553:
neutralized portfolios where the return effects of a particular class of active decisions have been stripped out, and then took the difference of the manager's portfolios against those neutralized portfolios for performance attribution. Allen's use of geometric returns also meant that non-currency return attributions could be convertible between currencies and summed up to a total portfolio attribution. Between 1992 and 1994, Ernest Ankrim and Chris Hensel introduced forward premium and currency surprise to the
Brinson models so that performance attribution could account for differential interest rates in currency decisions. In 1994, Denis Karnosky and Brian Singer demonstrated that managing multi-currency portfolios is sub-optimal if currency is not managed independently from allocation and selection effects.
25:
487:
of benchmark performance, produces a total portfolio return of 21%. One advantage of doing attribution in geometric form is that the attribution results translate consistently from one currency to another. It is plausible that this explains the popularity of geometric approaches in Europe. Another reason for using geometric attribution is that it is theoretically sound for both single period and multi period analyses, for arithmetic attribution additional "smoothing" is required to apply it to a multi period setting.
448:. This paper introduced the idea that active performance can be analysed by comparing the returns of different notional portfolios. In particular, if one examines the performance of a portfolio that holds each sector at the active weight, while earning a passive return within each sector, one can measure exactly the amount of value that is added by asset allocation decisions. The paper proposes that the performance of a fund depend on the selection of asset classes (now described as
470:. These models sub-divided active returns due to active management into security selection - return achieved through selecting different securities than the benchmark, and asset allocation - return achieved through weighting asset classes in a portfolio differently than the benchmark. The Brinson-Fachler methodology underpins many public performance attribution analyses. Morningstar, for example, includes a whitepaper on their mode of employing the Brinson-Fachler methodology.
478:
explain 11% of value added. However, arithmetic attribution faces problems in multi-period performance attribution because while benchmark returns and portfolio returns compound over multiple periods, the sum of return differences between a portfolio and a benchmark does not equal the difference between their compounded returns.
431:
suggested decomposing observed returns into returns from "selectivity", or the ability of managers to pick the best securities given a level of risk, and "timing", or the ability to predict general market price movements. The "timing" effect, or the effect of market return, was the first example of a
482:
proposed geometric excess return, as part of a geometric attribution, as a solution to this problem, and suggested that geometric attributions are preferable because they are compoundable, they are convertible among currencies, and they are proportionate (between different asset bases from period to
139:
attempts to distinguish which of the various different factors affecting portfolio performance is the source of the portfolio's overall performance. Specifically, this method compares the total return of the manager's actual investment holdings with the return for a predetermined benchmark portfolio
507:
proposed using a 12-factor model, including the market return, to determine the passive return of a portfolio that matches the style of a particular active manager, and then taking the difference between that passive portfolio and the active manager's actual portfolio return to determine the active
486:
In Europe and the UK, another approach (known as geometric attribution) has been common. If the portfolio return was 21% while the benchmark return was 10%, geometric attribution would explain an active return of 10%. The reasoning behind this is that 10% of active return, when compounded with 10%
297:
Stock
Selection: Especially within the equities sector, the manager may try to hold securities that will give a higher return than the overall equity benchmark. In the example, the securities selected by the equities manager produced an overall return of 5%, when the benchmark return for equities
477:
The
Brinson model performance attribution can be described as "arithmetic attribution" in the sense that it describes the difference between the portfolio return and the benchmark return. For example, if the portfolio return was 21%, and the benchmark return was 10%, arithmetic attribution would
324:
Some other versions of decision attribution analysis omit the interaction effect. As opposed to determining the contribution of uncontrollable market factors to active return, the type of analysis described here is meant to evaluate the effect of each (type of) controllable decision on the active
312:
Interaction captures the value added that is not attributable solely to the asset allocation and stock selection decisions. It is positive when outperformance is overweighted and when underperformance is underweighted. In this particular case, there was 0.40% of value added from the combination
499:
return data of a portfolio, and may require time series return data of securities held in that portfolio and of explanatory factor portfolios to conduct performance attribution. These methods do not require holdings data, they could be performed relatively easily, and they can compliment other
552:
developed as additions to holdings-based performance attribution methods in multi-currency portfolios. In 1991, Gregory Allen introduced geometric returns and neutralized portfolios as tools for performance attribution in a multi-currency context. Allen took a manager's portfolio and created
349:
Furthermore, modern portfolio theory requires that all return analysis be conjoined with risk analysis, else good performance results can mask their relationship to greatly increased risk. Thus, a viable performance attribution system must always be interpreted in parallel to a precisely
565:.") It is difficult to render effective comparisons between funds with different benchmarks. Proponents of adaptive benchmarking maintain that by understanding the characteristics of the portfolio at each point in time, they can better attribute excess returns to skill.
