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6 - Performance attribution
- Edited by Ulrich Bindseil, European Central Bank, Frankfurt, Fernando Gonzalez, European Central Bank, Frankfurt, Evangelos Tabakis, European Central Bank, Frankfurt
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- Book:
- Risk Management for Central Banks and Other Public Investors
- Published online:
- 23 December 2009
- Print publication:
- 15 January 2009, pp 222-268
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Summary
Introduction
Performance attribution analysis is a specific discipline in the investment process, with the prime objective to quantify the performance contributions which stem from the active portfolio management decisions and to assign them to exposures towards the various risk factors relative to the benchmark. Typical central bank foreign reserves portfolios are composed of more or less plain vanilla securities and also the levels of market and credit risk taken are naturally low. Despite these characteristics, performance attribution analysis in central banks is much harder than it might be expected. Generally, it can be very difficult to accurately separate the impacts of different fixed-income strategies, because interactions between each of them could exist in several ways. Especially for passively managed investment portfolios with their rather small risk factor-specific performance contributions it has proven in practice to be a difficult task of finding a balance between two of the main features of performance attribution: intuitive clarity and analytical precision.
Over the past several years, based on the collective work of experts involved in both practitioner and academic research, much progress has been made on the key ingredients of modern performance attribution analysis – yet most of the publications concentrated on models tailored to equity portfolios (see the seminal articles of Brinson and Fachler 1985, Brinson et al. 1986 and Brinson et al. 1991).
5 - Performance measurement
- Edited by Ulrich Bindseil, European Central Bank, Frankfurt, Fernando Gonzalez, European Central Bank, Frankfurt, Evangelos Tabakis, European Central Bank, Frankfurt
-
- Book:
- Risk Management for Central Banks and Other Public Investors
- Published online:
- 23 December 2009
- Print publication:
- 15 January 2009, pp 207-221
-
- Chapter
- Export citation
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Summary
Introduction
Performance analysis can be considered the final stage in the portfolio management process as it provides an overall evaluation of the success of the investment management in reaching its expected performance objective. Furthermore, it identifies the individual contributions of each of its components and underlying strategies to the overall performance result. The term ‘performance analysis’ covers all the techniques that are implemented to study the financial results obtained in the portfolio management process, ranging from simple performance measurement to performance attribution. This chapter deals with performance measurement, which in turn can be loosely defined as the analytical framework underlying the calculation and assessment of investment returns. Chapter 6 introduces performance attribution as the second leg of a performance analysis.
Where Markowitz (1952) is often considered to be the founder of modern portfolio theory (the analysis of rational portfolio choices based on the efficient use of risk), Dietz (1966) may be seen as the father of investment performance analysis. The theoretical foundations of performance analysis can be traced back to classic economic equilibrium and corporate finance theory. Over the years, numerous new concepts that describe the interdependencies between return (ex ante and ex post) and risk measures by the application of specific factor models have been incorporated into the evaluation of investment performance (e.g. Treynor 1965; Sharpe 1966; Jensen 1968). Most of these models can be implemented directly into the evaluation framework, whereby the choice of a method should match the investment style of the portfolio management.