Investment Performance Measurement & Performance Measurement Standards
©2005
Diplomarbeit
98 Seiten
Zusammenfassung
Inhaltsangabe:Abstract:
In the world of investment today, countless decisions are being taken in order to meet financial aims and fulfill expectations people have for the future. Day by day, tremendous amounts of information zigzag across the entire planet, from continent to continent, between people and places, rushing through all time zones at the speed of light. Managers, investors as well as private households, employees, foundations and many more seek to acquire essential data concerning their financial positions.
Since investing has gained significantly in importance over time, the quality of this data has increasingly received a substantial role. Many crucial subjects depend on the reliability and the trustworthiness of information about investments. Subjects which sooner or later concern everybodys lives in the developed societies such as pensions funding, future education financing or start-up business, plans just to name a few.
Therefore, in the new environment known as the Information Society, people have to be able to recognize the information that is relevant to them. They have to be able to distinguish it from misleading, sometimes even fraudulent data, which unfortunately continues circulating and incessantly creates considerable economical damage.
The qualitative requirements to be met by the provided data are quite straightforward and obvious, yet in nature difficult to reach. However, the success and the attractiveness of any kind of investment opportunity increasingly depends on the quality grade of the information exchange.
The urgent demand for fulfilling the requirements for investments led to the creation of a completely new standard: the Global Investment Performance Standard (GIPS). These standards, and their theoretical basis as well as their surroundings will form the core of this thesis.
In order not to be pushed immediately into a complete unknown environment, the structure of this thesis is organized in layers, starting from more general topics and developing into more detail thereafter. Part I covers the basic part about performance.
It will then guide to the thematical location of the subject Performance Presentation, and will briefly present a few major items, which shall help to quickly access more detailed chapters.
Part II will cover the technical clockwork of performance measurement. In a step-by-step process, the different components, their meaning and their calculation will be introduced. They […]
In the world of investment today, countless decisions are being taken in order to meet financial aims and fulfill expectations people have for the future. Day by day, tremendous amounts of information zigzag across the entire planet, from continent to continent, between people and places, rushing through all time zones at the speed of light. Managers, investors as well as private households, employees, foundations and many more seek to acquire essential data concerning their financial positions.
Since investing has gained significantly in importance over time, the quality of this data has increasingly received a substantial role. Many crucial subjects depend on the reliability and the trustworthiness of information about investments. Subjects which sooner or later concern everybodys lives in the developed societies such as pensions funding, future education financing or start-up business, plans just to name a few.
Therefore, in the new environment known as the Information Society, people have to be able to recognize the information that is relevant to them. They have to be able to distinguish it from misleading, sometimes even fraudulent data, which unfortunately continues circulating and incessantly creates considerable economical damage.
The qualitative requirements to be met by the provided data are quite straightforward and obvious, yet in nature difficult to reach. However, the success and the attractiveness of any kind of investment opportunity increasingly depends on the quality grade of the information exchange.
The urgent demand for fulfilling the requirements for investments led to the creation of a completely new standard: the Global Investment Performance Standard (GIPS). These standards, and their theoretical basis as well as their surroundings will form the core of this thesis.
In order not to be pushed immediately into a complete unknown environment, the structure of this thesis is organized in layers, starting from more general topics and developing into more detail thereafter. Part I covers the basic part about performance.
It will then guide to the thematical location of the subject Performance Presentation, and will briefly present a few major items, which shall help to quickly access more detailed chapters.
Part II will cover the technical clockwork of performance measurement. In a step-by-step process, the different components, their meaning and their calculation will be introduced. They […]
Leseprobe
Inhaltsverzeichnis
ID 9310
Chladek, Daniel: Investment Performance Measurement & Performance Measurement
Standards
Druck Diplomica GmbH, Hamburg, 2006
Zugl.: Universität Wien, Diplomarbeit, 2005
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I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
&
P
ERFORMANCE
M
EASUREMENT
S
TANDARDS
I
NDEX
II
I
NDEX
CHAPTER I BASICS ON PERFORMANCE ...3
I.1.
P
ERFORMANCE VERSUS
R
ETURN
...3
I.1.1. Investor and Manager...4
I.2.
P
OSITION OF
P
ERFORMANCE
M
EASUREMENT WITHIN THE
I
NVESTMENT
P
ROCESS
...6
I.2.1. External and Internal Performance Measurement ...8
CHAPTER II PERFORMANCE MEASUREMENT ...9
II.1.