338:
They might also include analysis of the effects of country and/or currency decisions in the context of the varying risk-free rates of different currencies or the decisions to set fund or bucket values for continuous properties like capitalization or duration.
334:
Such sophisticated investment processes might include ones that nest sectors within asset classes and/or industries within sectors, requiring the evaluation of the effects of deciding the relative weights of these nested components within the border classes.
342:
In addition, advanced systems allow for the decision process within asset classes, such as, following an asset allocation, when capitalization decisions are only made for the equity assets but duration decisions are only made for the fixed income assets.
537:
methods developed as variations on holdings-based and returns-based performance attribution methods, as developments in those attribution methods were driven by equity portfolio considerations and were generally inappropriate for
440:
Holdings based return attribution began to be developed after the 1970s as one group of attribution methods; these attribution methods required portfolio holding data to conduct performance attribution.
1141:
The
Society of Investment Analysts, "The Measurement of Portfolio Performance for Pension Funds", 1972, revised 1974, available from the National Library of Australia, Call Number p 332.6725 S678-2
309:
Stock selection is the value added by decisions within each sector of the portfolio. In this case, the superior stock selection in the equity sector added 1.40% to the portfolio's return .
294:
Asset
Allocation: the manager might choose to allocate 90% of the assets into equities (leaving only 10% for cash), on the belief that equities will produce a higher return than cash.
1187:
Laker, Damien, "Arithmetic
Performance Attribution" (Chapter) in Bacon, Carl, Advanced Portfolio Attribution Analysis: New Approaches to Return and Risk London: Risk Books, 2007.
577:). For complex or dynamic portfolios, risk-based profit attribution may have some advantages over methods which rely only on realized performance. This may be the case for some
290:
Under the most common paradigm for performance attribution, there are two different kinds of decisions that the portfolio manager can make in an attempt to produce added value:
400:
study proposed common methods of comparing pension fund performance to differentiate between the abilities of their respective managers. They recommended that following:
156:
Consider a portfolio whose benchmark consists of 30% cash and 70% equities. The following table provides a consistent set of weights and returns for this example.
561:
One limitation of portfolio attribution is the reliance on a pre-determined benchmark. The stated benchmark may not be appropriate or may change over time ("
829:
1167:, Randolph Hood, and Gilbert Beebower, “Determinants of Portfolio Performance,” Financial Analysts Journal, 1986, vol. 42, no. 4(July–August), pp. 39-44.
331:
In addition, more structured investment processes normally need to be addressed in order for the analysis to be relevant to actual fund construction.
287:. The task of performance attribution is to explain the decisions that the portfolio manager took to generate this 220 basis points of value added.
54:
1192:
Spaulding, David, Investment
Performance Attribution: A Guide to What it is, How to Calculate it, and How to Use it, New York: McGraw-Hill, 2003.
306:
Asset allocation is the value added by under-weighting cash , and over-weighting equities . The total value added by asset allocation was 0.40%.
584:
Risk-based profit attribution should not be confused with risk attribution which decomposes the total risk of a portfolio into smaller units.
1079:
1057:
1035:
1013:
991:
969:
947:
925:
903:
881:
859:
760:
738:
716:
694:
672:
317:
The three attribution terms (asset allocation, stock selection, and interaction) sum exactly to the active return without the need for any
842:
283:
The portfolio performance was 4.60%, compared with a benchmark return of 2.40%. Thus the portfolio outperformed the benchmark by 220
70:
846:
573:
Risk-based performance attribution decomposes the performance of a portfolio based on various risk factors or risk exposures (see
495:
Returns-based, or factor-based, attribution methods also began to be developed after the 1970s; these attribution methods require
474:
is known for its analysis of long-only mutual funds, but the
Brinson-Fachler analysis is also applicable to hedge ranking funds.
328:
Decision attribution also needs to address the combined effect of multiple periods over which weights vary and returns compound.
1159:, and Nimrod Fachler, “Measuring Non-US Equity Portfolio Performance,” Journal of Portfolio Management, Spring 1985, pp. 73-76.
546:
risk. In addition, the selection attribution category is augmented with carry, yield curve, and spread attribution categories.
1150:
803:
781:
655:
627:
612:
1172:
Bacon, Carl, “Excess
Returns – Arithmetic or Geometric?”, Journal of Performance Measurement, Spring 2002, pp. 23-31.
