The allocation effect measures how a portfolio's decision to overweight or underweight categories relative to a benchmark contributed to benchmark-relative return.
It is a core component of Brinson Attribution.
Brinson-Fachler formula
For category i, a common Brinson-Fachler formula is:
Allocation_i = (wp,i - wb,i) × (Rb,i - Rb)
where:
wp,iis the portfolio weight in the category;wb,iis the benchmark weight;Rb,iis the benchmark category return; andRbis the total benchmark return.
This formulation compares the manager's active weight with whether the category outperformed or underperformed the overall benchmark.
How to read the sign
Under the Brinson-Fachler convention, allocation tends to be positive when the portfolio:
- overweights a category that outperforms the overall benchmark; or
- underweights a category that underperforms the overall benchmark.
It tends to be negative when the portfolio overweights an underperformer or underweights an outperformer.
Example
Assume a sector has:
- portfolio weight: 30%;
- benchmark weight: 20%;
- benchmark sector return: 8%; and
- total benchmark return: 5%.
Then:
Allocation = (30% - 20%) × (8% - 5%) = 0.30%
The 30-basis-point positive effect reflects the decision to overweight a benchmark sector that outperformed the overall benchmark.
Allocation does not mean security selection
The allocation effect is designed to isolate the impact of where the portfolio was overweight or underweight.
Selection Effect instead addresses whether the portfolio's holdings within a category outperformed the corresponding benchmark segment.
Interaction Effect captures their joint effect in a three-part Brinson decomposition.
Convention matters
Not every Brinson report uses the same allocation formula. The Brinson-Hood-Beebower and Brinson-Fachler variants use different allocation baselines, and some systems combine or redistribute interaction.
A positive allocation effect therefore should be interpreted only after confirming the attribution methodology.
Positive allocation is not proof of skill
A favorable allocation effect is a realized arithmetic result. It does not prove that the overweight or underweight was based on a repeatable forecasting advantage.
The position may have benefited from luck, benchmark choice, temporary factor exposure, or a decision made for reasons unrelated to a directional forecast.
Sources
- CFA Institute, Portfolio Performance Evaluation, 2026
- CFA Institute, 2026 CIPM Level I Topic Outline
- CFA Institute Research Foundation, Performance Attribution
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