P
ERFORMANCE
M
EASUREMENT
R
EQUIREMENTS
...10
II.1.1. User Requirements...10
II.1.2. Measure Prerequisites ...11
II.1.3. Absolute Return ...12
II.1.4. Problems with Absolute Returns...18
II.1.5. Relative Return ...21
II.1.6. Problems with Relative Returns...27
II.1.7. Risk ...27
II.1.8. Overview Risk ...33
II.1.9. Market Data ...34
II.1.10. Attribution...34
II.1.11. Timing and Consistency...35
II.1.12. Independence ...36
II.2.
P
ERFORMANCE
M
EASUREMENT
...38
II.2.1. The Classical Measures...38
II.2.2. Pricing Models ...48
II.3.
P
ROBLEMS OF
P
ERFORMANCE
M
EASUREMENT FOR THE
I
NVESTOR
...53
II.3.1. Technical Problems with Return, Risk and Attribution ...53
II.3.2. Problems of Investment Business ...55
II.4.
C
ONCLUSION OF
CHAPTER
II ...57
CHAPTER III THE GLOBAL INVESTMENT PERFORMANCE STANDARDS...59
III.1.
I
NTRODUCTION
...59
III.1.1. History ...60
III.1.2. Development...61
III.1.3. Definition...63
III.1.4. Benefits...64
III.1.5. Motivation ...64
III.1.6. Short Overview of the GIPS ...66
III.2.
P
RACTICAL MEANING OF THE
GIPS...66
III.2.1. Compliance...67
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
&
P
ERFORMANCE
M
EASUREMENT
S
TANDARDS
I
NDEX
III
III.2.2. Composites ...68
III.2.3. Verification...75
III.3.
S
UMMARY AND
C
ONCLUSION
...76
III.3.1. Performance Measurement ...76
III.3.2. Performance Presentation Standards (GIPS) ...77
III.4.
S
AMPLE
P
ERFORMANCE PRESENTATIONS ACCORDING TO
GIPS ...80
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
&
P
ERFORMANCE
M
EASUREMENT
S
TANDARDS
E
XHIBITS
IV
E
XHIBITS
E
XHIBIT
I.1.
T
HE
O
RIGIN OF
P
ERFORMANCE
3
E
XHIBIT
I.2.
P
URPOSES FOR
P
ERFORMANCE
M
EASUREMENT
4
E
XHIBIT
I.3.
T
HE
I
NVESTMENT
P
ROCESS
6
E
XHIBIT
I.4.
T
HE
C
LOSED
C
IRCUIT OF
I
NVESTMENT
P
ROCESS
7
E
XHIBIT
II.1.
T
HE
P
ERFORMANCE
M
EASUREMENT
P
ROCESS
9
E
XHIBIT
II.2.
R
EQUIREMENTS FOR
P
ERFORMANCE
M
EASUREMENT
11
E
XHIBIT
II.3.
T
HE
M
ONEY
W
EIGHTED
R
ETURN
15
E
XHIBIT
II.4.
T
HE
T
IME
W
EIGHTED
R
ETURN
17
E
XHIBIT
II.5.
E
XAMPLE FOR
MWR/TWR 19
E
XHIBIT
II.6.
R
ISK
S
PLIT
29
E
XHIBIT
II.7.R
EQUIREMENTS
O
F
P
ERFORMANCE
M
EASUREMENT
37
E
XHIBIT
II.8.
O
VERVIEW
C
LASSICAL MEASURES
39
E
XHIBIT
II.9.
T
HE
S
HARPE
R
ATIO
40
E
XHIBIT
II.10.
T
HE
T
REYNOR
R
ATIO
42
E
XHIBIT
II.11.
R
ISK
-A
DJUSTED
P
ERFORMANCE
44
E
XHIBIT
II.12.
T
HE
J
ENSEN
'
S
A
LPHA
45
E
XHIBIT
III.1.
T
HE
D
EVELOPMENT OF THE
GIPS 62
E
XHIBIT
III.2.
A
TTAINING
GIPS
C
OMPLIANCE
67
E
XHIBIT
III.3.
