Practical Portfolio Performance Measurement and Attribution, 3rd Edition

6Return Attribution

Never try to walk across a river just because it has an average depth of four feet.

Milton Friedman (1912–2006)

WHAT IS ATTRIBUTION?

Definition

The objective of return attribution, as stated by Menchero,¹ is to explain portfolio return relative to a benchmark, identify the sources of excess return, and relate these to active decisions by the asset manager. Hensel, Ezra and Ilkiw² define attribution as the mathematical process of explaining an investment return by relating it to the different risk‐taking decisions implicit in the portfolio, and the extent to which each of those risks was rewarded or penalised in the capital markets. Colin³ says that the purpose of attribution is to disentangle the fund's overall return into its component returns generated by each risk.

In other words, return attribution measures which of your investment decisions about the portfolio's underlying risks worked, and which did not. This is critical business intelligence for anyone involved in selecting, managing, controlling or marketing investments. In general, it is not the absolute but the relative return that will be analysed.

Note

The terms performance attribution, return attribution or simply attribution are interchangeable. Performance attribution is perhaps in more common usage but as already discussed performance is not one‐dimensional; it is, at the very least, ...