Attribution analysis is performance-evaluation tool used to analyze the ability of portfolio and fund managers. Attribution analysis uncovers the impact of the manager’s investment decisions with regard to overall investment policy, asset allocation, security selection and activity. In this type of analysis, a fund or portfolio’s returns are compared to a benchmark to determine whether a manager is skilled or just lucky.
Fund and portfolio management costs money, so attribution analysis helps determine whether that money is being well spent. This technique is commonly used by institutional investors and is not widely used by individuals. Such an analysis helps large investors enlist the best managers and maximize their returns
Attribution analysis attempts to distinguish which of the two factors of portfolio performance, superior stock selection or superior market timing, is the source of the portfolio’s overall performance. Specifically, this method compares the total return of the manager’s actual investment holdings with the return for a predetermined benchmark portfolio and decomposes the difference into a selection effect and an allocation effect.