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Attribution analysis measures fund manager 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 primarily used by institutional investors.
Attribution analysis is a tool used to measure 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 analyzes 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 a hedge fund. Sometimes a mutual fund provides returns and it is not clear whether it was simply because the market increased in value or whether the fund manager did a good job. Attribution analysis determines what percentage of a fund’s increases were a result of the fund manager’s decisions. Individual investors generally do not have access to the information necessary to perform attribution analysis. As a result, institutional investors are traditionally the type of investors to use this strategy.
One of the main aspects observed during the attribution analysis is the allocation of assets. Asset allocation describes what percentage of the fund’s cash is allocated to each type of asset class. For example, a certain amount of money can be allocated to stocks, another percentage to bonds, and another percentage to the money market. Asset allocation can play a large role in the overall performance of a mutual fund.
A fund manager may decide to decrease the percentage of equity holdings in a portfolio and increase the percentage of equity holdings. If the stock market declined significantly after this decision was made, the fund manager would have effectively saved a large amount of money in the portfolio. If the stock market value rises, the fund manager will be responsible for missing opportunities.
Attribution analysis also analyzes a fund manager’s investment policy. Some managers will use a strategy of investing in growth stocks, while others prefer to invest in value stocks. This process analyzes 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, the attribution analysis also looks at the performance of the individual stocks chosen. If the fund manager chooses well-performing stocks, it will reflect positively on him. If bonds perform poorly, it will not reflect well on the manager.
Asset Smart.
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