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Performance attribution is a key element in the investment cycle, providing managers and clients with a mechanism for comparing the results of the investment process with its objectives. However, performance attribution for global fixed-income portfolios is often unsatisfactory and many managers are unable to give a full explanation of the sources of fund returns. In this article we explain why attribution is so important and what it is that makes an effective performance-attribution system. For managers without the resources to build an in-house attribution tool, a purchased system may be the only option. At ABN Amro Asset Management we have developed a flexible strategy-based performance-attribution system which is fully integrated into our investment process. This real-time system was specifically designed to reflect our specialist relative value approach to multi-currency fixed-income management. We have found that a high quality attribution system increases the transparency of our investment process, improving the level of understanding between our clients and ourselves.
Defining performance attribution
Performance attribution is the decomposition of fund performance according to the individual sources of return. The simplest analysis is to attribute performance between the return to the benchmark and the excess performance earned by the manager. More useful systems give the manager the ability to go beyond measurement of performance relative to the benchmark to show how that excess return has been achieved. At the most detailed level, an attribution system may capture the returns to individual holdings, but the better system identify key factors driving portfolio returns, such as an exposure to the steepness of the yield curve or to general levels of interest rates.
Benefits of performance attribution
Performance attribution is a powerful tool as it provides both client and manager with a disciplined framework for analyzing the success (or failure) of the investment programme.
For the client, an effective system increases the level of understanding of the manager's activity and is a means to ensure that the manager's style is consistent with the investment process that has been described to the investor. As an example, an investor may become concerned if a manager has presented their process as top-down and macro-based but the positive contributors to excess return are consistently security specific or arbitrage based.
For the manager, performance attribution can...