Case Study - Daily Portfolio Attribution

Overview

An Indian asset manager with over $40 billion in AUM used a vendor tool for attribution that left a large part of the return in its debt and hybrid schemes unexplained. Its risk team could not say with confidence which calls had added to a scheme's return.

We replaced it with daily attribution that ties to each scheme's NAV. On the scheme shown below, the unexplained part stayed within 1 bp in every month of 2025, and came to 3 bps for the full year against 200 bps of expenses.

Problem: Attribution Could Not Explain the Return

Portfolio managers use attribution to see which decisions added to a scheme's return and which took away from it. Risk managers use it to check that the return came from the risks the scheme is meant to take.

In debt and hybrid schemes, the vendor tool left about 30 bps a month unexplained. A residual of that size is larger than many of the effects attribution is meant to measure: a sector tilt or a hedge can move a month's return by less than that. So a stock pick or a hedge could look like it added return when the difference was really in the residual.

Debt schemes were the hardest. The vendor's model was built for international markets and did not use India's government bond curve, so more of the debt return went into the residual. The team could not separate how much came from duration, the curve position and the credit risk taken.

Approach: Daily Attribution That Ties to NAV

We started with the risk managers to agree which breakdowns they need and how each line should be treated.

Every scheme is attributed every day. A holding's contribution for the day is its weight at the start of the day times its return over the day. Return includes price, adjusted for splits and bonuses, and income: dividends for equity, coupon accrual for debt. Futures and swaps used as hedges sit on their own line. The scheme's expense ratio, accrued daily, takes the gross return to the NAV return. Days are linked into months, years and longer windows so that every window still adds up to that window's compound return.

Because every day is attributed and the expense ratio is accounted for, the residual against the asset manager's own NAV is very low.On the scheme shown below, the residual stays within 0.01% of NAV either way in every month of 2025, against an expense line of 0.15% to 0.17% a month. Over the full year, the residual is 0.03% against 2.00% of expense. For the risk team, that was the test of trust: when the attribution adds up to the scheme's return, every line in it can be relied on.

For debt, each bond's daily return splits into the factors a fixed income manager trades, measured against India's own government bond curve:

• Income - Coupon accrual.
• Shift - The parallel move in government bond yields at the scheme's duration.
• Twist - Changes in the shape of the government yield curve around that point.
• Spread - The bond's yield over government bonds of the same duration.
• Carry - Pull-to-par and rolldown.

Final Outcome: Attribution Dashboard

The dashboard opens on a scheme's return broken down by asset class, by day, month or year, with the expense and residual lines underneath. Each asset class opens into its instruments, and each instrument into the parts of its return.

• Bring your own slice - Group by asset class, macro sector, sector, industry, rating or tenor, or show equity net of its futures hedge, and stack groupings, for example rating within sector. A grouping the team uses internally can be added by asking for it.
• Measure - The same table shows return contribution, return, weight, P&L, NAV, quantity or valuation, in bps or percent.
• Horizon - Daily, monthly, annual or the full period, over any date range, each reconciled to the scheme's return over that window.
• Fixed income factors - A separate view splits debt returns into income, shift, twist, spread and carry.
• Export - Any view downloads to Excel.

How Portfolio and Risk Managers Use It

Portfolio managers use it to check that the return came from the decisions they meant to take:

• Equity - Which sectors and stocks drove the month, and whether the futures hedge offset market moves as intended.
• Fixed income - Whether the debt book earned its return from coupon income, a call on rates or a call on credit.
• Reviews - A breakdown that ties to the NAV is ready before the monthly investment review, rather than pieced together after it.

Risk managers use it to watch what the return depends on:

• Reconciliation - Every scheme ties to its NAV each day, so a jump in the residual flags a pricing or data problem the same day.
• Concentration - Whether a few positions or one sector account for most of the return.
• Hedges - Whether derivatives behave as intended when markets move.
• Committee questions - Answers for the investment committee and trustees, with numbers that add up to the reported return.

Comparing with peers. The same attribution runs on other schemes, using the portfolios fund houses disclose every month. Put two schemes from the same category side by side, and the gap between them breaks into the same parts: how much each held in equity, how each ran its hedge, which sectors and stocks each picked, and how much duration and credit each took in its debt book. That shows not just that a peer did better, but which decisions explain the difference.

Value Delivered

The risk team now gets attribution that reconciles to its own NAV, sliced the way it wants to see it, and can set any scheme against its peers.