346:
The most robust attribution models precisely address all of these aspects of decision attribution without residuals.
94:
1177:
Cariño, David, “Combining
Attribution Effects Over Time,” Journal of Performance Measurement, Summer 1999, pp. 5-14.
126:. The active return is the component of a portfolio's performance that arises from the fact that the portfolio is
46:
1182:
Laker, Damien, “What is this Thing Called Interaction?” Journal of Performance Measurement, Fall 2000, pp. 43-57.
646:
Jeffery V. Bailey, CFA; Thomas M. Richards, CFA; David E. Tierney (2016). "Reading 31". In CFA Institute (ed.).
597:
516:
59:
1129:
358:
There are a number of characteristics of a valid benchmark. The following is a list of such properties.
593:
508:
manager's selection ability. These passive portfolios became the foundation for later style benchmarks.
1211:
522:
In 1997, Mark Carhart proposed adding the Momentum factor to the Fama-French three-factor model in the
523:
313:
that the portfolio was overweight equities, and the equities sector also outperformed its benchmark .
1111:
393:
article established time-weighted rate of return as the most important measure of fund performance.
622:
133:
Different kinds of performance attribution provide different ways of explaining the active return.
1145:
Bacon, Carl, Practical portfolio performance measurement and attribution 2nd edition, Wiley 2008,
542:
portfolios. In 1977, Wagner and Tito replaced market return in the Fama return decomposition with
467:
50:
1196:
398:
Measuring the Investment Performance of Pension Funds for the Purpose of Inter-Fund Comparison
645:
617:
602:
648:
Trading and Rebalancing, Performance Evaluation, and Global Investment Performance Standards
420:
The report also suggested that portfolios should be compared with various sector returns.
8:
607:
464:
122:. This difference between the portfolio return and the benchmark return is known as the
115:
35:
39:
1146:
651:
504:
471:
127:
74:
449:
63:
1099:
500:
attribution methods. However, they require the appropriate definition of factors.
1164:
1156:
574:
512:
444:
In 1972, a working group of the Society of Investment Analysts (UK) published
1205:
543:
123:
539:
519:, consisting of the market return, and factors relating to size and value.
318:
119:
325:
return, and "interaction" is not a clearly defined controllable decision.
562:
496:
424:
302:
The attribution analysis dissects the value added into three components:
284:
578:
114:
is a set of techniques that performance analysts use to explain why a
404:
Return calculations should be based on market value, not cost.
452:) and on the selection of securities within an asset class.
413:
Performance measurement should include both return and risk.
446:
The Measurement of Portfolio Performance for Pension Funds
416:
Funds should be classified based on investment objectives.
57:
and tools are available to assist in formatting, such as
556:
628:
Financial risk management § Investment management
1038:. CFA Institute Research Foundation. p. 18,20–21
568:
435:
490:
1060:. CFA Institute Research Foundation. pp. 21–22
928:. CFA Institute Research Foundation. pp. 23–26
741:. CFA Institute Research Foundation. pp. 23–24
824:
822:
820:
463:introduced the Brinson models as a foundation for
763:. CFA Institute Research Foundation. pp. 5–8
697:. CFA Institute Research Foundation. pp. 3–4
1203:
1100:http://www.fundattribution.com/Home/Methodology
1082:. CFA Institute Research Foundation. p. 22
1016:. CFA Institute Research Foundation. p. 27
994:. CFA Institute Research Foundation. p. 41
972:. CFA Institute Research Foundation. p. 45
950:. CFA Institute Research Foundation. p. 25
906:. CFA Institute Research Foundation. p. 18
884:. CFA Institute Research Foundation. p. 16
862:. CFA Institute Research Foundation. p. 10
817:
719:. CFA Institute Research Foundation. p. 44
675:. CFA Institute Research Foundation. p. 42
391:Pension Funds: Measuring Investment Performance
1080:"Performance Attribution History and Progress"
1058:"Performance Attribution History and Progress"
1036:"Performance Attribution History and Progress"
1014:"Performance Attribution History and Progress"
992:"Performance Attribution History and Progress"
970:"Performance Attribution History and Progress"
948:"Performance Attribution History and Progress"
926:"Performance Attribution History and Progress"
904:"Performance Attribution History and Progress"
882:"Performance Attribution History and Progress"
860:"Performance Attribution History and Progress"
761:"Performance Attribution History and Progress"
739:"Performance Attribution History and Progress"
717:"Performance Attribution History and Progress"
695:"Performance Attribution History and Progress"
673:"Performance Attribution History and Progress"
535:Fixed income portfolio performance attribution
396:In 1968, the Bank Administration Institute's
1197:Attribution formulae from Riordan Consulting
38:, which are uninformative and vulnerable to
801:
53:and maintains a consistent citation style.
