What does "Allocation/Selection Interaction" return measure?

"Allocation/Selection Interaction" return measures the effect of weights assigned to sectors and individual securities. This concept focuses on how the combination of the asset allocation decision and the actual selection of securities contributes to overall portfolio performance.

In portfolio management, allocation refers to the decision made regarding how much capital to invest in various sectors or asset classes. When portfolio managers allocate funds, they are essentially betting on which sectors will perform best relative to others. The "selection" aspect relates to the specific securities chosen within those sectors or asset classes.

The interaction of these two elements—how the specific security choices perform within the context of the broader allocation strategy—can yield important insights into a portfolio's performance. This means that both the decision on how much to invest in a certain sector and the decision on which specific securities to choose from within that sector will affect the overall returns.

Thus, this measure captures not only the impact of an asset manager's choices in terms of sector weights but also how effective their individual security selections were within those chosen weights, making it a nuanced perspective on active management effectiveness.