Sometimes known as investment performance attribution, "performance attribution" is a term used to describe various strategies that are employed by performance analysts to determine why an investment portfolio performed in a manner different from an identified benchmark. This difference between the benchmark and the actual performance of the portfolio is known as the active return. By using specific tools to analyze why this active return came about, it is possible to determine if the factors were temporary anomalies that are not likely to occur again in the near future, or if there are some aspects of the events that can be replicated and aid the portfolio in continuing to enjoy an enhanced level of performance.
In its simplest sense, performance attribution is all about identifying the factors or attributes that led to a portfolio performing differently from what was originally anticipated. By looking closely at each factor involved, it is possible to develop future investment strategies that could possibly help to sustain the momentum, or aid the investor in avoiding a sudden downturn with some of the assets in the portfolio and sustaining some sort of loss.
There are several benefits that may be generated by engaging in performance attribution. One has to do with allocating resources within the investment portfolio. Should the investigation into the specific factors that led certain investments to perform above the identified benchmark indicate an emerging trend, this provides the investor with the opportunity to position the portfolio to make the most out of that trend. This may include buying or selling assets in a manner that re-allocates percentages within the portfolio in order to take advantage of what is happening in the marketplace.
At the same time, performance attribution can also provide valuable clues in how to go about avoiding a loss of value in the overall portfolio. If factors associated with specific investments are anticipated to experience a downward trend, the investor can use the data gathered as part of the attribution process to rearrange his or her investments, minimizing the impact of that negative trend. The end result is a portfolio that is insulated from the losses and at least has the ability to ride out a tough economy and still post modest gains in the interim.
The process of performance attribution is something that takes place as part of ongoing investment management. It is necessary to engage in this type of activity if the investor is to earn the highest possible returns from the portfolio, given his or her personal preferences in regard to selection of different types of investments and the level of risk the investor is willing to assume with each of those types. When the attribution process is managed competently, the investor is much more likely to enjoy consistent returns and eventually achieve his or her financial goals.
