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What Does Performance Attribution Tell You About Your Portfolio?

How do you know what's working in your portfolio? Performance isn't just about the total returns. You need attribution analysis to sniff out which ingredients mattered.

Published by Motley Fool Wealth Management Originally posted on Tue, Aug 15, 2023 Last updated on August 15, 2023

read time 7 min read

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How do you know if the strategies in your portfolio are delivering the return and risk you desire? Looking at the total return for a particular period could be an easy way to measure performance. But we believe more is needed to explain the performance or examine the reward of the risk taken.

We know that can be confusing…because the return numbers tell you how much your investment made or lost. And at the end of the day, that’s what matters when you’re growing your wealth.

But we're talking a layer deeper—how much return came from picking the right stocks versus choosing the best geography or the hot sector? In other words, what ingredients created your strategy’s return? Because when you're picking the "right" strategy or putting together a portfolio of strategies, you want to ensure that the funds don't create unexpected risks or unwanted exposures. How can you accomplish this level of analysis? Portfolio attribution is one way.

What is attribution analysis?

While you may keep track of performance regularly, to gain an understanding of contributors or detractors—what worked and didn’t work—you need a way to drill down into the strategy. That’s what attribution analysis does. As its name clearly states, it attributes performance to several factors.

Attribution analysis:

  • is used to explain portfolio performance relative to a benchmark, identify the sources of excess return, and relate them to active decisions by the portfolio manager.1
  • is a "mathematical process of explaining an investment return by relating it to the different risk-taking decisions implicit in the portfolio, and the extent to which each of those risks was rewarded or penalized in the capital markets."1
  • disentangles the fund’s overall return into the component returns generated by each risk.1

In a nutshell, attribution breaks down performance into drivers of return to determine which risks were warranted and rewarded and which risks hurt.

Components of attribution

Many attribution systems deconstruct performance into several categories to determine the effects of stock selection, which measures the fund manager's skill, and allocation, which considers the fund’s weighting to specific segments, sectors, or industries. The interaction effect combines these impacts—or looks at the interplay of the allocation and selection effects. These effects are measured relative to an appropriate benchmark. Generally, benchmarks are indices that invest in companies of similar size, geography, and other characteristics to the strategy.

Attribution (2)Source:, Mar. 15, 2023

How does attribution work in practice?

Determining these effects is easy. Let’s walk through a sample return decomposition for Fund A, a hypothetical U.S. large-cap strategy.

  • First, we compare the return of Fund A to its benchmark.
  • Next, we assess the allocation effect. Even if the portfolio managers take a stock-picking approach and don’t actively decide to over- or underweight a sector or industry, allocation differences from the benchmark may still contribute to or detract from performance.
  • Finally, we discover how the active bets—the securities that are over- or underweight the benchmark—affected returns.

FundA (2)For illustrative purposes only of an attribution analysis of hypothetical Fund A.

In our hypothetical example,

  • Fund A outperformed the benchmark by 4.7%
  • It’s allocation to overweight sectors—information technology and communication services—provided most of the outperformance.
  • Three largely positioned securities in the outsized sectors—stock M, stock A, and stock N—were the most significant contributors, while one overweight stock—stock T—was the largest detractor. In addition, stock selection in another slightly overweighted sector—financials—was also a contributor.

Top10Bottom10 (2)

For illustrative purposes only of an attribution analysis of hypothetical Fund A.

Can attribution help with strategy selection?

When you’re adding a strategy to a portfolio, you want to make sure you’re getting what you expect. So understanding the drivers of return can provide some indication of a manager’s skill and the extent to which they’re doing what they assert.

For example, if a manager says they’re good at discovering broad trends or macro impacts, you’d want to see allocation effects positively contributing to returns over time. Similarly, if an investment team alleges they excel at identifying high-quality companies, then security selection should add value.

On the other hand, if a firm suggests it’s an expert at pinpointing and benefiting from tech trends, but it dramatically underperformed on allocation and security selection, its assertion should probably be questioned. Likewise, if a manager claims to be technologists, but has consistently underweighted the information technology sector, you may want to ask why.

Skill is an elusive quality

Measuring “skill” is almost as hard as defining it. That’s why attribution analysis can be a vital component of strategy selection. It helps investors understand the portfolio manager’s decisions and if they correspond to their stated philosophy, and ultimately translate to outsized returns. We think this is the choice way to measure skill and determine if paying for that skill makes sense.


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