Performance attribution identifies sources of portfolio returns from "summary" of Institutional Investment Management by Frank J. Fabozzi
Performance attribution is a crucial tool used by institutional investors to analyze the components that contribute to the overall returns of their portfolios. By breaking down the returns into various sources, investors can gain valuable insights into the drivers of performance. This process helps investors understand which investment decisions have been successful and which have not, allowing them to make more informed decisions in the future. There are several key sources that performance attribution can identify, including asset allocation decisions, security selection, and market timing. Asset allocation refers to the strategic decision of how to distribute capital among different asset classes, such as stocks, bonds, and alternative investments. By analyzing the impact of asset allocation on portfolio returns, investors can assess whether their overall strategy is effective in achieving their investment objectives. Security selection, on the other hand, focuses on the individual securities chosen within each asset class. By comparing the performance of the selected securities to a benchmark, investors can determine whether their security selection process is adding value to the portfolio. This analysis can help investors identify which securities are contributing positively to returns and which ones are detracting from performance. Market timing is another important source of returns that performance attribution can identify. Market timing involves making decisions to buy or sell assets based on predictions of future market movements. By evaluating the impact of market timing decisions on portfolio returns, investors can assess whether their ability to forecast market trends is adding value to their investment strategy.- Performance attribution provides institutional investors with a comprehensive understanding of the sources of portfolio returns. By examining asset allocation, security selection, and market timing, investors can evaluate the effectiveness of their investment decisions and make adjustments to improve performance in the future. This analysis is essential for helping investors achieve their investment objectives and navigate the complex world of institutional investment management.
