21 Questions
What are the key requirements highlighted by Murira and Sierra for attribution analysis?
Consistency with investment decision-making process and compatibility with organization's performance and risk measurement systems
What did Eugene Fama's 1972 paper 'Components of Investment Performance' delve into?
Attribution analysis, breaking down observed return into selectivity and systematic risk
What does Fama's decomposition include?
The return from ability to pick the best securities (selectivity) and the return from predictions of general market price movements (systematic risk)
What is the Fama beta used for?
To calculate the return required to justify the loss of diversification
What is net selectivity in Fama's decomposition?
The remaining return from selectivity after deducting the amount of return required to justify not being fully diversified
What is timing in Fama's decomposition?
The return from the manager's variations in systematic risk around some policy or target amount
What does Fama's decomposition provide a framework for?
Understanding and analyzing the sources of excess return and the role of diversification and timing in portfolio management
What is the main aim of performance attribution?
To explain portfolio performance relative to a benchmark and identify sources of excess return
What does performance attribution quantify?
The excess return of a portfolio against its benchmark into active decisions of the investment decision process
What is a crucial characteristic of a good attribution system?
Consistent approach for analyzing returns, solid theoretical framework for valuation, and ability to analyze portfolios and indexes consistently
What does attribution analysis provide to asset owners?
Confidence by demonstrating a good understanding of performance drivers
How is attribution analysis used by senior management?
To monitor portfolio managers
What are the uses of attribution analysis?
Identifying underperformance early and providing clients with a thorough explanation of underperformance
What is the role of attribution analysis in the investment decision process?
Participating in the investment decision process and adding demonstrable value
How does attribution analysis benefit investment stakeholders?
By providing critical business intelligence and justifying the effort of performance analysts
Who first articulated the successive notional portfolio approach?
Holbrook
What is the main focus of the Brinson model in attribution analysis?
Decomposing total portfolio returns
In the Brinson model, what does Quadrant I represent?
The policy benchmark return
What is the aim of the portfolio manager in the Brinson model?
To add value through timing and security selection
What authority do managers often have in investment decisions?
Determine the timing of purchases and retain assets in short-term deposits
What did Holbrook link the successive notional portfolio approach to?
Fama's decomposition
Study Notes
Investment Trustees' Decision-Making and Performance Attribution Models
- Investment trustees seek advice from market experts for short-term outlook and delegate strategic decisions to managers and advisers.
- Investment meetings are held at short regular intervals, with special meetings arranged for material changes in market prospects.
- Managers are often authorized to determine the timing of purchases and retain assets in short-term deposits.
- Trustees' needs include evaluating fund performance, comparing with market returns, and analyzing risk.
- Trustees require advice on fund performance reasons and interpretation for future action.
- Holbrook suggests calculating return of three notional funds to break down returns into policy, strategic, and selection decisions.
- The first articulation of successive notional portfolios was written by Holbrook in 1977, ahead of his time.
- Holbrook linked the successive notional portfolio approach to Fama's decomposition, equating factors to systematic risk and selectivity.
- The Brinson model, a major development in attribution analysis, is based on a series of papers from the 1980s.
- The Brinson model decomposes total portfolio returns using a framework for analyzing portfolio returns.
- Quadrant I represents the policy benchmark return, and Quadrant II represents the return effects of policy and timing.
- The portfolio manager seeks to add value through timing and security selection, aiming to overweight well-performing asset classes and underweight poorly performing ones.
Learn about the decision-making process and performance attribution models used by investment trustees, including breaking down returns into policy, strategic, and selection decisions. Explore concepts such as the Brinson model, notional funds, and analyzing fund performance for future action.
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