Financial Education

The return on an actively managed portfolio can be broken down into three components:

1. The market return, or return on the market index
2. Style return, measured as the difference between the manager’s benchmark portfolio and the market index
3. Active return, measured as the difference between the portfolio return and that of the manager’s benchmark

For example, consider a manager who invests in large cap value stocks. The market index would probably be the S&P 500, but the manager’s benchmark would be the S&P 500 Value. If the S&P 500 earns 10%, the S&P 500 Value earns 9% and the manager earns 11%, the manager’s 11% total return would be comprised of:

• Market return = 10%
• Style return =  9% – 10% = -1%
• Active return = 11% – 9% = 2%

For more information, see all articles on: Active Management, Investment Returns, Portfolio Management

See also:

Total Return and Scenario Analysis in Fixed Income Portfolios

Performance Attribution for Fixed Income Managers

Macro Performance Attribution

Evaluating Investment Manager Performance

The 3-Stage DuPont Model