A central tenet in the theory and application of performance attribution is that the attribution model must reflect the investment decision-making process.  In the sector-based model of Brinson-Fachler (1985), the Active Return is decomposed into an Allocation Effect and a Selection Effect.  The Allocation Effect, also known as Sector Selection, measures the value added (or subtracted) through over-weighting or under-weighting individual sectors.  The Selection Effect, also known as Issue Selection, measures the value added (or subtracted) by weighting securities within a sector differently than the benchmark.

Nested Performance Attribution