Attribution Analysis

What is 'Attribution Analysis'

Attribution analysis is performance-evaluation tool used to analyze the ability of portfolio and fund managers. Attribution analysis uncovers the impact of the manager's investment decisions with regard to overall investment policy, asset allocation, security selection and activity. In this type of analysis, a fund or portfolio's returns are compared to a benchmark to determine whether a manager is skilled or just lucky.

BREAKING DOWN 'Attribution Analysis'

Attribution analysis, in essence, is a tool used by investment companies to analyze and track the performance of their portfolio managers. Usually, the performance of a portfolio is attributed to either stock picking, investment strategy or market timing, which some investment companies consider to be more luck than skill. The implementation of attribution analysis tells a company which of the above scenarios aided in the portfolio manager's returns.

Fund and portfolio management costs money, so attribution analysis helps determine whether that money is being well spent. This technique is commonly used by institutional investors and is not widely used by individuals. Such an analysis helps large investors enlist the best managers and maximize their returns.

Example of Attribution Analysis

Usually, the returns of an effective portfolio manager can be attributed to asset class returns, or, the individual stocks and securities that he chooses to invest. To a lesser degree, returns can also be attributed to the investment style of the portfolio manager. For example, some portfolio managers focus on growth stocks while other portfolio managers invest in dividend paying stocks. Since market forces are sometimes to blame for the performance of specific investment styles, it's not as important an attribute as the specific stocks that are chosen within that investment style.

If, using another example, a portfolio manager chooses to invest in high-growth stocks, and the market enters a recession that naturally decreases the returns of that specific asset class, the manager won't be completely beholden to the decreased returns. However, he will be judged on the performance of the stocks he chose within that asset class against a relative benchmark. So, if an index of growth stocks had declining returns of 10% to 5% from one year to the next, but the portfolio manager's returns only declined by 3% over that same period, attribution analysis would say that he generated satisfactory returns.

Finally, a portfolio manager's returns can be assessed based on market timing. Since market timing is largely out of the control of the investor, this aspect is valued the least. However, it is still taken into account in attribution analysis. One way to track the results of market timing is to analyze a manager's returns in both a down market and an up market and look at the disparity.