Definition of attribution

In fund management, attribution is the mathematical decomposition of an investment portfolio's return compared to its benchmark. The difference between the portfolio return and the benchmark return is broken down, so as to identify where the positive or negative returns are achieved. These can be stated either as a relative or an absolute.  Active fund managers typically like to identify the source of active returns that are derived from either portfolio selection choices or market timing. Attribution of these various returns at the fund manager level is done by decomposing returns against a benchmark into stock and sector returns, with an associated interaction effect. 

Two-dimensionally, it is possible to show the selection and the allocation effects of a fund manager’s investment decisions.  In order to attribute returns beyond a traditional two dimensional approach Brinson, Hood and Beebower developed a measurement framework that is used to identify the sources of active returns.  They decomposed the excess returns contributed by investment strategies and decisions into four components.  These are:

  1. Asset allocation decision to over or underweight a country or sector based on the country or sector expected return.
  2. Stock selection decision to over or underweight a security based on the stock expected return.
  3. Market timing decision to over or underweight the cash composition in the portfolio based on the expected return of the market.
  4. Interaction effect which accounts for the impact of all allocation decisions. [1]