Attribution Analysis is a sophisticated method for evaluating the performance of a portfolio or fund manager. Also known as “return attribution” or “performance attribution,” it attempts to quantitatively analyze aspects of an active fund manager’s investment selections and decisions—and to identify sources of excess returns, especially as compared to an index or other benchmark. The goal is not simply to measure how well a given portfolio has done, but also why it has done well or poorly.There are many different ways that Attribution analysis can be performed; the most common approach breaks down performance into three categories: security selection, market timing, and factor exposure. Security selection includes stock picking and sector allocation; market timing looks at whether the fund was buying (or selling) stocks at the right time; while factor exposure measures how much risk the manager took on relative to what could have been achieved by investing in a broad-based index.By analyzing all these factors separately, Attribution analysis can help investors understand which ones were most important in achieving (or under performing) their goals. This information can then be used to help make better investment choices in future—either by selecting a different active fund manager, or by adjusting one’s own portfolio allocations accordingly.
