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Performance attribution interprets how investors achieve their performance and measures the sources of value added to a portfolio. This guide describes how returns, relative to a benchmark, are broken down into attribution effects to determine how investors achieve performance and measure the sources of value added to a portfolio.
For investment managers to evaluate their job performance, they need to know how they achieved their performance results. In particular, they need to know whether their success is the result of their ability to effectively allocate their portfolio’s assets to various segments, their ability to effectively select securities within a given segment or the combined effect of their selection and allocation within a segment. Performance attribution interprets how investors achieve their performance and measures the sources of value added to a portfolio. To determine success, investors establish a benchmark, which they seek to outperform. Value added is the amount the return achieves in excess of the benchmark.
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