Allocation and selection

Module "Portfolio Service Extended Portfolio Analysis"

This section deals with the decomposition of the segment excess performance into the allocation and selection ability of the portfolio manager. Attribution analysis deals with the question of what the difference in performance between the portfolio and the benchmark is attributable to. The aspects of allocation and selection are often examined:

Allocation

Effect of weighting the segments compared to the benchmark. As part of the allocation decision, a portfolio manager may underweight or overweight a segment compared to the benchmark.

Selection

Effect through the selection of individual stocks in the respective segment. In a second step, the portfolio manager decides how the securities are to be weighted within the individual segments.

Two theoretical portfolios, the allocation portfolio and the selection portfolio, are formed in order to differentiate between the corresponding performance contributions.

In the allocation portfolio, only the segment weights are varied in comparison to the benchmark. Within the segments, the individual securities are weighted exactly as in the corresponding benchmark segment.

In the selection portfolio, the segment weights remain unchanged compared to the benchmark and the weighting ratios of the individual securities within the segments are changed.

The following formulas result for a segment:

AB = (gp - gb)*pb (allocation contribution AB of a segment)

SB = gb*(pp - pb) (selection contribution SB of a segment)

with

gp: Weight of the portfolio segment

gb: Weight of the benchmark segment

pp: Performance of the portfolio segment

pb: Performance of the benchmark segment

As the overall performance cannot be clearly divided between allocation and selection contributions, there is a residual contribution for each segment:

R = (gp - gb)*(pp - pb)

The above formulas assume that no change in weighting has taken place within the period under review as a result of reallocations, income postings, etc. As corresponding weight changes are always to be expected in practice, these formulae are only intended as an aid to understanding. In the general case, they become much more complex (see Fischer, Performanceanalyse in der Praxis, Oldenbourg, ISBN 3-486-25628-9).