The enduring value of decision-based attribution for asset owners managing multi-asset portfolios

This year marks the 25th anniversary of our decision-based attribution model. This model, based on the Investment Decision Process (IDP) was developed in 2000 by a team of investment performance professionals at Ortec Finance in collaboration with a major Dutch pension scheme.

It was created in response to the need for an attribution model that could address the increasing complexity of multi-asset portfolios and provide deeper insights on how decisions impact total fund performance.

Today, the model has been recognized by many institutional investors worldwide as the leading approach for total fund attribution. We reflect on how the model’s top-down approach makes it unique and continues to enable asset owners to navigate the ever-evolving investment landscape.

Limitations of Brinson’s bottom-up approach – a refresh

Many industry professionals will be familiar with Brinson’s (et al) attribution model. It was the first systematic framework to quantify (what they called) allocation and selection decisions. Their framework has become the cornerstone of performance attribution and has ruled the performance profession for decades. Unfortunately, the model has inherent flaws and can lead to misleading results.

A key limitation of the Brinson model lies in its bottom-up ‘data-mining’ approach, which does not reflect the real-life hierarchy of investment decisions within an asset owner’s operating framework. In this environment, where capital is allocated top-down, decisions at a lower level do not influence those made above them. For example, the added value of allocating money to a given manager should not depend on that manager’s alpha, something a bottom-up approach cannot adequately address.

Addressing bottom-up challenges with decision-based attribution

In contrast, the top-down IDP approach begins with the management structure and follows the flow of investments, all while preserving the objectives set for micro attribution. Each investment management process can be visualized as a hierarchy of investment decisions, with every decision contributing to the overall profit or loss.

Within this framework, benchmarks naturally arise from a fund’s layers of decisions. Each decision acts as a benchmark for the next, with value added measured by the difference in results between the layers, accurately reflecting the actual asset management process. This creates an invaluable feature of the IDP: the sum of the added values of all decisions equals the overall profit or loss of the investment strategy.

From addressing challenges to enhancing the investment process

Thanks to its accurate modeling of the investment decision process, decision-based attribution reveals the added value of all active investment decisions. This outcome is a crucial benefit of insightful performance evaluation, driving continuous improvement in future investment decisions based on results.

Because the approach closely mirrors the actual investment process, it is applicable across all asset classes and investment styles. It also addresses several recurring challenges often faced by investment performance professionals, including:

• Allocation effects of illiquid investments
• Benchmark inconsistencies
• Multi-asset and multi-manager structures, including pooled assets
• Strategies such as absolute return, hedge funds, and leveraged investments
• Overlay strategies, particularly those focused on currency management
• IDP’s relevance in today’s landscape

Over the past 25 years, not only has asset allocation become increasingly dynamic for asset owners, but there has also been the emergence of new asset categories, investment strategies, and the widespread adoption of derivatives. Coupled with asset owners using both internal and external management across their total portfolio, there is an increasing need for a tailored framework. This is exactly what can be achieved with the IDP model and the corresponding decision-based attribution.