A Brief Note on Attribution Analysis

For investing in actively managed funds to beat the market, an investor can reach out to a fund manager. A fund manager’s experience and the overall allocation of the fund play a vital role in the type of returns that an investor is likely to realise. 

In this regard, attribution analysis is a technique that helps in analysing and evaluating the performance of a portfolio or a fund manager. When an investor applies attribution analysis, they try to understand how well an investment has performed compared to a specific benchmark.

Attribution analysis is also referred to as return attribution or performance attribution. When it comes to its working, attribution analysis takes into account three factors: fund assets and allocation, a fund manager’s investment style and market timing. 

The idea is to highlight why a particular portfolio or fund performs differently from the benchmark it’s being measured against. One is looking for the difference between the returns of the portfolio as against the returns of the benchmark. The benchmark itself may be an index, such as the NSE Nifty or S&P BSE Senses, that includes a range of assets similar to the ones in the fund or portfolio.

The fund manager’s selection of investments, their overall investment style, and the market timing in which they’re buying and selling investments can have a significant influence on highlighting how wide or narrow the gap is between returns.

When it comes to generating alpha, which is the excess returns a fund generates in its effort to beat the market, attribution analysis can provide an idea of how likely a particular fund is to do that. 

Overall, attribution analysis is a useful tool for evaluating whether a particular investment option is suitable for an investor. It is important to note that an investor can consider reaching out to a financial advisor in order to talk to them about how to complete an attribution analysis for investments.