Asset managers today face constant challenges to differentiate their products and investment strategies in the market. Competition from passive strategies offered at lower fees, specialized asset allocation models, and technology advances require managers to continuously look at ways to market their investment approach to stand out amongst their peers.

Today’s leading asset managers are constantly self-evaluating their investment decisions by performing comprehensive analysis of their performance. Attribution analysis, also referred to as return attribution or performance attribution, is a valuable tool for evaluating a portfolio’s performance in comparison to a specific benchmark, asset segment, sector, or security. Whether investments performed well or poorly, asset managers want as much detail as possible about what worked, what did not, and why. Much can be learned by analyzing investment approaches that either outperform or lag against benchmarks and their peer groups to determine what decisions paid off in order to fine-tune an investment strategy and to better understand past performance.

Effective utilization of performance attribution tools allows a fund manager to identify key success drivers to help differentiate their investment strategy from peers. In its most simplistic form, performance attribution tools provide the ability to review the detail of a portfolio down to its lowest level, such as security or sector, and identify the impact a specific security or sector had on the total portfolio return – revealing its contribution to return. With this information, an asset manager can analyze the key drivers of portfolio-level returns, which can be vital in assessing their investment approach and providing an opportunity to tailor the communications around their key differentiators.

Key Factors to consider when presenting Investment Strategy and Performance:

Demonstrate your Investment Style

To promote investment performance, asset managers typically seek independent validation of their investment approach and user-friendly methods to visualize their portfolios’ performance and risk. When it comes to showcasing an investment strategy, there are several ways to illustrate how investment models are aligned with an investor’s goals. Employing effective use of performance attribution and risk reporting is foundational to supporting their value to underlying investors and distribution channels.

Asset managers should be able to illustrate to investors that investment strategies can be tailored to their specific goals and preferences. It is important to demonstrate how your portfolios align with their desired investment style, such as Value, Growth, Risk, or a combination of these.

Showcase Historical Performance

Asset managers typically aim to surpass benchmarks in both positive and negative market conditions. In doing so, they must articulate their track record of generating performance and provide transparent evidence of returns resulting from their strategic and tactical stock selections and weighting. A good performance attribution tool can assist with providing this historical track record, enabling effective communication with investors.

The below graph demonstrates how asset managers can utilize attribution reporting to track historical performance against their specific investment strategies and for decision making:

Exhibit your Risk and Profiles

Investors increasingly seek asset managers with the ability to adeptly handle risk and maintain liquidity within predefined parameters, this is particularly critical during periods of market volatility. Investors also seek asset managers that align with their risk tolerances.

Demonstrating the risk associated with any portfolio can be accomplished by clarifying volatility through industry accepted risk methodologies, like Standard Deviation, Tracking Error, and Sharpe and Sortino ratios among other metrics. With a comprehensive data set and performance attribution tool, asset managers can create visual representations to illustrate their active share and portfolio concentration and decision effect as ways to differentiate their investment approach in comparison to their peers and other products.

Security/sector-level attribution assists asset managers with providing the details supporting volatility versus return attributes to their investors. Below is a sample of how a manager can display a correlation between risk versus return for their selected investment segments:

Weigh your Options

Although finding an optimal performance attribution solution may seem challenging, asset managers have many options at their disposal to meet their needs.

Partnering with a firm like Ultimus, where our in-house professionals in performance attribution, and our technology-led model delivered through our uANALYZE reporting platform can help firms evaluate their attribution and risk reporting needs. Ultimus’ performance services include detailed contribution to return, attribution, and risk services and are fully integrated with our Investment Book of Record (IBOR) accounting services.

To learn more about our performance and attribution solutions along with our flexible Middle Office services, contact us today.

COD00000543 10/9/2024