A Campisi Perspective on the Brinson Models

Steve Campisi returns as both a "guest blogger" and "guest animator," sharing some of his insights on the Brinson models. I'm sure you'll find his commentary of value.

Attribution: a matter of perspective

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.

Attribution analysis ... when the numbers don't add up!

I was sent an attribution problem by a client to research for them. The details appear here:

I've highlighted the issues they were concerned with. First, in yellow we find that the technology sector's allocation effect is positive (0.222%), even though (a) it's overweighted (75% vs. 67%) and (b) the sector's index return (7.37%) is below the overall index return (7.51%).  How can this be? Note that the Brinson-Fachler model was used, meaning that this situation should result in a negative allocation effect. Why? Because the manager overweighted a sector that underperformed the overall index return (meaning there were other sectors that performed better).

Second, in blue we find that the finance sector's selection effect is positive (0.212%) although the portfolio underperformed the index (7.47% vs. 7.79%). The model expects the effect to be negative in this case. And why? Because the manager underperformed the index, so the selection effect should be negative to reflect poor selection decisions.

And so, what's the problem?

Well, if you duplicate these numbers you'll see that the sector effects were arrived at by adding the effects of the underlying sub-sectors. This isn't the way it's done. We need to apply the attribution effect formulas to the sector levels. And when we do that, we get:

  

By calculating the sector effects using the same formulas as we use at the subsector level, our numbers make sense. The technology sector's allocation effect (-0.011%), as well as the finance sector's selection effect (-0.105%), are now both negative, as we'd expect. 

Conclusion: sometimes the numbers don't add up ... because they're not supposed to!

Some thoughts on money-weighted attribution

Welcome back to "animation Monday." Steve Campisi, CFA, who was our first "guest blogger," has become our first "guest animator"! Steve always has some insightful and interesting perspectives, and today he presents his views in an animated fashion.

Geometric vs. Arithmetic Attribution Animation, Part II

The response to Monday's animation has been terrific, and I've decided to make Mondays "animation day." That being said, because of some comments we received specifically about this topic, I decided to continue this one, with an elaboration on the issue of the "elimination of residuals." We thank Andre Mirabelli for sharing his views and allowing us to insert him into the scene. Hope you enjoy, both from a content as well as presentation perspective.

An animated debate on geometric vs. arithmetic attribution

Here's a new way to communicate ideas, issues, and controversial topics. Hope you like it!