Performance Attribution Through a Factor Lens

Invesco Risk & Reward, #2/2018, pp. 32-38.

8 Pages Posted: 31 Jul 2018

See all articles by Sanne De Boer

Sanne De Boer

Voya Investment Management

Julian Keuerleber

Invesco

Carsten Rother

Invesco; University of Hamburg

Date Written: July 6, 2018

Abstract

We propose an adjustment of standard regression-based factor attribution to address a common issue: implementation constraints often mean that investors cannot realize the full potential of a factor strategy, but standard attribution analysis assumes that they can – leaving part of the portfolio return unexplained. Our alternative classifies stocks based on their factor exposures and identifies the segments most responsible for the unexplained portfolio return. The resulting nonlinear factor attribution better reconciles realized performance with the investment process, mitigating both the long-term average and short-term volatility of any residual. While our focus is on equity investing, the proposed methodology for factor attribution also applies to other asset classes.

Keywords: factor investing, performance attribution

JEL Classification: G12, G15, C13, C51, C52

Suggested Citation

De Boer, Sanne and Keuerleber, Julian and Rother, Carsten, Performance Attribution Through a Factor Lens (July 6, 2018). Invesco Risk & Reward, #2/2018, pp. 32-38., Available at SSRN: https://ssrn.com/abstract=3209424

Sanne De Boer (Contact Author)

Voya Investment Management ( email )

230 Park Avenue
13th Floor
New York, NY 10069
United States

Julian Keuerleber

Invesco ( email )

An der Welle 5
Frankfurt am Main, 60322
Germany

Carsten Rother

Invesco ( email )

An der Welle 5
Frankfurt am Main, 60322
Germany

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

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