Attribution Analysis - Explained
What is Attribution Analysis?
Written by Jason Gordon
Updated at April 17th, 2022
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Table of Contents
What is Attribution Analysis?How Does Attribution Analysis Work?Market Timing and Attribution Analysis: Skill or Luck?Academic Research on Attribution AnalysisWhat is Attribution Analysis?
Attribution analysis is a method of analyzing the performance of an investment portfolio or a fund manager. This method of analysis evaluates why a portfolio performs differently from the market benchmark. This form of analysis is also a performance attribution that seeks to evaluate how the decisions of a fund manager affect the performance of the investment portfolio. Attribution analysis provides insight into how the selection of investment in a portfolio affects the performance of the portfolio. In this analysis, three major factors are responsible for the performance of a portfolio, these are;
- The selection of investments,
- Market timing, and
- The investment style of the manager.
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How Does Attribution Analysis Work?
Attribution analysis is a form of analysis that explains why a portfolio performs differently from the market benchmark, resulting in an active return. Active return refers to the difference between the return of a portfolio and the return of the market benchmark. There are certain factors responsible for the performance of a portfolio, this could be the selection of stocks, market timing or the fund managers style. The specific asset clas a fund manager decides to invest in is important to the performance of the portfolio, so also the style of investment the manager chooses to use. Diverse economists have various methods analyzing the style of a manager and the performance of a portfolio.
Market Timing and Attribution Analysis: Skill or Luck?
Market timing is an important factor in attribution analysis, this factor impacts the performance of a portfolio, whether negatively or positively. While some economists and analysts maintain that market timing has to do with the skill of the find manager, others maintain that the impact of market timing has to do more with luck rather than skill. However, analysts point out that in evaluating the performance of a fund manager, investment style use and stock selection are more vital than timing.