What is the Brinson model? Why use the model?
The Brinson Fachler model is a well-known method used to measure the performance of a portfolio and how it compares to its benchmark. It focuses on two factors, allocation and selection. Used extensively by portfolio and performance managers, Brinson attribution has provided a solid and hugely influential foundation for performance attribution since its inception in the 1980s.
The Brinson Fachler attribution model is useful if you are looking to measure the active return on the portfolio, an analysis of interest to both the client and manager. But when it comes to strategic asset allocation (SAA), there are ways to extend the usefulness of the model, to handle multiple allocation and selection terms.
Is there an alternative to the Brinson attribution model?
Moving from the original Brinson model to a full strategic attribution of the portfolio, it is possible to envisage multiple allocation and selection terms to capture each set of decisions as they are made. All that is required is a simple amendment to the original model framework.
In this whitepaper, we will provide an overview of how the Brinson attribution model can be extended to incorporate these strategic decisions and attribute accordingly.
What is strategic allocation?
Strategic asset allocation is a portfolio strategy whereby the investor sets target allocations for various asset classes and rebalances the portfolio periodically. The target allocations are based on factors such as the investor’s risk tolerance, time horizon, and investment objectives.
In the whitepaper, we discuss the challenge in representing the returns generated through these decisions via various selection and allocation decisions.
In our latest whitepaper, Macro Strategy Attribution: Extending the Standard Brinson-Fachler Model to Use a Strategic Benchmarking Approach to Attribution, CloudAttribution co-founder Peter Simmons outlines:
- Formulas for asset allocation and Brinson attribution analysis
- Allocation decisions: manager allocation, strategic asset allocation and tactical asset allocation
- Selection decisions: client benchmark, manager benchmark, and the selection effect in attribution
- Extending Brinson attribution to handle multi-level strategies
- Bringing it together using multiple allocation and selection terms
- Extending to security level
Find out more about using a strategic benchmarking approach to attribution with Cloud
If you would like to learn more about how you can capture multiple levels of attribution by our extension of the Brinson-Fachler model and represent the elements appropriately, download our whitepaper. If you have any other questions, get in touch with our experts today.
By Peter Simmons, CloudAttribution CEO