Brinson Performance Attribution: Separating Allocation, Timing, and Security Selection
Summary
The document explains a Brinson-style framework for decomposing portfolio returns into a benchmark baseline, the combined effects of active asset allocation and the benchmark, the combined effects of security selection and the benchmark, and the actual portfolio result. Comparing these components attributes excess return to allocation timing, security selection, and their interaction. The framework distinguishes long-term policy weights and passive asset-class returns from active decisions to shift weights or choose securities within an asset class.
A simulated example uses six stocks across two sectors over ten years, with normally generated returns and an equal-weight benchmark. The article reports that security selection contributed more than allocation timing in this example, while a large loss in one year reflected both unfavorable sector allocation and interaction effects. It also shows how the attribution can help assess a manager’s strengths. The example is synthetic, and the article gives no detailed tables or formulas in the supplied text, so its numerical findings do not establish general performance or skill.
Key ideas
- Brinson attribution separates benchmark return from active allocation, security selection, and their interaction.
- Long-term asset-class weights and passive returns define the policy benchmark.
- Allocation timing measures the effect of changing asset-class weights relative to the benchmark.
- Security selection measures active returns within asset classes, weighted by policy allocations.
- A simulated example attributes most excess return to selection, but its results are specific to that setup.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.