Decision Attribution Effects

Invest Effect

The Invest Effect captures the impact on the Active fund return due to the decision to remain invested from each period to the next. For example, suppose a fund returns 5% in the first half of the year while its benchmark has a 0% return. In the second half of the year, the fund exactly mimics the benchmark and both return 5%. Thus, in the first half of the year, the active return is 5% and in the second half it is 0%. Nonetheless, the fund’s active return over the full year is then 5.25%. Those extra 25 basis points are attributable to the decision to remain invested into second half of the year. The entry in the Active Gain column (i.e. the "Invest Value Effect" column) evaluates the effect of this decision on the active gain of the fund over the benchmark. Mathematically, it is the sum of the entries for the invest value effects of every security that appears either in the fund or in the benchmark. Similarly, the entry in the Active Return column (i.e. the "Invest Effect" column) is the sum of the entries for the invest effects of every security that appears either in the fund or in the benchmark.

Allocation Effects

In performance and attribution reports there may appear one or more categories for which the active effects are measured. The user can choose which categories appear in the report. In our example, we have chosen the GICS Sector and GICS Industry for our securities. Furthermore, the order matters. Here, we have first chosen how to distribute fund-level weights among sectors (the first allocation decision), then, within each sector, we made a decision as to how to allocate that sector weight among industries. The values in the first of the columns regarding Allocation Effects measures how the fund’s active return was affected by how the fund’s weighting among GICS sectors differed from their weighting in the benchmark.

Issue Selection Effect

The Selection Effect is the impact on active return resulting from the choices of security-level active begin weights for each period during the valuation period. In some sense, this is the bottom-level allocation decision since it evaluates the impact of how the weight within the last allocation grouping is distributed to its issues. The entry in the Active Gain column (i.e. the "Issue Selection Value Effect" column) is the sum of the entries for issue selection value effects of every security that appears either in the fund or in the benchmark. Similarly, the entry in the (Arithmetic) Active Return column (i.e. the "Issue Selection Effect" column) is the sum of entries for issue selection effects of every security that appears either in the fund or in the benchmark.

Trade Effect

The Trade Effect is the impact on cumulative active return resulting from trading decisions. The entry in the Active Gain column is the sum of the entries for trade value effects of every security that appears either in the fund or in the benchmark. Similarly, the entry in the (Arithmetic) Active Return column is the sum of the entries for trade effects of every security that appears either in the fund or in the benchmark.

Total Effect

The Total Effect gives the cumulative effect of active decisions made in the construction of the fund compared to the benchmark. When employing the ‘Brinson Hood Beebower’ methodology, the entry in the Total Effect column is the same as the Active Contribution column. At the level of the total fund, this is just the Active Total Return irrespective of the methodology employed. The entries in this row are the sum of the entries in the other rows in the decision attribution summary. Also, the entry in the Active Gain column evaluates the effect of each decision on the active gain of the fund over the benchmark. Mathematically, it is the sum of the entries for total value effects of every security that appears either in the fund or in the benchmark. Similarly, the entry in the Active Return column is the sum of the entries for total effects of every security that appears either in the fund or in the benchmark.