What is performance attribution?

In finance, performance attribution refers to a set of techniques used to explain why a portfolio's performance differed from the benchmark. The difference in return between the portfolio and the benchmark is referred to as the active return.

Where have you heard about performance attribution?

Whenever investors wish to determine their successes or failures, they establish a benchmark and seek to outperform it. Performance attribution techniques are then used by performance analysts to evaluate this performance, explaining the decisions taken that either generated or lost value.

What you need to know about performance attribution.

Performance attribution generally breaks down into three basic forms:

multi-factor analysis
style analysis
return decomposition analysis

Multi-factor analysis attributes performance to factors such as economy, bond durations and P/E ratio, requiring a great deal of economic and fundamental data and considered to be difficult to calculate and explain. Style analysis was developed by the American economist William Sharpe and uses portfolio rates of return to determine investment style. Return decomposition analysis is easy to calculate, understand and explain, focusing on allocation (top/down approach) or selection (bottom up approach).