594:Outline of finance § Portfolio theory
529:
374:Reflective of current investment opinions
353:
95:Learn how and when to remove this message
832:on Brinson-Fachler methodology; May 2011
802:Bacon, Carl R.; Wright, Marc A. (2012).
550:Currency performance attribution methods
432:factor used in performance attribution.
350:commensurate risk attribution analysis.
16:Investment portfolio analysis technique
1204:
1077:
1055:
1033:
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989:
967:
945:
923:
901:
879:
857:
758:
736:
714:
692:
670:
557:Benchmark-free attribution techniques
140:and decomposes the difference into a
1112:"Risk-Based Performance Attribution"
429:Components of Investment Performance
18:
45:Please consider converting them to
13:
1191:
569:Risk-based performance attribution
461:Brinson, Hood, and Beebower (1986)
436:Holdings-based attribution history
112:investment performance attribution
14:
1223:
1130:"Risk Attribution in a Portfolio"
491:Returns-based attribution history
151:
118:'s performance differed from the
1163:
1155:
841:Publisher: The Reformed Broker;
460:
456:
410:Returns should be time-weighted.
23:
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1093:
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961:
939:
917:
895:
873:
851:
843:Analysis of the top Hedge Funds
835:
1186:
1181:
1171:
1140:
795:
774:
752:
730:
708:
686:
664:
639:
613:Fama–French three-factor model
517:Fama-French three-factor model
479:
445:
49:to ensure the article remains
1:
633:
407:Total returns should be used.
7:
1176:
587:
272:
269:
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196:
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10:
1228:
457:Brinson and Fachler (1985)
384:
598:§ Performance measurement
524:Carhart four-factor model
511:In 1993, Eugene Fama and
623:Fixed income attribution
108:Performance attribution,
1078:Bacon, Carl R. (2019).
1056:Bacon, Carl R. (2019).
1034:Bacon, Carl R. (2019).
1012:Bacon, Carl R. (2019).
990:Bacon, Carl R. (2019).
968:Bacon, Carl R. (2019).
946:Bacon, Carl R. (2019).
924:Bacon, Carl R. (2019).
902:Bacon, Carl R. (2019).
880:Bacon, Carl R. (2019).
858:Bacon, Carl R. (2019).
845:, citing analysis from
759:Bacon, Carl R. (2019).
737:Bacon, Carl R. (2019).
715:Bacon, Carl R. (2019).
693:Bacon, Carl R. (2019).
671:Bacon, Carl R. (2019).
530:Concurrent developments
468:performance attribution
389:In 1966, Peter Dietz's
650:. Wiley. p. 135.
354:Validity of benchmarks
784:. CFA Institute. 2012
618:Modified Dietz Method
603:Investment management
804:"Return Attribution"
782:"Return Attribution"
465:investment portfolio
377:Specified in advance
137:Attribution analysis
608:Portfolio (finance)
503:From 1988 to 1992,
455:In 1985 and 1986,
1212:Financial markets
1151:978-0-470-05928-9
1118:. September 2015.
847:Alpha Attribution
657:978-1-942471-14-1
505:William F. Sharpe
281:
280:
177:Asset Allocation
174:Benchmark Return
171:Portfolio Return
168:Benchmark Weight
165:Portfolio Weight
146:allocation effect
105:
104:
97:
55:Several templates
1219:
1193:
1188:
1183:
1178:
1173:
1168:
1165:Brinson, Gary P.
1160:
1157:Brinson, Gary P.
1142:
1134:
1133:
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1119:
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978:
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936:
934:
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921:
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914:
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911:
899:
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833:
826:
815:
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771:
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747:
746:
734:
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712:
706:
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702:
690:
684:
683:
681:
680:
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662:
661:
643:
450:Asset allocation
180:Stock Selection
159:
158:
142:selection effect
128:actively managed
100:
93:
89:
86:
80:
78:
67:
27:
26:
19:
1227:
1226:
1222:
1221:
1220:
1218:
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1216:
1202:
1201:
1137:
1132:. 28 July 2014.
