Understanding Attribution Analysis in Portfolio Performance Evaluation

ABC Asset Management has recently conducted an attribution analysis on their large-cap equity portfolio. The analysis revealed that the portfolio outperformed its benchmark by 200 basis points over the last quarter. The portfolio manager is eager to understand the sources of this outperformance to assess whether it was due to skillful asset allocation or stock selection.

Attribution analysis can be broken down into two main components: allocation effect and selection effect. The allocation effect measures the impact of the portfolio manager’s decision to allocate funds across different sectors relative to the benchmark, while the selection effect measures the performance of the individual securities within those sectors compared to the benchmark.

If the allocation effect indicates that the portfolio was positioned favorably in sectors that outperformed the benchmark, this could explain part of the outperformance. Conversely, if the selection effect shows that the individual securities picked by the manager also outperformed their sector benchmarks, this could signify effective stock selection.

Based on this background, which of the following statements accurately describes a potential insight gained from the attribution analysis?