that were taken to generate these returns. First of all, let us clarify the language we will use in this chapter. Return attribution is often referred to as performance attribution or performance contribution. These terms are frequently used interchangeably, but we have in practice clarified their use as follows: II Performance contribution concerns the decomposition of officially reported2 total returns. It therefore answers questions of the following type: "What factors have contributed to my portfolio's 10 percent return over the past year?" II Performance attribution concerns the decomposition of officially reported excess returns over an assigned benchmark (such as the S&P 500, for example). It therefore answers questions of the following type: "Why has my portfolio outperformed the S&P 500 by 3 percent over the past year?" II Return attribution is the same as performance attribution except that it involves estimated return (e.g., return estimated from assuming a buy-and-hold strategy over a one-day period). In practice, it is common to find sources of return based on a portfolio's estimate rather than the officially reported return. The rest of this chapter is dedicated to outlining methods for return attribution, since in the investment management business we focus primarily on generating excess performance against an agreed-to benchmark or index. Return attribution is important because investment returns are not, or should not be, the result of chance. Returns should be generated by a we 11-articulated investment process agreed to at the inception of a mandate. Active investment managers are typically hired because they have demonstrated a particular skill set. Return attribution allows both portfolio managers and clients to identify and measure these skills and ensure consistency between the portrayal of skill and its implementation. Assume an equity portfolio manager has been hired because of his or her ability to pick stocks within the U.S. value market as defined by the Russell 2000 Value index (R2000V). Return attribution will allow the client to ensure that the portfolio manager's returns are consistent with the plan. If it appears that all of the excess performance versus the R2000V results from market timing (the portfolio may have held a significant amount of cash in a declining equity market), and if the portfolio manager did not claim to be able to time the market, then the client could argue that the portfolio manager has not been true to his or her investment style or philosophy. Similarly, in the fixed income world, a client generally would want to know if a manager, hired because of an ability to forecast changes in interest rates, was outperforming his or her benchmark because of loading up on lower-credit-rated bonds instead of deviating in terms of duration or yield curve exposure. Why is it important for managers to be true to their style? First of all, clients have the right to get what they pay for. If a particular active 2The term "officially reported" means the reconciled performance numbers that have been either reported by a custodian or derived from the official books and records.