Andrew Allentuck

Saturday, February 8, 2003

Investment Performance Attribution: A Guide to What It Is, How to Calculate It, and How to Use It
by David Spaulding
254 pages
ISBN 0-07-140885-1.

The measurement of investment performance is the key to the question of whether portfolio managers add anything to the sectors or markets in which they invest and whether the value they add exceeds the fees that they and their funds charge for management.

David Spaulding, a scholarly analyst with a gift for injecting humour into measurement procedures, is the publisher of the Journal of Performance Meeasurement His procedure in this book is basically to determine total return, subtract the return from an appropriate index, and to call the result the performance that the fund manager has added. That keeps the math simple, but it conceals the different levels of risk that a manager may take on in comparison to what risks the index holds. This leads to a philosophical problem when risks are explicit.

Two bond funds, one with long duration bonds, another with short duration bonds, may have different returns. If duration can be varied within the fund's mandate, then duration optimization may be credited to a manager. But a fund with average 10 to 20 year duration is not the same thing as a bond fund with a mix of treasury bills and short bonds with average 180 day duration.

In bonds, Mr. Spaulding recognizes that a portfolio's return has much more than duration issues. There are treasury changes, grade questions, and effects of bond hedging if any, perhaps foreign currency issues and measurement problems.

Mr. Spaulding makes a large contribution with his book. Even though the formulas can't answer as many issues as he rises, they provoke consideration of what is in an asset's return by type of asset, risk, time and so forth. The math he uses is more tedious than difficult. For the serious investor, this is a must-have book.