Simulation as a means of portfolio performance evaluation 145
new instruments, such as derivative instruments, exchange-traded funds and
emerging markets securities.
Data, tools and analysis techniques available to investment managers are
continuously evolving, placing inevitable pressure on investment managers
to upgrade and modify portfolio construction, analysis and monitoring tech-
Regulatory and tax environments are subject to continuous change, forcing
investment managers to modify their approaches accordingly.
Maintaining a reliable database of portfolio performance for the purpose of
multiple period portfolio comparisons for even a moderately comprehensive
range of investments is extremely difficult.
Portfolio return analyses therefore can usually span only a relatively small
number of periods, so that the results obtained nearly always fail to meet any
test of statistical significance or reveal persistent performance patterns.
The uncertainties implicit in traditional return and attribution analysis leave
plenty of room for speculation by investors that persistent outperformance
of benchmarks is due principally to luck or a particularly ‘easy’ mandate
specification; and conversely claims by investment managers that persistently
poor performance is the result of very tight or conflicting constraints. These
are claims that are difficult to reliably support or refute using conventional
return and attribution analysis.
Traditional attribution analysis cannot be applied to funds that do not reg-
ularly offer transparency of holdings to investors. Evaluation of such funds
is limited to comparison with their stated benchmarks or with funds with
similar stated investment objectives comparisons of which may be of limi-
ted validity because of differences in objectives, focus, investment universe
or constraints, and because there are often only a small number of similar
portfolios available for comparison.
Conventional return and attribution analysis does not facilitate ‘what-if’
analyses, aimed at exploring the performance effect of changing various port-
folio selection parameters, for example altering the scope of the investment
universe and testing changes in hedging policy.
Moreover, these problems are all equally acute at the level of asset
allocation for balanced portfolios and security selection for specialist sector
The objectives are:
To distinguish portfolio outcomes that are due to chance from those
resulting from deliberate investment choices and systemic biases in

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