CFA Level 3 | Equity: Equity Return Attribution (Brinson-Fachler Model)

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CFA Level 3
Topic: Equity Portfolio Management
Reading: Portfolio Performance Evaluation
When a manager outperforms or underperforms the benchmark, a question we will want to explore is: What contributed to it? And to answer that question, we have to conduct a performance attribution process.
For equity return attribution, this can be done using the Brinson-Fachler model, which is the focus of the CFA Level 3 syllabus. The Brinson-Hood-Beebower (BHB) model is first introduced to form the foundation, but Brinson-Fachler is the focus in this case.
In the model, there are three effects:
- Allocation effect
- Selection effect
- Interaction effect
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[@tapmijyo]

Thousand thanks for clarifying that there are 2 models... I got.so confused earlier as to whu different formulae were used.

[@irmdev595]

great teacher

[@jeetchandra1454]

Thanks 😇

[@priyasachdev3836]

Could you please share the calculation of total. How 6.1% and 3.4% are calculated ? Thanks

[@farfigschiter6019]

Presumably you've finished whatever course you were taking by now, but for those with the same question in the future: Portfolio Return TOTAL = (Portfolio Weight * Portfolio Return) for each individual sector, added together. For example (40% * 12%) + (35% * -7%) + (25% * 15%) = 6.1% Benchmark Return TOTAL = (Benchmark Weight * Benchmark Return) for each individual sector, added together. For example (45% * 8%) + (38% * -5%) + (17% * 10%) = 3.4%

[@chariscchi3140]

thank you for this. May i ask how to apply and interpret the performance returns when the portfolio is holding the passive ETF ie i have 5 Asset Class (says Global Equities(35%), Global list property (35%), Fixed Interest (30%)), each class would only have one ETF fund.

[@johnfrank5943]

plz can you explain var Riskmetrics on Portfolio bond , and stratégie Portfolio bonds , and backtesting ans stress var thank you

[@antopocalyse]

sometimes the book uses Selection + Interaction and some times only selection how will we know which one to use?

[@FabianMoa]

In exam, the questions would specify what you need to do. If they are only asking for Selection effect, I would stick to just that (without including the Interaction effect). In the textbook, they do provide a short explanation to mention that they combined (Selection + Interaction) into the Selection effect to indicate that there were only to active decisions that managers make: Allocation & Selection.

[@fajardwialfian2304]

Where I can watch Fixed Income attribution model video?🙏

[@harinisrini94]

Hi, do we know when to use BF and when to use BHB?

[@FabianMoa]

Use BF by default, unless told otherwise

[@harinisrini94]

@@FabianMoa thank you so much!

[@FabianMoa]

You're welcome 👍

[@z93g43]

for selection effect, why do we use benchmark weights instead of portfolio weights?

[@FabianMoa]

Between weights and returns, you need to hold one thing constant to be able to have a good comparison. The benchmark is that constant as it should be the neutral (i.e., starting point). For allocation effect, you hold the returns constant by using the benchmark returns. You can then assess the impact of overweighting/underweighting the benchmark. For selection effect, you hold the weights constant by using the benchmark weights. You can then assess the difference in the portfolio vs benchmark returns

[@butterbunzful]

What would happen with the inclusion of short positions?

[@dixonkee]

Hey Fabian, I cant seem to find Brinson Fachler Model in the CFA syllabus, can you please kindly show which reading is this model in?

[@FabianMoa]

Portfolio Performance Evaluation

[@rikki146]

so.. if the sum of BF model attribution breakdowns can fully explain the difference in return between portfolio and benchmark, then BHB cannot. am i right?

[@FabianMoa]

The BHB can too. Try it out based on the example in this video

[@rikki146]

@@FabianMoa just tried it, and yes both can resemble the difference. math is amazing lol! but i'm too lazy to figure out why that is the case

[@fhihiYT]

The two models are strictly identical as long as the weights sum up to 1. It can be proven with very simple math.

[@moneyness1]

it seems there is a brinson model and BF model, former one doesn't need to substract B return. why there is diff?

[@FabianMoa]

The BHB model and Brinson-Fachler model were established in different time periods with different authors. Even though BHB does not subtract B return, the total allocation effect from BHB and Brinson Fachler model are actually the same

[@moneyness1]

@@FabianMoa I also notice in the curriculum, BF model is introduced under Micro attribution. Is this also part of reason that BHB model used to analysis the return attribution in sponsor level but BF more into study manger's skill level?

[@FabianMoa]

Nope. BHB and BF can be used for both micro and macro attribution. Brinson Fachler is the more popular model. So, if the question does not specify the model to be used, always go with BF model for the allocation effect