Fa Variance Commentary

Variance Commentary

When to use

Use this to explain why a fund figure moved — NAV or return period over period, income vs prior period, expense ratio vs budget, a balance-sheet line vs last close, or actual vs a forecast — in language an investor, auditor, or board can rely on. It turns a raw delta into a short, sourced narrative with each material piece attributed to a real driver.

Not for: proving a balance ties to its source (use fa-gl-recon or fa-nav-tieout) or hunting the transaction behind a difference (fa-break-trace). This explains a movement you already trust; it does not prove one.

Method

1. Frame the comparison. State the metric, the two points (current vs prior/budget), the absolute and percentage change, and the materiality threshold you'll comment to.
2. Confirm the numbers are proven. Decision point: don't write commentary on an untied figure — an unexplained variance may be an error, not a story. Reconcile first.
3. Decompose the change into drivers: for return, use attribution (allocation, selection, FX, income, fees); for a balance, use the roll-forward flows; for expenses, split rate vs volume vs one-offs.
4. Quantify each driver. Attach a number and a sign to every contributor; the drivers must sum to the total variance (residual = 0). Decision point: an unattributed residual above threshold means a missing driver — keep decomposing.
5. Attribute root cause. Name the reason (a position rallied, FX moved, a fee trued up, a subscription diluted), not just the account.
6. Rank and threshold. Lead with the largest drivers; net small offsetting items into "other." Comment on everything above threshold, individually.
7. Write it tight and sourced. One to three sentences per material driver, each pointing to its evidence; state anything still unexplained plainly rather than hand-waving.

Example

NAV/unit +1.43% this month vs +0.60% expected. Decompose: equity selection +1.10% (overweight XYZ, +18% on earnings, the single largest contributor); FX +0.20% (EUR book, EUR +1.1% vs base); income +0.04%; management fee −0.11% (routine accrual); a one-off audit-fee true-up −0.03% (invoice above accrual, reset going forward); residual +0.00%. Drivers sum to +1.20% net of the +0.23% base carry = +1.43%, nil residual. Commentary: "Return of +1.43% was driven principally by security selection (+1.10%), notably an overweight position in XYZ following results, with a favorable EUR contribution (+0.20%); a modest audit-fee catch-up (−0.03%) reset the ongoing accrual."

Pitfalls

• Commenting on an untied number. If the figure isn't reconciled, the "variance" may be an error; you'll narrate a bug.
• Restating the number instead of explaining it. "Expenses rose because expenses were higher" is not commentary — name the driver and the cause.
• Leaving a residual. Drivers that don't sum to the total mean a driver is missing or double-counted; an unexplained residual undermines the whole note.
• Netting away a material offset. A big positive and big negative that net small each deserve their own line — burying them hides risk and effort.
• False precision or vague causation. Don't attribute to two decimals when the source is an estimate, and don't say "market conditions" when you can name the position, rate, or fee.

Output format

Metric: <...> | Current: <> vs prior/budget: <> | Δ abs: <> | Δ %: <> | Threshold: <>
Numbers proven: Y/N (source)
Driver attribution:
  | driver | contribution | sign | root cause | evidence |
  ... (largest first)
  residual: <should be 0>
Commentary (prose):
  <1–3 sentences per material driver, sourced>
Unexplained / to investigate: <...>

Reference

Variance vs attribution

A variance is the raw delta (this − that). Attribution decomposes it into additive drivers that sum back to the delta with no residual. Good commentary is attribution written in prose: every material dollar or basis point of the variance is assigned to a named driver, and the reader can reconcile the words back to the number.

Return attribution (Brinson-style)

Decompose active return vs a benchmark into:

• Allocation — over/underweighting sectors/regions that out/under-performed.
• Selection — picking securities that beat their sector.
• Interaction — the cross term of allocation and selection.
• Currency / FX — return from currency exposure and hedging.
• Income vs price — coupon/dividend yield vs capital movement.
• Fees — management, incentive, and other expenses drag. These sum to the total active return; a residual signals a missing effect (often FX or fees).

Expense variance: rate vs volume vs one-off

Split an expense change into: rate (fee % changed), volume/base (AUM or driver changed), and one-off/timing (true-ups, catch-ups, non-recurring costs). Δexpense ≈ (Δrate × base) + (rate × Δbase) + one-offs. Distinguishing a permanent rate change from a one-time true-up is the whole point — one resets the run-rate, the other doesn't.

Balance variance via roll-forward

For a balance-sheet line, the drivers are the roll-forward flows: Δbalance = additions − reductions ± adjustments. Capital moved because of subscriptions, redemptions, P&L, and distributions; investments moved because of buys, sells, and revaluation. Tie commentary to the movement note, not just the two endpoints.

Materiality and thresholds

Comment to a stated threshold — commonly a fixed dollar amount and/or a percentage (e.g., items > $50k or > 5% of the line, and any driver > a set number of basis points on return). Below threshold, net into "other." The threshold should be documented and applied consistently period to period so the note is comparable and defensible.

Writing standard

Lead with the largest driver; one to three sentences each; every claim sourced to a reconciliation, attribution run, or schedule. Quantify with the sign, use plain causal language ("driven principally by," "partly offset by"), avoid unfounded macro narration, and state any unexplained residual openly. The test: an auditor can trace every sentence back to a number.