Attribution Analysis

Key Highlights

• Attribution Analysis is a performance evaluation technique used to determine the sources of a portfolio’s returns relative to a benchmark.

• Attribution analysis generally involves three core components which are asset allocation effect, security selection effect and interaction effect.

What is Attribution Analysis?

Attribution Analysis is a performance evaluation technique used to determine the sources of a portfolio’s returns relative to a benchmark. It helps investors and fund managers understand whether investment results stem from strategic decisions (like asset allocation) or security selection.

This analysis breaks down portfolio performance into measurable components, providing clarity on the effectiveness of investment decisions and the skill of the portfolio manager.

Purpose of Attribution Analysis

The core objective of attribution analysis is to identify what drives performance - whether returns are due to market movements, allocation strategy, or active management choices. For institutional investors and wealth managers, it’s a key diagnostic tool for evaluating the value added through active management versus passive exposure to markets.

Key Components of Attribution Analysis

Attribution analysis generally involves three core components:

• Asset Allocation Effect: Evaluates how decisions about the distribution of investments across asset classes (e.g., equities, bonds, alternatives) contributed to performance.

• Security Selection Effect: Measures the impact of choosing specific securities within each asset class relative to the benchmark.

• Interaction Effect: Captures the combined impact of allocation and selection decisions working together.

Applications of Attribution Analysis

Attribution analysis is widely used by portfolio managers, analysts, and institutional clients to:

• Assess manager skill and strategy effectiveness.

• Refine investment processes by identifying strengths and weaknesses.

• Provide transparent reporting to investors and stakeholders.

• Support performance benchmarking and compensation evaluation.

Benefits of Attribution Analysis

• Enhances accountability and performance transparency.

• Helps identify alpha generation sources.

• Aids in refining portfolio strategy and structure.

• Strengthens client communication with quantifiable evidence of value creation.

Limitations of Attribution Analysis

• Complexity: Requires robust data and accurate benchmarks.

• Attribution Errors: Small data inconsistencies can distort results.

• Backward-Looking Nature: Reflects past performance, not necessarily future outcomes.