To analyze or measure the results of the manager's actions, the Brinson-Fachler attribution process decomposes the asset's returns into currency, cross product, allocation, selection, and interaction effects. See the following figure.
The total attributed value is 0.255%. This is the excess return or the value added by active portfolio management. It is the sum of the currency, cross product, allocation, selection, and interaction effects.
The currency and cross product are calculated as positive effects. The allocation effect measures the impact of decisions to overweight or underweight particular asset segments relative to the benchmark. The selection effect measures the impact of choosing securities within an asset segment that provide different returns from the benchmark. The interaction effect results from an interaction of the other two effects. It is often combined, as it is in this example, into the selection effect. This combined effect uses the same equation as the security selection effect in Karnosky-Singer attribution. Therefore, the results are the same.
The Karnosky-Singer attribution process decomposes the asset returns into currency selection, market selection, and security selection effects. See the following figure.
The total attributed value is also 0.255%. It is the sum of the currency selection, market selection, and security selection effects.
The market selection effect measures the impact of decisions to overweight or underweight particular asset segments relative to the benchmark. Unlike the Brinson-Fachler model, a positive market selection effect results and a negative currency selection effect results from the currency exposure that came along with those weights.
The difference between the two models lies in the clean separation of the market and currency effects. The Karnosky-Singer model defines the currency selection effect based on cash returns and the market selection effect in terms of return premiums.
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