The Explainer explained

Overview

The function of Explainer breaks down all activity in the account and aims to completely attribute the change in the Net Worth over a given time period to the contributing factors.

All calculations are based on a) transaction tickets of the underlying account with the categorization to them and b) the market data for underlying assets and exchange rates.

The abbreviation "PnL" stands for "Profit and Loss".

Fundamental Treatments

Date Selection

Any day can be a Start date or End date for the Explainer.

The evaluation will run from the Closing Prices of the start date to the Closing Prices of the end date.

Which means that flows that happened on the start date are excluded from the attribution.

Assume we wanted to understand the performance of the month of January 2017, the dates to choose are 31-Dec-2016 to 31-Jan-2017.

The closing values of 31-Dec are equal to the opening values on 01-Jan. To ensure that a particular day is included in the attribution, set the start date to one day prior.

FX Reval

One of the most important concepts is FX revaluation, a very important topic which causes a headache and adrenaline rush in equal portions.

Opening Positions:

The market value of any position is taken at the start date and any exchange rate difference at the end date is applied to this.

This distinction becomes very important when we look at the attribution between exchange rate moves and price moves.

Example: An account with Base currency in USD and an account in JPY which holds 100 shares in Toyota.

Here we have three alternative end date scenarios 

End 1 = only FX rate move, no price move

End 2 = no FX rate move, only price move

End 3 = FX rate move and price move combined

Both start values and end values are converted to a market value via quantity x price / exchange rate.

Scenario 1 has only FX movements, so the attribution of -333 in this example is straightforward, in that all change is due to the FX rate change.

As mentioned before, the FX revaluation for securities is based on the market value on the opening day. The price move of the share price during the period has no impact on FX Reval, only opening market value and exchange rate change matters.

Scenario 2 has only Price movements in the underlying shares. Again, the attribution of +100 is clear in that it is only price move and therefore Unrealised PnL.

The Price move is only attributed at the end day FX rate. That means FX rate at the beginning of the period does not matter for the Unrealised PnL calculation.

Scenario 3 is where things become interesting; we have a total move of +263 to explain. We are applying the same method as before:

• • The beginning market value together with the exchange rate move determines the FX Reval of [(7,000x100) / 95] - 7,000 = +368 
  • The share price move into quantity and end date FX rate determines the Unrealised PnL of [(-100*100) / 95 ] = -105 

Flows = intra-period cash flows

Any Flow (Dividends / Coupons or Realised PnL) is displayed with the exchange rate on the date that the flow occurred - with subsequent exchange rate movements classified as FX Reval.

Example: The same case as before: An account with Base currency in USD and an account in JPY which holds 100 shares in Toyota.

Here we have added an intra-period cash flow, and based on the same three ending scenarios we are observing the impact on the flow representation.

The cash from the dividend payment is assumed to stay in the JPY account and is not converted into USD.

The FX Reval and Unrealised PnL of the security holding is not impacted by the dividend payment.

The dividend is represented as Realised PnL with the exchange rate from the day the flow actually occurred, 102.5 in this case. No matter what end date is selected for the period (and what the exchange rate values are at period end), the dividend payment will always show as 341.5.

The only distinction between the scenarios is the FX reval that is applied to the cash. At the point that the dividend is paid into the account, it no longer is related to the investment position in Toyota shares and should not be attributed to it. It will now be treated as a cash position.

Scenario 1 JPY has devalued between dividend payment and period end, the 35,000 JPY were worth USD 341.5 on the payment date and USD 333.3 on the period end date. The USD -8.1 is therefore FX Reval.

Note that we have rounded to one digit after the comma to keep the example readable. The actual numbers are 333.3333 - 341.4634 = -8.1301.

Scenario 2 JPY has appreciated between dividend payment and period end, the 35,000 JPY were worth USD 341.5 on the payment date and USD 350 on the period end date. The USD +8.5 is therefore FX Reval.

Scenario 3 JPY has appreciated between dividend payment and period end, the 35,000 JPY were worth USD 341.5 on the payment date and USD 368.4 on the period end date. The USD +27 is therefore FX Reval.

Intra Period Transactions

Intra Period transactions are assumed to have an opening FX rate as per the day the transaction occurred.

All other treatments for FX Reval or Unrealised PnL are identical to opening positions.

Report Sections

Realised Earnings

The value in this category is converted into the base currency at exchange rates of the day the payment was made → see section on FX Reval.

All payments after the start and up to and including the end date are included here → see section on Date Selection.

Distributions

All payments that are related to an investment, most commonly Dividends or Coupons.

Contributions

All payments that are made into an investment that do not impact the quantity of the holding, most commonly tranched payments into Hedge Funds or Private Equity positions.

