Performance attribution integrating risk

 

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PERFORMANCE ATTRIBUTION: INTEGRATING RISK TO ASSESS THE EFFICIENCY OF ACTIVE MANAGEMENT DECISIONS

 

AMINDIS INSIGHTS

Estimated reading time: 4 min.

 

By Philippe Grégoire – Source: The Journal of Performance Measurement


In an increasingly demanding asset management environment, where transparency, risk-adjusted performance, and the added value of the manager are key imperatives, performance attribution has become an essential tool. It not only allows for a detailed breakdown and explanation of portfolio returns relative to a benchmark but also serves as a lever to assess the efficiency of active management decisions and strengthen communication with institutional clients.

This article, written by Philippe Grégoire and published in The Journal of Performance Measurement, presents an integrated approach combining performance and risk, designed to determine whether allocation and selection decisions genuinely contribute to the portfolio’s risk-adjusted performance.


KEY INSIGHTS FROM THIS ARTICLE

 

    BREAKING DOWN PERFORMANCE TO IMPROVE COMMUNICATION

    Performance attribution provides a rigorous explanation of relative over- or under-performance, strengthening client trust and supporting institutional reporting.

    SEPARATING ALLOCATION AND SELECTION FOR PRECISE INSIGHTS

    Allocation decisions define exposure to asset classes and sectors, while selection decisions focus on individual securities. This distinction allows managers to accurately identify the source of active return.

    INCORPORATING RISK INTO PERFORMANCE ANALYSIS

    Traditional models (Brinson, Hood & Beebower, CAPM) measure returns but often ignore associated risk. Combining risk and return attribution provides a more complete diagnosis of active management efficiency.

    MEASURING THE IMPACT OF DECISIONS ON THE RISK PROFILE

    Risk contribution analysis identifies whether allocation and selection choices justify any additional risk taken through proportional excess performance.

    ASSESSING EFFICIENCY THROUGH THE RISK-RETURN TRADE-OFF

    By comparing actual returns from active decisions to expected returns given their impact on risk, managers can determine which actions were genuinely efficient.

    PRACTICAL SECTOR-LEVEL APPLICATION

    Sector examples show that some allocation decisions can reduce risk-adjusted performance, while well-executed security selection can generate positive alpha despite increased volatility.

 

 

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COMMON QUESTIONS ABOUT THIS TOPIC

Performance attribution includes both the return attribution and the risk attribution, not just that of the performance. Return attribution analyzes the impact of active investment decisions on returns, not passive returns. Risk attribution analyzes the risk consequences of those active decisions.

Performance attribution, or investment performance attribution is a set of techniques that performance analysts use to explain why a portfolio's performance differed from the benchmark. This difference between the portfolio return and the benchmark return is known as the active return.

Variations of Risk Attribution Analysis

As an example, a European equity investment strategy might use a country allocation process with security selection within each country or a sector allocation process with security selection within each industrial sector.

Attribution analysis focuses on three factors: the manager's investment picks and asset allocation, their investment style, and the market timing of their decisions and trades. The method begins by identifying the asset class in which a fund manager chooses to invest.

The four types of attribution are internal, external, stable, and unstable.