Attributing the Risk and Return of Benchmark Misfit

Asset owners often use one benchmark for setting investment policy, and a different benchmark for evaluating the performance of external fund managers. The discrepancy between these two benchmarks is known as benchmark misfit. In this paper, we show how the classic Brinson model can be generalized to account for return contributions arising from benchmark misfit. We also show how risk can be attributed to the same sources.

DeWitt Miller, CFA, FRM, Wurts & Associates,
Anil Rao, MSCI and
Jose Menchero, Ph.D., CFA