What is performance and attribution?
Attribution untangles the results to show what has actually happened in a portfolio
Performance and attribution is the only way to find out what really happened in a portfolio.
It is the final step in the portfolio construction process.
That process starts with the ideas themselves, whether from models, analysts or portfolio managers.
Implementation into portfolios involves scaling the position given its expected risk and correlation with other already held securities and the risk appetite of each portfolio.
Trading then goes out to find the required securities in the market to purchase them at the best price possible.
Performance and attribution brings these processes together to quantify how well each worked.
For portfolio managers we can breakdown the performance of the portfolio against the benchmark (attribution) to match the way that they constructed the portfolio.
In equities this will typically be into sectors or countries but could also be by market cap or style.
In fixed income, it will usually involve identifying the performance due to the duration position of the portfolio and then attributing the remainder by sector,
where sectors could be defined by industry, rating, country or a combination of all of these.
For both equities and fixed income currency contributions would also be identified.
Overall we aim to capture the contributions from each decision that the portfolio manager has made: how much did the overweight to energy add,
was buying the Vodafone Feb 2018 bond a good decision and did the choice not to hedge currencies add value.
Being able to see these results through time allows the portfolio manager to identify systematic effects: am I adding value in asset allocation or stock selection, for example?
Attribution can also answer a harder to estimate question like what were my trading costs and can be the basis for a more in depth ex-post risk analysis.
Overall, it is a vital last step in the portfolio construction process.
Performance and attribution helps to tell the story of what has happened in the portfolio over time. When well presented, it can be invaluable to the client team and clients to identify themes within the results.
It helps the client team to quickly overview how the portfolio was structured and therefore what led to the performance outcomes observed.
It also helps the client team to ask questions of the portfolio manager, confident in the results before them.
Management and Compliance
Portfolio oversight has always been an important part of the asset management process, it also has a high prominence with clients and regulators.
Performance and attribution is important because it provides transparency to the portfolio results.
It helps management and compliance ask questions about whether the portfolio is taking the right amount of risk relative to its benchmark and mandate,
whether portfolios with similar mandates are run along the same lines and are obtaining the same results.
It also allows management to understand the repeatability of results. Are they coming from one or two big positions or from a selection of smaller sized positions?
Finally, it can help to answer in what types of markets the portfolio will do well.
Overall, portfolio and attribution should be an integral part of any asset management process. A clear and transparent attribution system can add value throughout the company.