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Attribution Analysis and Risk-Adjusted Returns - getting under the hood

 Analysing Performance and Attributing Portfolio Returns - the best papers

Attribution analysis involves comparing a portfolio's performance against a set benchmark and unpacking the excess return to examine the impact of various investment decisions. We list below our selection of the best reports and white papers on performance attribution.

In our first two papers, we focus specifically on risk-adjusted returns, recognising that Modern Portfolio Theory (MPT) assumes that higher risk should be compensated by higher returns. S&P Dow Jones has a long history of measuring this within their SPIVA reports.

portfolio attribution under hood

SPIVA® Through a Risk-Adjusted Lens (S&P Dow Jones Indices, July 2018)
Modern portfolio theory purports that greater risks should be compensated with higher returns. S&P Dow Jones Indices examines actively managed funds and evaluates their risk-adjusted performance.

How Sharp is the Sharpe-Ratio? Risk-Adjusted Return Measures (StatPro, 2016)
This StatPro paper compares the Sharpe Ratio with a number of competing and complementary ratios for assessing risk-adjusted returns.

Performance Attribution through a Factor Lens (Invesco Risk & Reward, July 2018)
(For compliance reasons, this paper is only accessible in certain geographies)
Turn to p42 of Invesco's quarterly Risk & Reward magazine for a six-page discussion of how standard attribution analysis techniques can be adjusted to develop a factor attribution which reconciles realistically with the investment process.

Total Portfolio Performance Attribution Methodology (Morningstar, 2015)
Morningstar reviews methods for analysing and attributing portfolio performance, decomposing returns into decisions that stem from the plan sponsor versus those that stem from the investment manager.

Global active bond fund returns: a factor decomposition (Vanguard, July 2018)
Vanguard analyzes 15 types of global active bond funds to determine the sources of their returns. How much can be explained by risk factors (term, credit, currency, high yield) versus the manager's bond selection and market timing?

Performance Measurement: How to Do It If We Must (Research Affiliates, 2018)
It is natural to assess a portfolio's performance on a regular basis, but taking action over short-term time horizons can be dangerous when it is likely that noise in investment returns also exists. 

Rethinking Investment Performance Attribution (AIMCO, 2014)
This 2014 article discusses a case study on the Alberta Investment Management Corporation and its journey toward the development of an investment performance attribution system.

Active Equity Returns: Putting Dunn's Law to the Test (Morningstar, 2018)
This paper investigates whether the index-relative performance of an active manager is driven by the returns that are attributable to their investment style.

Investment Performance Reporting: GIPS Standards (CFA Institute)
The CFA Institute’s website provides all of the requisite details about the GIPS standards, including the 2010 GIPS Handbook, guidance on compliance, factsheets, and a searchable FAQ section.

CFA Principles for Investment Reporting (CFA Institute, 2014)
The Principles for Investment Reporting have a specific focus on reporting to existing clients (the GIPS standards primarily consider presentation to prospective clients).

Sharpe Ratio: Estimation, Confidence Intervals and Testing (Two Sigma, 2018)
The authors look at Sharpe ratio estimation, complete with confidence intervals and hypothesis testing of single Sharpe ratio estimates and the difference between 2 Sharpe ratios.

Understanding Active Risk and Tracking Error (Commonfund, 2016)
In this paper, Jess Gasper, PhD and Head of Asset Allocation and Research at Commonfund, discusses tracking error and the concept of active risk, as well as each of their impacts upon the investment decision-making process.

Performance Attribution Analysis Models - Under The Microscope (Deloitte, 2015)
The authors of this paper provide a comprehensive review of attribution models for equity portfolios. They touch on the linking attribution effects issue, and show how attribution analysis can be used by investors and fund managers.

Does Past Performance Matter? Persistence Scorecard (S&P Dow Jones, July 2018)
It is said that "past performance is not an indicator of future outcomes." The S&P Persistence Scorecard is released twice per year and tracks the consistency of top performing mutual funds over yearly consecutive periods.

The Folly of Hiring Winners and Firing Losers (Research Affiliates, 2017)
Performance chasing can lead to underperformance, so investors need to look forward as well as at historical returns, considering factor exposures, manager skill, fees, and other statistics before making an informed manager selection.