C
OMPOSITE
S
TRUCTURE
E
XAMPLES
70
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
&
P
ERFORMANCE
M
EASUREMENT
S
TANDARDS
T
ABLES
&
F
ORMUL
Æ
V
T
ABLES
T
ABLE
II.1.
FUND
R
EACTION TO
I
NVESTOR
B
EHAVIOR
14
T
ABLE
II.2.
MWR
VS
.
TWR 20
T
ABLE
II.3.
M
INIMUM
R
EQUIREMENTS FOR A
B
ENCHMARK
25
T
ABLE
II.4.
I
DEAL
B
ENCHMARK
C
ONDITIONS ACCORDING TO
S
HARPE
26
T
ABLE
II.5.
D
EFINITIONS OF
A
LPHAS
46
T
ABLE
III.1.
I
NDEX OF COUNTRY SPECIFIC
PPS. 61
F
ORMUL
Æ
II.1. R
ETURN ON
I
NVESTMENT
(ROI)...13
II.2.
I
NTERNAL
R
ATE OF
R
ETURN
(IRR)...16
II.3. M
ODIFIES
DIETZ
RETURN
...16
II.4. T
IME
W
EIGHTED
R
ETURN
...18
II.5. B
ETA
...32
II.6. A
LPHA
...32
II.7. L
INE OF
B
EST
F
IT
...32
II.8.
T
RACKING
E
RROR
...33
II.9. S
HARPE
R
ATIO
...40
II.10. T
REYNOR
R
ATIO
...42
II.11. M
ODIGLIANI
M
ODIGLIANI
R
ETURN
...44
II.12. T
REYNOR
/B
LACK
M
EASURE
...46
II.13. C
APITAL
A
SSET
P
RICIING
M
ODEL
(CAPM)...50
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
&
M
EASUREMENT
P
RESENTATION
S
TANDARDS
I
NTRODUCTION
1
I
NTRODUCTION
n the world of investment today, countless decisions are being taken in
order to meet financial aims and fulfill expectations people have for the
future. Day by day, tremendous amounts of information zigzag across the
entire planet, from continent to continent, between people and places,
rushing through all time zones at the speed of light. Managers, investors as well as
private households, employees, foundations and many more seek to acquire
essential data concerning their financial positions.
Since investing has gained significantly in importance over time, the quality of
this data has increasingly received a substantial role. Many crucial subjects
depend on the reliability and the trustworthiness of information about
investments. Subjects which sooner or later concern everybody's lives in the
developed societies such as pensions funding, future education financing or start-
up business, plans just to name a few.
Therefore, in the new environment known as the "Information Society", people
have to be able to recognize the information that is relevant to them. They have to
be able to distinguish it from misleading, sometimes even fraudulent data, which
unfortunately continues circulating and incessantly creates considerable
economical damage.
The qualitative requirements to be met by the provided data are quite
straightforward and obvious, yet in nature difficult to reach. However, the success
and the attractiveness of any kind of investment opportunity increasingly depends
on the quality grade of the information exchange.
O
UTLINE
O
F
T
HIS
T
HESIS
The urgent demand for fulfilling the requirements for investments led to the
creation of a completely new standard: the Global Investment Performance
Standard (GIPS). These standards, and their theoretical basis as well as their
surroundings will form the core of this thesis.
In order not to be pushed immediately into a complete unknown environment, the
structure of this thesis is organized in layers, starting from more general topics
and developing into more detail thereafter. Part I covers the basic part about
performance.
I
I
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
&
M
EASUREMENT
P
RESENTATION
S
TANDARDS
I
NTRODUCTION
2
It will then guide to the thematical location of the subject `Performance
Presentation', and will briefly present a few major items, which shall help to
quickly access more detailed chapters.
Part II will cover the technical clockwork of performance measurement. In a step-
by-step process, the different components, their meaning and their calculation will
be introduced. They shall provide the theoretical background knowledge which
forms the underlying of performance presentation standards.
Part III then figures the swap from the theoretical principles over to the practical
GIPS framework itself. The aim of this part is to explain the development of the
GIPS, their functioning, and the significance in the investment business. After
this, a complete and fairly detailed image should remain in mind.
The last part includes any kind of personal reflection, criticism and outlook about
performance presentation standards and finally concludes this thesis.
