Practical Portfolio Performance Measurement and Attribution, Second Edition

5

Performance Attribution

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

Milton Friedman (1912-2006)

 

Definition Performance attribution is a technique used to quantify the excess return of a portfolio against its benchmark into the active decisions of the investment decision process.

 

Performance return attribution is a key management tool for several key stakeholders in the asset management process.

Above all it is the key tool for performance analysts; it allows them to participate in the investment decision process and demonstrably add value, thus justifying their salary. Performance return attribution, together with risk analysis, is the key tool that allows the analyst to understand the sources of return in a portfolio and to communicate that understanding to portfolio managers, senior management and clients.

Effective attribution requires that the analyst thoroughly understands the investment decision process. The task of the analyst is to quantify the decisions taken by the portfolio manager. If the analyst can demonstrate an understanding of the decision process and accurately quantify the decisions taken then the confidence of the portfolio manager will soon be gained. There is little value in analysing factors that are not part of the decision process.

Portfolio managers are obviously major users of attribution analysis. Clearly, they will have a good qualitative understanding of the portfolio but not necessarily a good quantitative ...