Attribution Analysis

Attribution Analysis

What is attribution analysis

Attribution analysis is a sophisticated method for assessing the performance of a portfolio or fund manager. The method focuses on three factors: the manager’s investment style, his choice of specific securities and the market timing of these decisions. It attempts to provide a quantitative analysis of the aspects of investment choices and the philosophy of a fund manager that drive the performance of this fund.

BREAKDOWN Attribution analysis

The attribution analysis begins with the identification of the asset class in which a fund manager chooses to invest. This will provide a general reference for comparing performance. An asset class generally describes the type of securities a manager chooses and the market in which they originate. European fixed income securities or US technology stocks could be examples.

The next step in the attribution analysis is to determine the investment style of the manager. Like the class identification discussed above, a style will provide a benchmark against which to gauge the manager’s performance. The first method of style analysis focuses on the manager’s assets. Are they large or small cap? Value or growth? Bill Sharpe introduced the second type of style analysis in 1988. Yield-based style analysis (RBSA) tracks a fund’s returns and searches for an index with a comparable performance history. Sharpe refined this method with a technique he called quadratic optimization, which allowed him to assign a mix of indices that most closely matched a manager’s returns.

Once an attribution analyst has identified this mix, he can formulate a personalized performance benchmark against which he can assess the manager’s performance. Such an analysis should highlight the excess returns, or alpha, which the manager benefits from these benchmarks. The next step in the attribution analysis attempts to explain this alpha. Is it due to the manager’s choice of securities, the selection of sectors or the synchronization of the market? To determine the alpha generated by their choice of securities, an analyst must identify and subtract the part of the alpha attributable to the sector and the calendar. Again, this can be done by developing custom benchmarks based on the combination of sectors selected by the manager and the timing of their transactions. If the alpha of the fund is 13%, it is possible to allocate a certain portion of this 13% to the selection of the sector and at the time of entry and exit of these sectors. The rest will be title selection alpha.

Timing of the market and attribution analysis: skill or luck?

Academic research on the importance of market timing in the assessment of managers has led to a wide range of conclusions on the importance of timing. In general, most analyzes of the subject agree that the selection of securities and the style of investment involve a share of the manager’s performance more important than the timing. Some researchers point out that a significant part of a manager’s performance in terms of timing is random, or luck. To the extent that market timing can be measured, the researchers emphasize the importance of evaluating a manager’s returns against benchmarks that reflect ups and downs. Ideally, the fund will increase in a bullish period and fall less than the market in a bearish period. Because this is the most difficult part of analyzing attributes to put in quantitative terms, most analysts attribute less importance to market timing than to stock selection and investment style.

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