Advanced Attribution Analysis for Underperforming Family Office Portfolio

A family office managing a portfolio valued at $100 million has underperformed its benchmark by 2% over the past year, generating a return of 4% compared to the benchmark of 6%. The portfolio consists of global equities, fixed income, and alternative investments, with an approximate allocation of 60%, 30%, and 10%, respectively. The family office utilizes a peer-group benchmark that has similar asset class weightings.

The portfolio manager has requested an in-depth performance attribution analysis to understand the sources of underperformance, specifically focusing on allocation effect, selection effect, and interaction effect. Additionally, the portfolio manager wishes to assess whether the portfolio’s asset allocation deviated from the strategic asset allocation policy and how this deviation may have impacted performance relative to the benchmark.

Please provide a detailed attribution analysis, including the calculations for both allocation and selection effects, the impact of any deviations from benchmark weights, and a conclusion that synthesizes these analyses into actionable insights for future investment strategy adjustments.