performance attribution

Professional equity managers use three main kinds of tools to help them think about how to shape their portfolios. They are: research services, either in-house or bought from third parties, that provide economic information and individual stock analysis; price and data feeds that give company/industry news and real-time and historical information about the trading of individual stocks, industry groups and markets; and performance attribution reports that calculate portfolio performance vs. its benchmark and break out under/outperformance by individual stock, industry and sector.

Performance attribution reports can be a blessing or a curse. I had a colleague, for example, who had a simplified version of an attribution report rigged up on his desktop to show, second by second, how his portfolio was doing vs. the S&P 500. Instead of thinking about stocks he was watching their random trade-by-trade dance, which absorbed a lot of his time. Also, I don’t see how he wasn’t paralyzed into inaction during bad times, when he pummeling himself with how much money he was losing for clients rather than figuring out how to make things better.

But that’s just me.

Even though I think it’s a mistake for us to try to chart every little twist and turn in the market and in the stocks we hold (the academic view is that less-than-a-month stock movements are just random fluctuations), it is important to sit down, say, monthly and spend some time thinking about what went right and what went wrong. Personally, I also think that if/as one gets familiar with what normal price action is in a stock, unusual movements–that may contain information–will begin to jump out. For almost everyone, though, the effort involved is much higher than the reward.

What made me think about this today is that I was scrolling through my tablet looking at the list of stocks I follow (I use Yahoo Finance). I was looking mostly at the performance of stay-at-home stocks over the past six months. They have been, by and large, the considerable laggards I’d expected. This tends to confirm for me my thought that the market has been rotating away from them into stocks that stand to do well in a world where the pandemic is under control. (In my view, two factors are involved: the idea that the pandemic is within six months of being under control and the assessment that stay at home stocks were/are already at nosebleed high prices and would need a second catastrophe to emerge to drive them higher.)

We all can–and should–do something like this periodically. Many years of experience as a portfolio manager and a supervisor of other portfolio managers has shown me that clunkers (especially the really stupid things everyone does) in a portfolio tend to develop a cloak of invisibility that prevents their being seen and removed. The only defense is a regular position-by-position review. Getting rid of one or two can have surprisingly positive results in a portfolio.

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