What's Driving Your Performance and Why? Insights on Performance Attribution for Institutional Investors

Success for institutional investors is built on operational excellence, performance attribution, risk management, and cash management. Over the course of 2024 we’ll explore these themes in detail and highlight how each is integral to a high-performing multi-asset class portfolio.

Performance attribution: the foundation of deeper insights

Taken at face value, performance attribution is a backward-looking analysis that can only tell you where your returns have been generated. On the other hand, for sophisticated institutional investors, performance attribution analysis offers much more and can be the foundation of deeper portfolio insights. In this article we explore how performance attribution powers future portfolio success for modern, technology-minded allocators.

Informing portfolio decisions with performance attribution

Asset allocation as an institutional investor is a Sisyphean task that requires constant attention. Markets are always changing and performance attribution helps allocators understand where the strengths and weaknesses are in their portfolios. Insights gleaned from performance attribution can support decision-making in manager selection and exposure management, both of which ultimately inform asset allocation.
Performance attribution analysis helps allocators understand if there is any strategic tilt to their portfolio and whether that tilt had contributed excess returns. From there allocators can make comparisons to their portfolio and policy benchmarks to understand whether manager selection is driving outperformance or whether outperformance is driven by market-wide upward trends in specific sectors or asset classes.

Nasdaq Solovis allows allocators to understand what segments of a multi-asset class portfolio is driving out performance and how each compare to policy benchmarks.

Understanding where active management is generating outperformance

Understanding performance drivers through performance attribution analysis also helps institutional investors understand how active management is contributing to outperformance. These insights can help inform future investment decisions that are more cost effective for allocators, such as passively managed strategies or direct ownership of assets, versus through an asset manager. This same analysis can be used to understand what impacts currency exposure has on the portfolio.

The effectiveness and timeliness of investment decisions, from implementation to execution can be assessed with performance attribution. Were you able to pick managers and construct the portfolio in a way that properly captures the strategy or were you slow to implement given the investment vehicles and lagged investment timelines of certain asset classes like private markets?
With Nasdaq Solovis, asset owners can view their portfolio holdings in a range of different exposure or sector roll-ups. The platform allows users to analyze a “mixed bag” of manager-level exposure data, direct holdings, and marketable securities all in one multi-asset class view.

Pictured above is an example of how the Nasdaq Solovis data model allows a portfolio with varying degrees of transparency to aggregate into exposure profiles. Jump International Developed is a public company with fund-level exposure, the GPIP holdings are multiple drawdown funds with fund-level exposure, Greenfarm Growth II is a private fund with holding-level exposure, and Boutique Global Fund and International Prospect Fund are public holding-level exposures.

Understanding risk through the lens of performance attribution

Another application for performance attribution is understanding the risk/return trade-off of investments. Performance attribution and ex-post risk analysis allow allocators to use historical performance to understand how an investment might be affected by risk in the future. Together with Sharpe ratios and tracking error, these analysis help allocators better align their portfolios to their desired benchmarks and risk profiles. Risk analysis through performance attribution allows asset owners to compare their portfolios to policy benchmarks or broader industry measures like the ACWI and MSCI indices.

The image above demonstrates how an asset owner can use Nasdaq Solovis to set upper and lower tracking error bounds and monitoring when portfolio holdings are in or out of risk budget limits.

Click here to learn more about how Nasdaq Solovis helps asset owns plan for and avoid risk from market event.

Performance Attribution: a pillar of the Nasdaq Solovis platform

Performance Attribution, along with cash management, operational excellence, and risk management are the four foundational pillars of the Nasdaq Solovis platform. Nasdaq Solovis helps asset owners gain instant insights across an entire multi-asset class portfolio and create context fast to drive decision-making.