Research Proposes New Approach to Portfolio Risk and Performance Reporting

New research from EDHEC-Risk Institute, conducted with the support of CACEIS, proposes a revised methodology for assessing the real risks and performance of equity portfolios. The study, titled «Accounting for Geographic Exposure in Performance and Risk Reporting for Equity Portfolios», argues that the traditional classification of stocks based on their country of listing or stated nationality does not accurately reflect their economic exposure in a globalized market.

The research utilizes new international accounting rules that require listed companies to report the geographic distribution of their sales. Analysis indicates a significant and growing portion of corporate sales originates outside the country of listing. For instance, the non-US sales exposure for the S&P 500 index increased from 30% to 39% between June 2004 and June 2013. Similarly, the non-European sales exposure for the STOXX Europe 600 index rose from 41% to 53% over the same period.

This divergence between official domicile and actual economic activity can lead to misinterpretations of portfolio diversification and expose investors to unforeseen risks. The study suggests that reliance on conventional assessment methods may result in sub-optimal investment allocation decisions.

The initiative by EDHEC-Risk Institute, backed by CACEIS, aims to equip investors with the ability to identify and manage the true geographic risks within their portfolios. This allows for more informed strategic and tactical asset allocation, mitigating potential drawbacks stemming from inaccurate geographic exposure assessments.