attribution calculations return attribution analysis aims to identify and explain sources of portfolio performance. It quantifies, each of the portfolio managers active decisions in a manner that explains the difference between the portfolio return and The Benchmark return known as relative attribution. It can also be conducted as absolute return attribution analysis or return contribution analysis.
This is not calculated relative to a benchmark and identifies the contributions of portfolio components to the total return of the portfolio.
Returns based or factor attribution uses only the portfolio returns over a period of time to identify the factors that have generated the returns observed. It is most appropriate when the underlying portfolio holding. The information is unavailable for example hedge funds because Holdings are not typically disclosed. It is the quickest and easiest to implement because it does not access the underlying Holdings but offers the least amount of detail Holdings based attribution is calculated by reference to the underlying beginning period Holdings of the portfolio only it can be calculated using monthly weekly or daily data with shorter time periods. Leading to Greater accuracy. It ignores transactions between measurement periods. Therefore.
It is most appropriate for portfolios with low turnover transaction based attribution is calculated by using both the Holdings of the portfolio and the transactions buys.
Cells that occurred during the evaluation period this is the most accurate type of attribution analysis, but also the most difficult and data intensive to implement.
The Brinson attribution method is a foundational and well-known method to decompose the excess return of a portfolio relative to its Benchmark portfolio. The process involves comparing the total return of the manager's actual investment Holdings with the return for predetermined Benchmark portfolio and decomposes the difference into the following three effects.
One the allocation effect, which is the broad allocation level asset class sector country Etc.
Two the selection effect, which is at the security level and three the interaction effect, which is a balancing figure. The Brinson approach was designed chiefly with Equity returned attribution in mind, but it can be suitable for only the simplest of fixed income investment processes more robust fixed income return attribution models tend to be data and computationally intensive.
The allocation effect refers to the value of the portfolio manager adds or subtracts by having portfolio broad allocation weights that are different from The Benchmark weights a weight in the portfolio greater than the Benchmark weight would be described as overweight a weight less than the Benchmark weight would be described as underweight an example of allocation effect is holding a 15% waiting for energy Securities versus The Benchmark having a 20% energy component.
Selection effect is the value the portfolio manager adds by holding individual Securities of instruments within the broad allocation in different from Benchmark weights an example of selection effect is holding a different proportional mix of energy Securities than the benchmark.
The interaction effect is the effect resulting from the interaction of the allocation and selection decisions combined.
For example holding 50% of your energy allocation in Exxon compared to the Benchmark with 20% The various effects can be applied at different levels in the investment decision process sponsor level manager level country level sector level and security level.
Here we see a portfolio and a benchmark the first two columns illustrate the weights of the portfolio and The Benchmark the portfolio has an underweighting to Consumer Staples, but in overweighting to materials the third and fourth columns, give the weighted average of the sector returns. We now want to be able to understand how the portfolio got an excess return of 1.8% by breaking down the excess return into the amount coming from sector allocation and the amount coming from security allocation.
