The Use and Misuse of Attribution
| Date: | December 2005 |
| Author: | Peter Ellis |
Attribution is the dominant technique performance teams at investment management companies use, in order to explain performance to both internal and external clients. But most investment management firms are not extracting as much value from attribution services as they could do, and should do.
The use of attribution is growing, in response to both internal and external pressures; pension fund clients want clearer descriptions of performance, and the portfolio managers themselves use attribution to better measure the effectiveness of their process an individual skill. Attribution has become a key business service for investment management companies.
Attribution is a technical subject and, even within performance teams at investment management firms, the understanding of attribution is generally concentrated in a small number of people. Performance teams often work in isolation when designing and implementing attribution solutions. So, it remains a mystery to non-specialists.
The internal and external demands for more detail and greater accuracy in performance attribution is driving the industry towards more sophisticated attribution services and more complex methods. Many investment management firms are struggling to cope with the challenges posed to upgrade their performance services. Unsurprisingly then, in the past five years, vendor systems have emerged that support these new models and calculation methods.
As part of this research, Investit interviewed 17 investment management companies, 10 performance system vendors and also appointed Carl Bacon, an industry-known performance expert, as a special advisor to the research project.
Table of contents
| Management Summary | 1 | |||
| 1.0 | Introduction | |||
| 1.1 | Scope of the research | 4 | ||
| 1.2 | Methodology | 5 | ||
| 2.0 | An Introduction to Attribution | 7 | ||
| 2.1 | Definitions of basic terms | 8 | ||
| 2.2 | Performance measurement basics | 10 | ||
| 2.3 | Attribution basics | 13 | ||
| 2.4 | Attribution models | 17 | ||
| 2.5 | Calculation methods | 21 | ||
| 3.0 | The Use of Attribution | 23 | ||
| 3.1 | The clients of attribution | 24 | ||
| 3.2 | The value delivered by attribution | 27 | ||
| 3.3 | Attribution models | 30 | ||
| 3.4 | Delivering attribution | 33 | ||
| 3.5 | The growth of complexity in attribution | 35 | ||
| 3.6 | Attribution systems | 37 | ||
| 4.0 | The Misuse of Attribution | 39 | ||
| 4.1 | Performance analysis | 40 | ||
| 4.2 | Evaluating performance | 41 | ||
| 4.3 | Explaining performance | 45 | ||
| 4.4 | The deficiencies of attribution as a performance analysis technique | 48 | ||
| 4.5 | Problems arising from dominance of attribution | 50 | ||
| 4.6 | Systems issues | 52 | ||
| 5.0 | The Attribution Landscape | 55 | ||
| 5.1 | The evolution of attribution | 56 | ||
| 5.2 | The current state of attribution | 59 | ||
| 5.3 | The future landscape | 60 | ||
| 5.4 | Business impact of enhanced performance analysis techniques | 65 | ||
| 6.0 | Attribution Best Practice | 67 | ||
| 6.1 | Best practice for using attribution in performance analysis | 68 | ||
| 6.2 | Best practice for delivering attribution | 70 | ||
| 6.3 | Best practice for upgrading attribution services | 72 | ||
| 7.0 | Conclusions | 73 | ||
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