
Holdings-Based Style and Attribution
Analysis Using Custom Benchmarks
Style analysis identifies the composition of
the portfolio as a blend of value-growth and large-small stocks,
in a manner similar to the traditional breakout by economic
sector, such as technology and utilities. Most managers profess
an expertise in a particular style of investment management,
so its important to know if they are following that
expertise. Holdings-based style analysis provides this insight
real time, as compared to an alternative approach that uses
returns to make a similar determination. Returns-based style
analysis does not identify and control style drift; holdings-based does.
Performance attribution determines the reasons
that performance is good or bad, and is the next step beyond
performance evaluation. The reasons for performance include
the following: general market conditions, manager style, stock
selection, sector allocation, and trading activity. Its
important to know the sources of your investment managers
value added, and to confirm that this skill continues to be
delivered. Its very easy to confuse skill with style,
but very difficult to make good decisions once youve
made this mistake, so StokTrib focuses on making the important
distinction between style and skill, and on measuring the
contributions of each to investment performance.
Examples of Style-Based and Style-Specific
Investment Performance Attribution. For an explanation of the StokTrib report, please examine this new article.
The Future of Performance Attribution. Awareness of the importance of investment style
has led to significant improvements in investment performance
evaluation. Unfortunately, this awareness hasn't yet fully
carried forward to the next step, which is determining why
performance is good or bad, otherwise known as performance
attribution. We think that attribution analysis should differentiate
between style and skill in the future. In fact, it's already
beginning.
Style Analysis: How & Why. Returns-based and holdings-based style analyses
are both good approaches, although there are situations when
one approach is clearly superior to the other. Moving on from
style analysis to style-specific attribution analysis, holdings
really are the only choice. |