Practical Portfolio Performance Measurement and Attribution, Second Edition

9

Further Attribution Issues

Prudens quaestio dimidium scientiae. Half of science is asking the right questions.

Roger Bacon (1214-1294)

ATTRIBUTION VARIATIONS

The Brinson model remains the foundation of performance return attribution methodologies but there are many variations and some alternatives.

Contribution analysis (or absolute return attribution)

Portfolios without benchmarks or absolute return strategies do not readily fit into the definition of performance attribution since there is no benchmark to attribute against. Contribution analysis simply breaks down the total return of the portfolio by individual instrument or instrument types to provide some information of the sources of return in the portfolio.

Even though there is a zero or cash return benchmark, standard attribution analysis may still be applied. The portfolio manager may be employing a clear strategy to add value to an absolute return objective – that strategy may be converted to customised benchmark and hence attribution can be calculated. Market neutral-type strategies are a good example of this approach.

Return (or regression)-based attribution

Return-based attribution uses regression analysis to identify the sources of return of a portfolio. These sources of return or factors can be statistically derived from principal component analysis, macroeconomic factors or fundamental factors. Stock-specific factors are normally the residual of the chosen approach. Although useful information can be derived ...