Realised Profits

This category is very position specific and captures any profit realised on a position that was partially or fully closed out with a transaction during the period in question - even if the opening of this position was done before the period start date.

• • The closing date of a position is after the start date but before or on the end date.
  • Realised PnL is calculated as the (closing price - average price) x quantity closed out.
  • Because Realised PnL uses the average purchase price of a position, it does not use the period start date price that is selected for an Explainer period.
  • What counts as closing a position:

• • • Any purchase when a positive quantity holding exists
    • Any sale when a negative quantity holding exists
    • Average price is quantity weighted
    • Any purchase or sale with a prior quantity holding of zero will set the average purchase price to the traded price of this transaction.

Interest

All payments that are classified as Interest, further split into Deposit Interest or Loan Cost. Each category will also hold items of an interest category that were due on current accounts.

Income/Expense

Income or Expenses are commonly account fees, advisory fees or any other miscellaneous items that are specifically booked under the current account activity.

Unrealised Earnings

Accrued Interest

The change in accrued interest on a position converted to base currency on the end day of the period.

This is NOT the amount of interest that has accrued during the period; this is the CHANGE in the outstanding interest accrual.

This means that this number can easily be negative if a bond had a large accrual portion on the beginning of the period which was paid out during the period.

The interest accrual paid out will be found in the > Realised Earnings > Distributions > Coupons section.

The market value of accrued interest on the start date of the period is also used to determine FX Reval for the period and can be found in > FX Reval > FX Reval on Securities > Currency > Detail Table

Unrealised Profit

The example for FX Reval in the Fundamental Treatments section of this article already mentions an example of what counts towards Unrealised Earnings.

We use the (market price end - market price start) * quantity / exchange rate on the end date.

All changes of a position that are due to exchange rate changes are not counted in Unrealised Profit but rather in FX Reval and can be found in the > FX Reval > FX Reval on Securities > Currency > Detail Table

Additionally, the Realised Profits section can influence Unrealised Profit!

Realised Profits are calculated position specific whenever any open position is fully or partially closed out during the period of attribution.

Which means that Realised Profit reach out of the period, whereas the current Unrealised Profit calculation is only intra period.

Unrealised Profits in Explainer, therefore, include a reversal of position specific unrealised profits (on positions that were closed out during the relevant period) that were accumulated prior or on period start date.

Due to this treatment, it is possible that Unrealised Profits can become negative even though the price of the instrument has risen during the period.

Fund Flows

All external flows that are relevant to the account.

Note that this is done at portfolio level (Child Account) and may include transactions that were transferred between portfolios under the same parent.

The granular view allows the system to be able to drill down and regard each portfolio as a unit and properly reflect any combination of portfolios.

To understand more detail of each transaction, they can be viewed based on the transaction reference found in the detail table below the summary.

Incoming Funds

All flows that are marked as Inflow for the account.

Outgoing Funds

All flows that are marked as Outflow for the account.

Incoming Securities

All securities including loans or deposits that have been transferred into the account without payment.

Outgoing Securities

All securities including loans or deposits that have been transferred out of the account without payment.

Currency Transactions

All cash transactions that have been marked as FX Spot.

Since this category holds the buy and sell legs of the transactions it should only display a small net amount.  Any amounts here are due to the valuation difference between executed price and the day's closing price.

If this category shows a very large amount, it is likely that one leg of the transaction was not captured in this analysis. This can be due to the portfolio being excluded from the analysis or the transaction not being identified as FX Spot transaction.

FX Reval

This section is broken down by currency.

All positions that are not in base currency will attract FX Reval.

FX Reval on Securities

All security holdings, whether they are held at the beginning of the period or acquired within the period, are included here

FX Reval on Cash

All cash holdings, whether they are held at the beginning of the period or acquired within the period, are included here.

That includes payments coming from security holdings.

Networth Summary

This section summarises the findings from the attribution.

While all other bars in the chart are cumulative and each category starts where the previous one ends, the bar in the chart representing Networth is the summation of all categories and will start from zero.

Start Networth

The market value of the account using the closing prices on the start date.

End Networth

The market value of the account using the closing prices on the end date.

Change in Networth

This is what we are looking to explain, and therefore (End Networth - Start Networth).

Attributions Total

The sum of the individual items that we have detailed in the table.

Unexplained

The difference between Change in Networth and Attributions Total.

This number should be zero or near zero.

Because of minor rounding found in the calculation and limitations in floating point operations which provide substantial processing speed improvements, it is common to find small amounts in this category.

This is highly dependent on the number of transactions in the period and the length of the period.

If this number has any meaningful values, please contact the Canopy team to investigate the source of the discrepancy.

Performance

This details the amount of the Networth change that is attributable to investment activity.

It is calculated as Change in Networth - Incoming/Outgoing Funds and Securities.