I am working on my doctoral dissertation (hoping to have it completed by the end of the year), and wanted to cite comments I’ve made regarding my questioning of the value of having security level attribution, but can’t find anything in writing. This doesn’t mean I haven’t written on it; just that I can’t find it. And so, I decided to briefly pen my thoughts as a start; more details will be presented in this month’s newsletter.

Sector, industry, portfolio attribution I get: we want to capture our allocation and selection decisions (for the purpose of this post, I’m limiting my discussion to equity attribution, though similar arguments can also be made in other asset classes). The manager looks at the index and decides to overweight some sectors and underweight others; and so, we need to capture the impact of these decisions.

But how many managers actually allocate at the security level? Perhaps overweight within the portfolio, relative to other securities they hold, but relative to the index?

Let’s say that the manager is using the S&P 500 where we find that the consumer discretionary sector has roughly 80 securities. Chances are the portfolio will hold much fewer securities in this sector. One of them is Best Buy, which is in the index, and it makes up 2.5% of the portfolio. It’s about 0.15% of the index. Does this mean the manager overweighted Best Buy? No, it means that he has much fewer consumer discretionary stocks and stocks in total, and is therefore able to invest more in them than the index, which has 500 stocks. But if we run attribution at this level as we do at the sector, we’ll get a contributor for the overweighting; does this make any sense?

Because the portfolio holds much fewer stocks than the index, it won’t hold most of what the index has; does this mean the allocation is zero percent? Well, technically this may be, but isn’t it really about selection?