Performance Attribution: Introduction
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The Nematrian website differentiates between fund-level
performance measurement calculations, explained in pages linked to PerfMeasIntro, and
stock, sector and factor level performance attribution calculations described
in these pages.
Employers of investment managers will generally be
interested in understanding what has been the source of their (past) under- or
out-performance. The process of carrying out such an analysis is typically
called performance attribution.
Performance attribution typically requires high quality
accounting and/or instrument characteristic data. However, it may not
necessarily need as high quality data as may be needed for pure performance measurement
purposes.
From a theoretical perspective this differentiation arises
principally because sources of under or outperformance interact with each
other. It is therefore not always practical to expect performance allocation to
provide a unique theoretically correct answer. For example, suppose a manager
performs well in an asset class that also did well and in which he/she was
overweighted. Should we deem the additional outperformance at the fund level
coming from the good performance on the overweighted asset class be deemed to
be good ‘stock selection’ within that asset class, or good ‘asset allocation’
between classes? Once users focus on such uncertainties they may also feel that
the need for high precision is less compelling, particularly if it comes at a
high cost.
A particular issue here is that some types of transactional
data we might otherwise ideally want, i.e. prices at which instruments are
bought and sold, can in theory be dispensed with for performance attribution
purposes if we include in an ‘other’ category the contribution to performance
coming from the fund manager buying and selling instruments at other than their
period end valuations.
However, the problem with this line of reasoning is that we
can always identify situations where such blurring does not actually apply in
practice. In the situation highlighted in the previous paragraph this would
include the case where the fund manager did not deviate materially from
benchmark exposures but typically bought assets at a poor price. The element of
the attribution that we would then ideally want to focus on would have been
bucketed into the residual item that had been created by lack of better data.
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