tag:blogger.com,1999:blog-2568941354104807757.post3827166617615193432..comments2023-10-05T09:07:24.225-04:00Comments on Investment Performance Guy: Why security level attribution?Dave Spauldinghttp://www.blogger.com/profile/01777929408680234896noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-2568941354104807757.post-1378964043818677822012-09-04T09:16:04.315-04:002012-09-04T09:16:04.315-04:00Dorian, thanks for your note; sorry it didn't ...Dorian, thanks for your note; sorry it didn't get posted sooner (problem w/blog). Interesting points, and no doubt more to be offered. Thanks!Dave Spauldinghttps://www.blogger.com/profile/01777929408680234896noreply@blogger.comtag:blogger.com,1999:blog-2568941354104807757.post-2687207523208915042012-06-05T15:57:58.105-04:002012-06-05T15:57:58.105-04:00The way that I look at attribution at the security...The way that I look at attribution at the security level is arguably meaningless. Consider each security to be it's own "group". So, within each group, "selection" will be zero for every group, and "allocation" across groups will sum up to the active return (portfolio minus benchmark).<br /><br />Where this does become meaningful is within an education framework, where I've taught how the number of groups in an attribution will have a bearing on the amount of allocation versus selection. I use two extremes -- first, the case above, where every security is its own group, and thus allocation picks up all of the basis points. Second, where there is only one group -- say "equity" for an equity portfolio -- where Allocation to equity in both the portfolio and benchmark are 100%, so Selection picks up all of the basis points. The lesson is that if the number of groups is very close to 1, then it's mostly Selection, while if the number of groups is close to the total number of stocks in the benchmark plus the portfolio, then it's mostly Allocation. <br /><br />I should pause for a second and point out that the best Attribution framework for a portfolio is the one that reflects the investment process. The lesson above is simply academic, and my portfolio managers had no interest in either extreme. (Incidentally, they were equity managers that were heavily bottom-up but with a top-down feedback loop -- so at best we could force a Brinson-style approach, but it was a force.)<br /><br />That all said, we did use three other attribution-like approaches, which we called "Absolute Contribution", "Active Contribution", and "Stock Picking". The Absolute Contribution measured the individual stock contribution to the portfolio's absolute return (independent of benchmark). The Active Contribution viewed every stock in the portfolio and benchmark as a relative weight (overweight, underweight, or rare same weight), and multiplied by the relative weight by the stock's benchmark-relative return -- so unheld stocks that were large in the benchmark and underperformed the benchmark would positively contribute to the Active Contribution. Stock Picking falls between the two Contributions -- Stock Picking measures the absolute weight in the portfolio times the stock's benchmark-relative performance -- stocks in the benchmark but not in the portfolio will have no contribution. Stock Picking takes the perspective that the PM is trying to outperform the benchmark with each and every stock (rather than outperforming the benchmark sector return) -- and that any sector allocation is a second-order reflection of risk control and the "bunchiness" of attractive stocks across sectors.<br /><br />Hope this is useful -- I enjoy reading your blog.Dorianhttps://www.blogger.com/profile/13593860384754349051noreply@blogger.comtag:blogger.com,1999:blog-2568941354104807757.post-58897056319191667082012-06-05T10:09:52.945-04:002012-06-05T10:09:52.945-04:00Steve, thanks for your commentary. I am confident ...Steve, thanks for your commentary. I am confident that a great deal more can be written on this subject; perhaps we can collaborate on something!Dave Spauldinghttps://www.blogger.com/profile/01777929408680234896noreply@blogger.comtag:blogger.com,1999:blog-2568941354104807757.post-50207839907879581212012-06-05T09:42:49.167-04:002012-06-05T09:42:49.167-04:00I am pleased to see your comments on so-called &qu...I am pleased to see your comments on so-called "security level attribution." This is an area of performance analysis that really needs better definition. We often hear claims of "sector level attribution" without a clear definition of what this actually means, much less what value such alleged information provides. It's sad that performance analysts, writers and vendors perform detailed work in this area without having first established so much as a clear definition of the term.<br /><br />I believe it would be most helpful for everyone to remember to relate their attribution analysis to the investment decision making process. After all, this is what attribution is supposed to evaluate. When investing, there are only two real decisions that are made - the first decision is about the allocation of capital and the second decision is about the implementation of that allocation decision. The "allocation" decision addresses capital committed to asset classes, sectors, sub-sectors and also to both risk, style or other structural factors. The challenge is in preserving the unique ("orthogonal") nature of these characteristics, since these often overlap. It's also difficult to distinguish a deliberate decision from an unintended consequence of a different decision - that's why this is challenging! Nonetheless, we clearly see a decision or a set of decisions around the allocation of capital.<br /><br />The second decision relates to how to turn this plan into an actual portfolio, and that is the job of execution. This is what most performance analysts are referring to when they use that loosely-defined term "selection." Obviously, the portfolio manager must select specific investments which represent the allocation strategy. In doing so, we deliver the structural characteristics of the strategy (what some call the "beta" return.) We also see the introduction of an idiosyncratic component of return, also called an "alpha" return (although the better term is probably "excess" return, since this does not imply that the additional return has been adjusted for differences in risk.)<br /><br />So, how does this actual investment process "get attributed" at the security level? I believe that it doesn't - this is simply definitional because each attribution effect is unique. But perhaps we can stretch the definition and say that each issue makes its contribution to the allocation of capital, although I don't think this conveys any meaningful information about the selection process. This is what happens when you naively calculate things without a clear understanding of the content - everything gets muddled.<br /><br />In the end, performance analysis answers two questions: how effectively did we allocate capital, and how effective was our execution? This makes sense at the macro level; it makes no sense at the issue level. Issue level attribution only makes sense in the context of contribution to return. Frankly, "That's all she wrote..."Stephen Campisi, CFAnoreply@blogger.com