Attribution Analysis
Candlefocus EditorThe analyst looks at how a portfolio manager’s investments, asset allocation, and market timing decisions impacted the performance of a portfolio, either positively or negatively, relative to the benchmark. On the positive side, attribution analysis looks at how well the manager selected investments, asset classes, and timed entry and exits. On the negative side, the analyst reviews how much the manager’s stock, asset class, and market timing decisions hurt the portfolio’s performance, relative to the benchmark. By looking at these characteristics of the portfolio, an analyst can identify weaknesses and devise strategies for improving performance.
Attribution analysis allows for evaluation at three different levels. The first is "asset selection," which assesses the investment decisions made by the portfolio manager, as well as the factors influencing those decisions. The second is "asset allocation," which evaluates the mix of different asset classes and the weightings placed in each class. Finally, attribution analysis looks at the "market timing" of the portfolio's trades, which is the impact of the manager’s entry and exit points, and the overall directional change of the market.
Attribution analysis allows the portfolio manager to learn and understand how the portfolio’s individual holdings and overall asset allocation worked together in relation to a benchmark over a period of time. By creating an understanding of what factors contributed to a portfolio’s success or failure over time, portfolio managers can gain valuable insights into their own strategies and make adjustments to future strategies, as needed. Through active attribution analysis, portfolios managers can confidently measure performance, adjust strategies, and ensure that the portfolio is positioned for success.