P
RINCIPLE
I
SSUE
This thesis shall analyze what problems existed and still exist today in the
investment business. That is, the problems of the "clients" in the investment
business - the investors. This question mainly has arisen because of several major
financial scandals which troubled not only the U.S., but also other global
economies.
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
&
M
EASUREMENT
P
RESENTATION
S
TANDARDS
C
HAPTER
I
B
ASICS ON
P
ERFORMANCE
3
CHAPTER I
B
ASICS ON
P
ERFORMANCE
The first and immediate question arises about which concept lies behind the term
performance measurement?
Basically, it implies the collection and treatment of data and their conversion into
representative results, all emerging from financial investing. Hence, performance
measurement does not consist of one single action, but rather sums up an entire
process of actions. These actions are chained to one another and are known as the
Performance Measurement Process.(see Exhibit I.4 on p.7)
I.1.
P
ERFORMANCE VERSUS
R
ETURN
Quite important in this respect is a clear and precise distinction between
Performance and Return. According to B
ICKEL
(2000, p.25), the return is set
together by `Interest and Dividend income, the realized gains/losses from sales as
well as the non-realized Capital gains/losses. Further, in a more general sense, the
return of an asset is any result in comparison to a certain reference, a so-called
benchmark, over a period of time.
`Performance however is a special fraction of the return, which cannot be replicated
by publicly known information.'
1
Rather, a positive performance can be achieved
by the exploitation of a certain
information advantage only
open to an individual
investment manager. This also
referred to as information
inefficiency, can be directly
transformed into a "beyond-
return" known as Performance.'
In other words, when
performance is the above-
benchmark return, its measurement indicates which of it is directly attributable to
the manager's decisions and behavior. Still of considerable importance is the fact
that this unique information which the manager initially possesses actually becomes
1
See W
ITTROCK
, 1998, p.933, (quote B
ICKEL
, 2000, p.26).
E
XHIBIT
I.1.
T
HE
O
RIGIN OF
P
ERFORMANCE
Information
Inefficiency
Public Information
Information Inefficiency
declines by turning public.
Asset Value
t
Private Information
Source:Author's Origin
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
M
EASUREMENT
P
RESENTATION
S
TANDARDS
C
HAPTER
I
B
ASICS ON
P
ERFORMANCE
4
publicly confirmed information over time, in order to make the asset in question
attains the formal theoretical value.
I.1.1.
Investor and Manager
The two main characters which are directly related to the measurement of
performance are the Investor, who provides funds, and the (Investment-) Manager,
who develops and implements investment strategies either individually or in teams.
While Investors commonly are private individuals or corporations (institutional
investors), investment managers work for Investment firms, i.e. asset management
firms, banks, mutual funds and so on.
Although it may happen that Investor and Investment Manager are the same person,
the differentiation of these two parties might facilitate the understanding of
performance measurement. The process itself is always similar in structure, from
the investor's as well as the manager's point of view. Yet, the purpose of
performance analysis and its results play a complete different role for the two
parties. As a matter of fact, performance measurement takes a keystone position
between investor and manager, but with quite different features and patterns to each
of the parties. If not stated otherwise, this text always starts from a situation where
investor and manager are two
different positions.
For the investor, there are
three main objectives behind
performance measurement:
monitoring progress,
manager selection and
evaluation and inputs for
asset allocation. (see E
XHIBIT
I.2.) Probably the most
important one, the monitoring
ability of the investments' progress simply informs the investor about the situation
of his funds. Since investments very often serve for long-term purposes as pension
funding or funding for academic education, this monitoring progress plays a crucial
and decisive role at any time. It must be possible to check one's funds, with
E
XHIBIT
I.2.
P
URPOSES FOR
P
ERFORMANCE
M
EASUREMENT
Performance
Performance
Measurement
Measurement
I
I
NVESTOR
NVESTOR
· Monitoring
Progress
· Manager
Selection
· Asset Allocation
M
M
ANAGER
ANAGER
·Process Control
· Marketing
Client Service
Source:Author's Origin
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
M
EASUREMENT
P
RESENTATION
S
TANDARDS
C
HAPTER
I
B
ASICS ON
P
ERFORMANCE
5
constant quality measures and in an clearly arranged overview. But the fund's
performance is not the only figure that can be monitored.
