“An investment in knowledge pays the best interest.” – Benjamin Franklin
“You have to know the past to understand the present.”- Carl Sagan
The above quotes both come to mind when discussing the relevance of investment performance measurement. Investment performance measurement is an integral tool in the investment management process. It answers What, How and Why of past portfolio management decisions. At its basic core, the measurement of investment performance is a continuous process which involves verifying the rates of return of a given portfolio or individual investment against the standards that have been set. It may also include quantification of how the return was made via attribution analysis and the risks taken to generate the returns.
The What, How and Why can be answered by analyzing investment performance via three components of investment reporting. Rates of returns calculated by dollar weighting and time weighting based on GIPS standards allow an investor to view their performance at the total fund level or drilled down to security level. It is easy to dismiss investment performance measurement as it relates to individual investments. Anyone can launch a website and get historic prices to do a quick price change calculation. However, this is a small picture in a huge landscape. This simple calculation does not consider the effect of income, purchases, sales and fees and manager discretion. Nor does it allow for the effects of timing, security selection and multi asset class accounts.
Rates of return measured against a benchmark allows the investor to have a baseline to analyze their calculated performance. It helps answer the “what” by giving the investor tools to measure their active investing vs the benchmark’s passive investing. When a portfolio is actively managed, the deviation between the fund returns and the benchmark, may reflect the investment choices made by the active manager in an attempt to improve performance. If the active manager is successful, the portfolio outperforms the benchmark; if not, the portfolio underperforms its benchmark.
Performance measurement tools like risk and attribution are also integral to investors and managers. Many investors base the success of their portfolios on a simple rate of return calculation. Few investors, however, consider the risk involved in achieving those returns. Measures like Alpha, Beta, Standard Deviation and the Traynor measure are used to track risk of fluctuations in the stock market and fluctuations of individual securities. Attribution allows an investor or manger to examine the portfolio and review the impact that each investment’s contribution had on the total portfolio. This can be done with individual securities or economic sectors and industries and shows how the fund did on an absolute basis.
Clients today can demand greater transparency into their portfolios. Many are using the objectives and strategies supplied by portfolio managers with an inherent need to verify that the objectives and strategies are being realized. Investment performance measurement allows investors to monitor their progress towards set investment objectives and amend their strategies as needed. These objectives also involve various asset classes with distinct characteristics and yielding different returns.
Investment Performance Reporting is more than just a tool used by portfolio managers. It is necessary to evaluate and provide reassurance to their clients and is an integral method to verify their objectives. It helps answer the ultimate question when it comes to investing, “Am I there yet” and if not, “How far away am I?” and “Will I get there at the rate I am going?”
GreenHill Investment Reporting® is a leader in performance measurement reporting. Our calculations are based on GIPS standards and are verified at the highest level for all your investments. Contact us for more information. We make performance personal!
GreenHill is the premier performance measurement reporting firm to the wealth management industry. We offer web access to client reports, model accounts, and customized benchmarks.