While I often speak of returns being a matter of perspective (that is, whether we’re speaking about how the manager did or how the portfolio or client did) to determine whether time- or money-weighting should be used, the same holds true with attribution. I was recently approached by a portfolio manager who wants to report attribution from a selection, country, and sector perspective. Okay, so right there we have three different effects we may want to consider. But it gets even more interesting. Let’s consider this first approach:
Here we see that we are able to reconcile to the excess return, using either the country or sector effects. And notice that the sector’s weights are relative to the portfolio, meaning that we are evaluating how each sector (as well as country) contributes to the overall excess return. And so, we see how our allocation and selection decisions worked out at the country, sector, and overall levels.
Now, let’s consider the following:
Here we have grouped the sector data together, so that we are only focusing on how each sector contributed to the overall return. You’ll notice that the portfolio’s effects are different than what we saw in the earlier example, but that’s because our analysis is now from the perspective of the sectors and the way the manager invested relative to them.
In our third example you can see how the sector weights are now relative to their respective countries:
We are now answering the question, how did the manager’s actions at the sector level contribute to each country’s performance?
And so, there are lots of ways to “slice-and-dice” our numbers, to provide us with different perspectives as to what is going on. It’s important to understand that this is possible and to decide which way(s) makes the most sense for you. You may want to look at attribution from multiple perspectives, which is great, but understand what the information is reporting to you.
By the way, I have ignored the currency effects to make this presentation easier; perhaps we’ll add this factor at a later time.