Key Points
- Decision attribution analysis helps portfolio managers determine the impact of their decisions on performance.
- This type of analysis looks at the individual decisions made by the manager and assesses their value and evidence of skill or bias.
- While fund managers may change their stock-picking behavior, other decisions, such as when to enter or exit a position, are often more consistent.
- Technology now allows for ongoing decision attribution analysis, providing managers with valuable insights to improve performance and prove their skills to investors.
- Investors should use caution when interpreting decision attribution analysis, as it is a complex process that requires ongoing assessment.
A portfolio manager’s job is to make decisions – all day, every day. However, it can be challenging for managers to determine which decisions are positively impacting performance and which are not. This is where decision attribution analysis comes into play.
Traditionally, performance attribution analysis has been the primary evaluative tool for investors and fund managers. This analysis starts with the outcome and works backwards to explain it by comparing it to the performance of an index alternative. While this analysis is useful for explaining performance, it does not provide insights into how the manager could achieve better results.
However, decision attribution analysis takes a bottom-up approach and examines the actual decisions made by the manager during a specific period. It considers the context surrounding these decisions and assesses the value generated or destroyed as a result. This analysis can identify evidence of skill or bias within the decisions.
While managers make different decisions in different market environments, there are consistent decision patterns that are often overlooked. In addition to stock selection, managers also make decisions regarding entry and exit points, position sizes, and adjustments over time. These decisions are less variable and have a significant impact on performance.
Historical daily holdings data can provide valuable insights into a manager’s decision-making skills and consistent errors. Technology advancements now enable ongoing decision attribution analysis, which is particularly beneficial in today’s market. It helps managers understand how to improve performance and demonstrate their skills to investors, even during periods of negative performance.
Ultimately, decision attribution analysis allows portfolio managers to show investors that they understand their strengths and are actively working to improve. With the availability of data and analytical tools, there is no excuse for not conducting this analysis.
Note: This article is for informational purposes only and should not be considered as investment advice. The opinions expressed are solely those of the author and do not necessarily reflect the views of pankajsihag.com or the author’s employer.
