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Attribution analysis is a tool used to gauge fund managers' performance. This technique is used by many institutional investors to see what percentage of gains are directly attributable to the performance of a fund manager. Attribution analysis looks at many variables such as asset allocation, investment policy, and individual investment selection.
A fund manager is in charge of investment decisions for a mutual fund or a hedge fund. Sometimes, a mutual fund will provide returns and it is unclear whether it was simply because the market increased in value or if the fund manager did a good job. Attribution analysis determines which percentage of a fund's increases were the result of the decisions of the fund manager. Individual investors usually do not have access to the information necessary to perform attribution analysis. As a result, institutional investors are traditionally the type of investor to use this strategy.
One of the key aspects looked at during attribution analysis is asset allocation. Asset allocation describes what percentage of the fund's money is allocated to each type of asset class. For example, a certain amount of money might be allocated to stocks, another percentage to bonds, and another percentage to the money market. Asset allocation can play a big role in the overall performance of a mutual fund.
A fund manager could decide to lower the percentage of stock holdings in a portfolio and raise the percentage of bond holdings. If the stock market significantly declined in value after this decision was made, the fund manager would have effectively saved the portfolio a large amount of money. If the stock market increase in value, the fund manager would be responsible for missing out on opportunities.
Attribution analysis also looks at the investment policy of a fund manager. Some managers will utilize a strategy of investing in growth stocks while others will prefer to invest in value stocks. This process looks at the effectiveness of each type of investment policy and determines if another policy could provide better returns.
In addition to looking at the overall strategy of the fund manager, attribution analysis also looks at the performance of the individual securities chosen. If the fund manager chooses securities which perform well, this will reflect positively on him. If the securities have performed poorly, it will not reflect well on the manager.
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