Style analysis identifies the composition of the portfolio as a blend of value-growth and large-small stocks, in a manner similar to the traditional breakout by economic sector, such as technology and utilities. Most managers profess an expertise in a particular style of investment management, so it’s important to know if they are following that expertise. Holdings-based style analysis provides this insight real time, as compared to an alternative approach that uses returns to make a similar determination. Returns-based style analysis does not identify and control style drift; holdings-based does.

Performance attribution determines the reasons that performance is good or bad, and is the next step beyond performance evaluation. The reasons for performance include the following: general market conditions, manager style, stock selection, sector allocation, and trading activity. It’s important to know the sources of your investment manager’s value added, and to confirm that this skill continues to be delivered. It’s very easy to confuse skill with style, but very difficult to make good decisions once you’ve made this mistake. StokTrib focuses on making the important distinction between style and skill, and on measuring the contributions of each to investment performance.

For an explanation of the StokTrib report, please examine this article, written by Ron Surz, President of PPCA, Inc. and developer of StokTrib: Examples of Style-Based and Style-Specific Investment Performance Attribution.

The Future of Performance Attribution

Awareness of the importance of investment style has led to significant improvements in investment performance evaluation. Unfortunately, this awareness hasn't yet fully carried forward to the next step, which is determining why performance is good or bad, otherwise known as performance attribution. We think that attribution analysis should differentiate between style and skill in the future. (Please see presentation slides, The Future of Performance Attribution.)

Style Analysis: How and Why

Returns-based and holdings-based style analyses are both good approaches, although there are situations when one approach is clearly superior to the other. Moving on from style analysis to style-specific attribution analysis, holdings really are the only choice. (Please read article, Style Analysis: How and Why.)