What is Performance Attribution?

Performance attribution is an analytical process to identify the sources contributing to a return and/or excess return. The purpose of performance attribution is to decompose the total return and explain the performance in terms of investment strategy and changes in market conditions.

A primary focus of attribution is to find the source of the portfolio's excess return. Excess return is the difference between a portfolio and its benchmark. Excess return is also referred to as the active return, alpha, value added, relative return, and net management effect. This value can be calculated as either an arithmetic difference or geometric ratio.

Attribution effects measure the impact of the manager's actions. To measure or analyze the effects of the manager's actions you need a model. Attribution models are designed to identify the relevant effects that impact performance, and to assess the contribution of each of these effects to the total excess return.

Attribution models calculate the attribution effects for single-periods. If you want to link these effects to achieve multi-period attribution and you are using the arithmetic or geometric approach, you can employ multi-period smoothing models, such as Carino or Menchero.

If you want to account for the currency effects that arise when you are invested across multiple currencies, you need to employ a multicurrency or global attribution model. This book provides insight into the key attributes of both single and multicurrency attribution and how it can be applied using the Global Attribution Group field.