Viewing performance attribution through a "factor lens"

Article | 10 August 2018 | Invesco Quantitative Strategies


In our latest paper we discuss how a factor lens approach may help to attribute previously unexplained returns - and so link performance directly to the factor-driven investment process.

Factor investing has become an established cornerstone of asset management. Amid ever accelerating product innovation and expansion, the question of exactly how exposure to different factors contributes to overall investment success is perhaps more pressing than ever.

We make the case for a novel factor lens approach to performance attribution. We argue that traditional linear models of stock returns cannot be relied upon to capture all the possible interactions within sophisticated, multi-factor strategies and that a nonlinear methodology is better equipped to reconcile portfolio performance with investment process.

We suggest that our proposed model is easy to implement as an extension of standard factor attribution. It intuitively adopts the view of a portfolio manager rather than the view of an econometrician, as each stock’s residual contribution is attributed according to the factors that drove its position.

Read the whitepaper


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