Attribution Analytics

Wilshire Compass offers three attribution models which clients can use to evaluate manager performance and to determine sources of total and excess returns. The models are:

  Fundamental (holdings-based) Attribution

  Multiple Factor (returns-based) Attribution

  Capital Asset Pricing Model 

Fundamental Attribution Model

The Fundamental (holdings-based) attribution models in Compass use portfolio characteristics to evaluate the impact that certain portfolio-level decisions have on the portfolio's excess return. Specifically, the U.S. equity attribution analytic details the consequences of decisions relating to trading, stock selection, sector selection, and cash holdings (market timing) as shown in the graph below.

Compass also offers holdings-based attribution for fixed income products, an example of which is shown below.

Multiple Factor Attribution

The multiple factor attribution model calculates a portfolio's average exposure to particular factors over time. For example, the attribution model allows users to separate U.S. equity portfolio returns into two components: style returns and stock-specific returns. In evaluating fixed income, the factors typically used are specific fixed income market sectors. Non-U.S. equity is usually evaluated using regional factors. The attribution report also includes tools that permit the user to compare manager performance to style normal benchmarks, and test style-adjusted excess returns for statistical significance as is shown in the example below.

Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) is a valuation model derived from modern portfolio theory. CAPM is viewed as a single factor attribution model with the single factor being represented by a broad market index. The CAPM attribution allows users to separate a portfolio's total return into two components - a market component, which reflects the portion of total return earned as a result of being invested in the market, and a residual component, which captures the effects of all active investment decisions.

The graph below depicts the Security Market Line derived from the broad market index and the risk-free rate. The Security Market Line represents the return attributable to systematic market exposure (beta). The manager's systematic market exposure (beta) and total return are also plotted. Interpretation is fairly straight forward, if the manager plots above the security market line their return is greater than what would be expected purely from their systematic exposure, indicating positive "alpha". If the manager plots below the security market line, it indicates negative alpha. The table following the graph provides this product's historical beta and alpha, as well as some additional risk and return statistics.

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