Attribution analysis evaluates fund managers’ performance by analyzing variables such as asset allocation, investment policy, and individual investment selection. It determines what percentage of a fund’s returns are due to the manager’s decisions, and is typically used by institutional investors. The analysis examines the effectiveness of investment policies and the performance of individual stocks chosen.
Attribution analysis is a tool used to evaluate the performance of fund managers. This technique is used by many institutional investors to see what percentage of earnings is directly attributable to a fund manager’s performance. Attribution analysis looks at many variables such as asset allocation, investment policy and individual investment selection.
A fund manager is responsible for the investment decisions of a mutual fund or hedge fund. Sometimes, a mutual fund will deliver returns and it’s not clear whether it was simply because the market rose in value or if the fund manager did a good job. Attribution analysis determines what percentage of a fund’s increases are the result of fund manager decisions. Individual investors typically do not have access to the information needed to perform attribution analysis. As a result, institutional investors are traditionally the type of investor using this strategy.
One of the key aspects examined during attribution analysis is asset allocation. The asset allocation describes the percentage of the fund’s money going to each type of asset class. For example, a certain amount of money might be allocated to stocks, another percentage to bonds, and another percentage to the money market. Asset allocation can play an important role in the overall performance of a mutual fund.
A fund manager might decide to reduce the percentage of equities in a portfolio and increase the percentage of bonds. If the stock market had significantly fallen in value after making this decision, the fund manager would actually have saved a large amount of money in the portfolio. If the value of the stock market goes up, the fund manager would be responsible for missing out on opportunities.
Attribution analysis also looks at a fund manager’s investment policy. Some managers will employ a growth stock investing strategy, while others will prefer to invest in value stocks. This process examines the effectiveness of each type of investment policy and determines whether another policy could provide better returns.
In addition to looking at the fund manager’s overall strategy, attribution analysis also looks at the performance of the individual stocks chosen. If the fund manager chooses stocks that perform well, this will reflect positively on him. If stocks have performed poorly, they don’t reflect well on the manager.
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