I got an email from someone today asking how to calculate transaction-based attribution. I addressed this during our recent Attribution Week, but will touch on it briefly here, and in greater detail in this month’s newsletter.

Recall that attribution relies on returns and weights.

The Weights

With a holdings-based appraoch we use the weight at the start of the period. For example, if the portfolio’s initial value is 100,000, and Technology has 10,000 as its starting value, then its weight is 10% (10,000 / 100,000).

To have a transaction-based approach, we need to adjust the weight for any buys/sells/income that occur during the month. For example, if we bought another 2,000 at the middle of the month, then we weight the transaction the same way we do with Modified Dietz [(CD-D+1)/CD] and multiply this by the value (and so, 0.5 x 2,000 = 1,000). We add this to the starting value and get a revised weight [(10,000 + 1,000)/100,000 = 11%]
We use this weight in our formula.

The Returns

With holdings-based, we can simply account for the starting values to derive our returns. With transaction-based, I suggest you use Modified Dietz, so that you capture the activity that occurs. And so for our example above, if we ended with Technology being valued at 14,000, we’d have R = (VE-VB-CF)/(VB+w*CF)=(14,000-10,000-2,000)/(10,000+0.5*2,000).
[I’ll let you do the math]

That’s it! Again, I’ll spend a bit more time on this in the newsletter.