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Page last updated
February 15, 2003




Investment performance results

Essential of a global performance measurement solution

The solid foundation of data used fro performance analysis is a springboard to providing decision support tools for cross-border performance and risk analysis, performance attribution, and asset allocation.

As performance takes a greater and greater role in your markets, choosing a performance measurement solution will be come a more and more important decision.

There are several essential components of a performance measurement system or service: time-weighted returns; dollar-weighted returns; measures of risk and diversification; measures of risk adjusted returns; comparisons against stated performance objectives (e.g., actuarial assumptions, market indexes, the Consumer Price Index, etc.); and comparisons against other pools of managed money.The system you choose must have the capabilities to perform the following five functions:

1.Cover many different time periods, including fiscal, calendar, and rolling periods in the report process. The report also should allow you to choose any time period from inception of the fund to the latest day. The system should also be able to calculate returns either gross or net of fees. The reporting module should have the ability to change time periods, fund segments, and benchmarks.Graphical output is also necessary, because a picture is easily understood

2.Measure many segments of a fund common stock, fixed income, large cap value, growth, sectors, etc.-as well as the entire fund. Some managers are more effective at selecting equity and debt in an attempt to time the market. Similarly, investment management is now specialized enough that plan sponsors search for and money managers promote specified styles, such as: large-cap growth/value, sector rotation, cross-border and other objectives that benefit from focused performance measurement and evaluation. The capability to focus on fund segments allows for the separate measurement of the security selection component of the manager's job.

3.Generate a balanced market index, style-based sector or international index for comparison against a balanced or other type of fund. When a fund has both debt and equity segments, it can be misleading to compare it against an all-equity or all-debt market index. Likewise, it would be inappropriate to compare a small-cap manager to an index like the FTSE 100, which has a large-cap bias. By combining multiple indices, the performance measurement system should automatically create a balanced index of virtually any specified mix.

4.Produce a composite report on multiple funds. This is desirable from a reporting standpoint, but is also necessary for GIPS. (The Global Investment Performance Standards, or 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.) The standards require that every fee-paying discretionary portfolio be included in a composite. To comply with the standards you must have a system that has powerful composite functionality. The composite report should contain all the information that the individual reports contain. It also may be desirable to create composites where portfolios may have to be in several different composites, so this functionality may be necessary. In addition, it should be possible to group funds in order to create separate composites by investment objective, fund manager, type of fund, or asset size, etc. The system also should be able to create size-weighted or equal-weighted composites for different performance standards. The newly revised standards also require a measure of dispersion for the portfolios comprising the composite. This can take the form of standard deviation, high-low range, or similar measures.

5.Create management summary reporting. This is appropriate whenever a money manager is measuring numerous funds under management, or whenever a fund sponsor has distributed his fund among several managers. This function allows the manager to group similar funds together and ranks them by return. This is also necessary for management reporting that seeks to quantify a portfolio manager's performance.

The most overlooked feature is that a well-designed performance measurement system must minimize the burden of input preparation and maintenance. A system that delivers great reports, but requires a great deal of maintenance or manual interaction with the data is not a good system. Operational efficiency (for in-house users) is enhanced when the system provides an easy-to-use and flexible data import tool. A robust integration tool within the software that allows the user to aggregate, segregate, or eliminate securities or cash flows from performance calculations is of paramount importance. Additionally, it is very beneficial to allow the user to maintain and update the interface files. All too often, file formats change and modifications to the interfaces require extensive reprogramming and cost to accommodate change. A flexible import tool eliminates the need to spend additional money and time on the vendor building new interfaces or changing existing ones.

A good performance system must allow the user to easily update and maintain portfolios. This is sometimes overlooked, but the reason is obvious: setting up 5,000 (or even 500) portfolios manually takes a great deal of time and maintaining them even more time. A quality system will have an architecture that allows for updates electronically rather than by manual input. Grouping similar portfolios is also very

beneficial because they may be unique in one area, but may share similar characteristics with other portfolios. Examples of these groupings include: reconciliation rules ("flag portfolios that have returns that are not within 2% of a specified benchmark"), reports to be run, indices to compare to, cash allocation, etc. Why set up and maintain 5,000 different types of portfolios when a large majority of those portfolios can be grouped into ten different types?

It is also imperative for a performance measurement system to have rigorous built-in edit routines that guard against incomplete or inaccurate data. Obviously, it is not possible to assure 100% accuracy. It is, however, possible to establish permissible tolerances, which, when violated, will either abort the performance measurement report, or at least provide the user with a warning message that can be checked before relying on what could be faulty information. Another important feature of the edit process is to define the tolerances and edits on a portfolio-on-a-portfolio basis rather than across all portfolios. This may not be necessary, but should the £50,000 personal account be as stringently reconciled as the £100 million pension plan?

Reporting is another area where uniqueness and flexibility are an absolute must. In a very competitive money management world, a unique "look and feel" to the reports presented to clients is an important means of distinguishing oneself from the competition. A flexible reporting tool that provides control over the data and format presented will make the difference in a crowded investment field.

As cross-border investing increases along with market volatility, it will become imperative to implement a streamlined, automated process for measuring and analyzing investment performance results. Providing meaningful analysis to clients and fund managers will play an important role in gaining an edge in the highly competitive fund management business.



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