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865:
863:
856:
852:
840:
836:
827:
818:
809:
807:
806:. CFA Institute
800:
796:
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775:
766:
764:
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742:
735:
731:
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713:
709:
700:
698:
691:
687:
678:
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669:
665:
658:
644:
640:
636:
590:
575:factor analysis
571:
559:
532:
493:
438:
387:
356:
154:
101:
90:
84:
81:
69:
58:
44:
28:
24:
17:
12:
11:
5:
1225:
1215:
1214:
1200:
1199:
1194:
1189:
1184:
1179:
1174:
1169:
1161:
1153:
1143:
1136:
1135:
1121:
1116:Northstar Risk
1103:
1092:
1070:
1048:
1026:
1004:
982:
960:
938:
916:
894:
872:
850:
834:
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729:
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685:
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637:
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631:
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620:
615:
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605:
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589:
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570:
567:
558:
555:
531:
528:
513:Kenneth French
492:
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437:
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279:
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163:
153:
152:Simple example
150:
103:
102:
47:full citations
31:
29:
22:
15:
9:
6:
4:
3:
2:
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1213:
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1207:
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1190:
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1158:
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1144:
1139:
1138:
1131:
1125:
1117:
1113:
1107:
1101:
1096:
1081:
1074:
1059:
1052:
1037:
1030:
1015:
1008:
993:
986:
971:
964:
949:
942:
927:
920:
905:
898:
883:
876:
861:
854:
848:
844:
838:
831:
825:
823:
821:
805:
798:
783:
777:
762:
755:
740:
733:
718:
711:
696:
689:
674:
667:
659:
653:
649:
642:
638:
629:
626:
624:
621:
619:
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611:
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599:
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585:
582:
580:
576:
566:
564:
554:
551:
547:
545:
541:
536:
527:
525:
520:
518:
515:proposed the
514:
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484:
481:
475:
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367:
364:
361:
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359:
351:
347:
344:
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336:
332:
329:
326:
322:
320:
319:fudge factors
311:
308:
305:
304:
303:
296:
293:
292:
291:
288:
286:
277:
276:
248:
247:
219:
218:
190:
189:
186:Total Active
185:
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176:
173:
170:
167:
164:
161:
160:
157:
149:
147:
143:
138:
134:
131:
129:
125:
124:active return
121:
117:
113:
109:
99:
96:
88:
76:
75:documentation
72:
65:
64:documentation
61:
56:
52:
48:
43:
41:
37:
32:This article
30:
21:
20:
1124:
1115:
1106:
1095:
1084:. Retrieved
1073:
1062:. Retrieved
1051:
1040:. Retrieved
1029:
1018:. Retrieved
1007:
996:. Retrieved
985:
974:. Retrieved
963:
952:. Retrieved
941:
930:. Retrieved
919:
908:. Retrieved
897:
886:. Retrieved
875:
864:. Retrieved
853:
837:
828:Morningstar
808:. Retrieved
797:
786:. Retrieved
776:
765:. Retrieved
754:
743:. Retrieved
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581:strategies.
572:
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540:fixed income
534:
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521:
510:
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494:
485:
480:Bacon (2002)
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357:
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298:was only 3%.
289:
285:basis points
282:
183:Interaction
155:
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111:
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106:
91:
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71:Citation bot
33:
563:Style Drift
497:time series
472:Morningstar
425:Eugene Fama
371:Appropriate
362:Unambiguous
85:August 2022
1086:2020-05-14
1064:2020-05-14
1042:2020-05-14
1020:2020-05-14
998:2020-05-14
976:2020-05-14
954:2020-05-14
932:2020-05-14
910:2020-05-14
888:2020-05-14
866:2020-05-14
830:whitepaper
810:2020-05-10
788:2020-05-11
767:2020-05-14
745:2020-05-14
723:2020-05-14
701:2020-05-14
679:2020-05-14
634:References
579:hedge fund
368:Measurable
365:Investable
51:verifiable
483:period).
423:In 1972,
191:Equities
120:benchmark
116:portfolio
36:bare URLs
1206:Category
588:See also
544:duration
40:link rot
385:History
244:-0.20%
235:-0.20%
162:Sector
144:and an
1149:
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273:2.20%
270:0.40%
267:1.40%
264:0.40%
261:2.40%
258:4.60%
249:Total
241:0.00%
238:0.00%
232:1.00%
229:1.00%
215:2.40%
212:0.40%
209:1.40%
206:0.60%
203:3.00%
200:5.00%
60:reFill
380:Owned
255:100%
252:100%
220:Cash
34:uses
1147:ISBN
652:ISBN
596:and
459:and
226:30%
223:10%
197:70%
194:90%
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