Calculate Weekly Returns

If you set Sys Item 33, MFP SRRI Weekly Crossover Condition Methodology, to 1 (use actual dates), Eagle uses a linking process to calculate a weekly return with a more than one fund for any given week. This method automatically calculates sub-period returns, then links the sub-period returns to calculate a weekly return. Using the example above, a sub-period return for Fund 1 will be calculated using the NAVs from 12/27 to 12/29, and then another sub-period return for Fund 2 will be calculated using the NAVs from 12/30 to 1/2. Lastly, those two sub-period returns are linked to calculate the 12/27/2007 to 1/2/2008 weekly return. The process of calculating sub-period returns supports combining NAVs from multiple funds/representative entities and returns from multiple funds/representative entities. This process also eliminates issues with blending daily returns with NAVs because the sub-period is calculated first, then linked to generate the weekly return.

The enhanced crossover condition logic is capable of linking sub-period returns that:

• Combine Returns with NAVs

• Combine NAVs from multiple funds/representative entities

• Combine returns from multiple funds/representative entities

To illustrate the performance information that should be fetched in each scenario, let us consider that there was a transition on Wednesday from Fund 1 to Fund 2. The table below illustrates the days that should be fetched based on the transition:

Using the data fetched above, the sub-period returns linked for each scenario are: