What's the difference between macro and micro performance attribution and when do you use each?

Macro and micro attribution operate at different levels of the investment management hierarchy. Think of macro attribution as evaluating the overall investment policy decisions (top-down), while micro attribution evaluates individual portfolio manager decisions (bottom-up).

Macro Attribution — Evaluating the Investment Committee:

Macro attribution decomposes the total fund return into contributions from the major decisions made by the investment committee or plan sponsor:

1. Net Contributions — Cash flows in/out of the fund
2. Risk-Free Rate — The return from simply holding cash
3. Asset Category Allocation — The decision to allocate, say, 60% equity / 30% fixed income / 10% alternatives vs the policy benchmark
4. Benchmark Selection — Choosing the Russell 1000 Growth vs S&P 500 as the equity benchmark
5. Investment Manager Selection — Each manager's alpha relative to their benchmark
6. Allocation Effects — Interaction between over/underweighting a category and that category's performance

Micro Attribution — Evaluating Individual Managers:

Micro attribution drills into a single portfolio manager's returns and decomposes them into:

1. Pure Sector Allocation — Did the manager over/underweight sectors that outperformed?
2. Within-Sector Selection (Stock Selection) — Did the manager pick outperforming securities within each sector?
3. Interaction Effect — The combined impact of sector weights and stock selection

Example:

A pension fund earned 9.2% total return. Macro attribution reveals:

• Policy benchmark returned 8.5%
• Overweighting equities added 0.3% (allocation effect)
• Selecting Manager A over Manager B added 0.4% (manager selection)

Micro attribution of Manager A (who earned 11.5% vs benchmark 10.8%):

• Overweighting technology added 0.25% (sector allocation)
• Picking outperforming tech stocks added 0.35% (selection)
• Interaction added 0.10%

When to Use Each:

• Macro — Board meetings, investment committee reviews, evaluating the entire investment program
• Micro — Manager performance reviews, understanding where alpha comes from, deciding whether to retain or replace a manager

The CFA Level III exam tests both levels, often within the same vignette — decomposing the fund return at the macro level and then drilling into one manager at the micro level.

Practice attribution analysis in our CFA Level III question bank.