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Investment Performance Measurement: Evaluating and Presenting Results

July 13th, 2016

Investment managers need insight into their historical performance to help evaluate and control their investment process. This insight also facilitates the marketing of services and communication with current and prospective clients. The reporting data helps the client monitor whether a manager is performing as expected given the capital market environment over the period.

Performance measurement begins with the valuation of the assets within the portfolio. The trade-date portfolio positions, prices, transactions are used as inputs to a performance system. Trade-date accounting is preferred for performance measurement, because securities in the fund valuation are included on the day a manager agrees to buy or sell the securities, as opposed to the day they are settled, or exchanged for cash. The trade date valuation is made because it is the date upon which the manager assumes ownership of the security.

After accounting inputs are collected, a portfolio return can be calculated, ideally using a daily Time-Weighted Return (TWR) methodology. The TWR is a form of total return that measures the performance of a dollar invested in the portfolio for an entire measurement period. The TWR is used to make legitimate comparisons of manager performance, both to other managers with a similar style and to the market, because it eliminates the timing effect that external portfolio cash flows have on performance, leaving only the effects of the market and manager decisions. Absolute and benchmark relative risks taken to earn returns can also be measured to determine manager skill (more risk should equal more return).

If we are interested in the sources of the total return, the contribution made by the securities and segments of the portfolio can be calculated. By comparing the relative contributions made by different securities to the total fund and benchmark return, we can attribute value added over the passive market return as represented by the benchmark to the asset allocation and security selection decisions made by the manager. Institutional investors review and compare a manager’s absolute, risk-adjusted, and benchmark relative performance histories to identify top performing managers and to determine if the manager’s track record reflects his stated style and strategy.

A standard to provide comparable, verified performance figures for investment performance presentation evolved under the guidance of the CFA Institute, formerly known as the Association for Investment Management (AIMR). Global investment performance standards (GIPS) are ethical standards to be used by investment managers for creating performance presentations that ensure fair representation and full disclosure of investment performance results.

STP Investment Services utilizes an industry-leading platform to deliver timely and accurate performance measurement to our clients. Customized reports and reporting packages, available via our client portal, give our clients immediate access to their historical performance and take the hassle out of generating client reporting.

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