Press Release

London, Nice, Paris, Singapore, 7 April 2015

In new research, EDHEC-Risk Institute proposes a different reporting approach to better assess the real risks and performance of a portfolio

In a new publication entitled « Accounting for Geographic Exposure in Performance and Risk Reporting for Equity Portfolios », EDHEC-Risk Institute underlines the usefulness of analysing the performance and risks of portfolios, by taking into account their geographic equity exposure based on real economic activity and not only on their place of listing or, more generally, the nationality assigned to them in market indices. This research was conducted with the support of CACEIS as part of EDHEC-Risk Institute’s research chair on “New Frontiers in Risk Assessment and Performance Reporting”.

This study finds that, for a number of stocks, their official nationality does not match their real economic exposure as represented by the company’s distribution of sales. A dominant practice in the search for international diversification of equity portfolios is to classify stocks according to their place of listing, incorporation or headquarters. However, such a practice is questionable within the context of a globalised marketplace where a company's operations are typically not restricted to any single country.

This study uses geographic segmentation sales data introduced by the new international accounting rules that preside over the reporting activities of listed companies within the context of assessing geographic equity risk exposure. This study clearly shows that, in developed market indices, the percentage of company sales generated outside the official region of the index is significant and has increased in recent years. For example, the cap-weighted non-US exposure of the S&P 500 and the non-European exposure of the STOXX Europe 600 between June 2004 and June 2013 increased from 30% to 39% and from 41% to 53%, respectively. This indicates, for the STOXX Europe 600 for example, this indicates that the index is predominantly non-European.

These real economic exposures essentially influence variations in index performance. A clear separation between stocks actually exposed to the nationality of the index and those that are not allows us to distinguish the real differences in performance between these groups, naturally with conditional performance that is more or less pronounced vis-à-vis the market that they officially supposed represent or, conversely, the market that matches their real geographical exposure.

In this study, EDHEC-Risk Institute ultimately shows that the assessment of the geographic exposure and diversification of portfolios presents an incorrect view when simply using measures such as a stock’s place of listing, place of incorporation or, more generally, the nationality of the indices it belongs to. Consequently, it may transpire that the geographical diversification of equity portfolios, based on such incorrect assessments of economic exposure, turns out to be vastly sub-optimal.

In this perspective, this EDHEC-Risk Institute initiative, supported by CACEIS, allows investors to take account of the real geographic risks of their portfolios when making strategic or tactical asset allocation decisions. It would indeed be disappointing for asset managers to compromise their asset allocation policy by poorly evaluating the geographic reality of their portfolio or benchmark.

A copy of “Accounting for Geographic Exposure in Performance and Risk Reporting for Equity Portfolios” can be downloaded via the following link:

EDHEC Publication Accounting for Geographic Exposure in Performance and Risk Reporting for Equity Portfolios

About CACEIS

CACEIS is the asset servicing banking group dedicated to institutional and corporate clients. Through offices across Europe, North America and Asia, CACEIS offers a broad range of services covering execution, clearing, depositary and custody, fund administration, middle office outsourcing, forex, securities lending, fund distribution support and issuer services. With assets under custody of €2.4 trillion and assets under administration of €1.4 trillion, CACEIS is one of the world market leaders in asset servicing, the second depositary bank and the leading fund administrator for European funds (figures as of 31 December 2014).

www.caceis.com

About EDHEC-Risk Institute

Since 2001, EDHEC Business School has been pursuing an ambitious policy in terms of international research. This policy, known as “Research for Business”, aims to make EDHEC an academic institution of reference for the industry in a small number of areas in which the school has reached critical mass in terms of expertise and research results. Among these areas, asset and risk management have occupied privileged positions, leading to the creation in 2001 of a major research facility: EDHEC-Risk Institute. This institute now boasts a team of over 95 permanent professors, engineers and support staff, as well as 48 research associates from the financial industry and affiliate professors.

EDHEC-Risk Institute is located at campuses in Singapore, which was established at the invitation of the Monetary Authority of Singapore (MAS); the City of London in the United Kingdom; Nice and Paris in France; and New York in the United States. The philosophy of the institute is to validate its work by publication in prestigious academic journals, but also to make it available to professionals and to participate in industry debate through its Position Papers, published studies and conferences. Each year, EDHEC-Risk organises three conferences for professionals in order to present the results of its research, one in London (EDHEC-Risk Days Europe), one in Singapore (EDHEC-Risk Days Asia), and one in New York (EDHEC-Risk Days North America) attracting more than 2,500 professional delegates..

To ensure the distribution of its research to the industry, EDHEC-Risk also provides professionals with access to its website, www.edhec-risk.com, which is entirely devoted to international risk and asset management research. The website, which has more than 65,000 regular visitors, is aimed at professionals who wish to benefit from EDHEC-Risk’s analysis and expertise in the area of applied portfolio management research. Its monthly newsletter is distributed to more than 1.5 million readers.

EDHEC-Risk Institute also has highly significant executive education activities for professionals. In partnership with CFA Institute, it has developed advanced seminars based on its research which are available to CFA charterholders and have been taking place since 2008 in New York, Singapore and London. EDHEC-Risk Institute has an original PhD in Finance programme which, in addition to its highly selective residential track for young talents worldwide, has an executive track for high level professionals who already have master’s degrees from prestigious universities and significant industry experience. These professionals are looking to go beyond their usual activities in order to develop research on the concepts that are relevant to their occupation. Complementing the core faculty, this unique PhD in Finance programme has highly prestigious affiliate faculty from universities such as Princeton, Wharton, Oxford, Chicago and CalTech.

In 2012, EDHEC-Risk Institute signed two strategic partnership agreements with the Operations Research and Financial Engineering department of Princeton University to set up a joint research programme in the area of risk and investment management, and with Yale School of Management to set up joint certified executive training courses in North America and Europe in the area of investment management.

Building on its experience in the area of beta analysis and creation, EDHEC-Risk Institute has also created ERI Scientific Beta, which aims to be the leading provider of advanced beta for the investment industry. This initiative is based on all of the research conducted by EDHEC in the area of indices and benchmarks.

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