​Investment- Performance Attribution

Benchmarks constitute the basis of performance measurement, which is an important aspect of performance evaluation. By comparing the performance of a UK equity fund with the performance of an appropriate UK equity index, the fund’s investors can get an idea of how well the fund is performing relative to the market in general, both in terms of average return and in terms of risk, by calculating the fund’s tracking error or information ratio.



Benchmarks can also be utilized to analyze the causes behind the fund’s performance. By employing proper financial market indicators, the fund manager’s performance can be deconstructed to uncover the sources of returns. Depending on the nature of the fund, the performance itself could originate from the following sources: 
 Asset allocation 
Sector selection
Stock selection 
Currency exposure

Determining how much of the performance is the consequence of the choices of asset classes, sectors, individual stocks, and currencies is known as performance attribution. The following example provides an illustration of performance attribution.