Another success factor in investments is the manner how carefully a fund is being
managed. `If investors delegate all or a portion of the management of funds to
professional investment managers'
2
, this manager in turn himself also becomes a
subject of evaluation. The manager is the major link between the investor and his
funds. `Performance measurement facilitates the ongoing communication between
the client and the manager about the client's changing objectives and the portfolio's
place within the strategy to meet them.' The fees that managers demand can mean a
considerable charge for investors. So if a manager claims to have a strategic
solution for an investor, the investor might as well be interested in verifying this
offering regularly. For this purpose, `several consultancies, custodians or
investment research companies offer their service for manager performance
evaluation.'
3
.
Even though this evaluation might always turn out quite tough and demanding for
the manager, it likewise helps him to obtain an essential feature for his career: the
tracking record. In order to attract new clients, a manager has to present his work
of the past, a set of historic data on investment activity. In this sense, every time his
work is monitored, he gets an approval for his working quality.
Finally, performance measurement gives advice to the investor in general terms, as
in the question of the optimal asset allocation.
Coming to the major purposes of performance measurement `for the investment
manager these are quite straightforward: Process Control, Marketing and Client
Service.'
4
(see Exhibit
I.2, p.4) As within Process Control, performance
measurement simply helps the manager himself to observe, understand and control
his own work. Based on this, he can choose to be an active investment manager
with clearly defined intentions to beat a chosen benchmark, or to act as a passive
investment manager with the aim to accomplish pre-set benchmark figures.
Last but not least, performance measurement also is useful for any marketing
activities. To transmit the investment manager's philosophy, principles and also
performance, he uses achieved results and attaches any meaningful data to potential
2
See F
EIBEL
, 2003, p.4.
3
See F
EIBEL
, 2003, p.4.
4
See F
EIBEL
, 2003, p.4.
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
M
EASUREMENT
P
RESENTATION
S
TANDARDS
C
HAPTER
I
B
ASICS ON
P
ERFORMANCE
6
clients, for his own personal marketing purposes. This feature of investment
performance will touch several points discussed in this thesis, e.g. the fact that
managers tend to flatten out only their best managed investments results to an
overall average, thus creating sometimes questionable tracking records.
I.2.
P
OSITION OF
P
ERFORMANCE
M
EASUREMENT WITHIN THE
I
NVESTMENT
P
ROCESS
In the chain of the investment process the impression might evolve that
performance measurement figures the final station, i.e. that at the end of the day,
when investment has been done, the results are being derived. However, the
operation of performance measurement occupies a far more load-bearing position,
in the process of asset allocation to place it more precisely. As a matter of fact, the
measurement of performance figures a key-stone procedure within the investment
process.
Initially, the investor has to name clearly defined goals that he intends to reach by
financial means. What does the Investor want at what time is the strategic question.
The way and means by which he intends to reach this point make up the question of
tactical decision. The infinite answers to the strategic question can lie in the quest
for short-term high-return opportunities or in saving money in a steady and risk free
way over decades e.g. for pension or children education purposes. Further, it has to
be noted whether the investor has intentions to beat the benchmark or does he
prefer passive objectives? Those are the strategic concerns.
If he does not want to or
simply does not know how to
reach his strategic goals, he
may authorize an investment
manager with this duty (see
E
XHIBIT
I.3). In this case, the
investor has to communicate
his precise thoughts. In order
to reach the return needed for
the investor, the manager in
consequence has to set up a
perfect combination key composed of financial products that are available on the
E
XHIBIT
I.3.
T
HE
I
NVESTMENT
P
ROCESS
Source:Author's Origin
I
I
N
N
V
V
E
E
S
S
T
T
O
O
R
R
M
M
A
A
N
N
A
A
G
G
E
E
R
R
S
S
TRATEGIC
TRATEGIC
A
A
IMS
IMS
T
T
AILOR -
AILOR -
M
M
ADE
ADE
I
I
NVESTMENT
NVESTMENT
T
T
ACTICAL
ACTICAL
D
D
ECISIONS
ECISIONS
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
M
EASUREMENT
P
RESENTATION
S
TANDARDS
C
HAPTER
I
B
ASICS ON
P
ERFORMANCE
7
market- maintaining an acceptable amount of risk for the investor. On this stage,
called the Tactical Asset Allocation, performance management becomes a tool of
guidance.
According to results and performance, the manager can set up any tailor-made
solution for virtually any demand situation. He creates an investing system, which
consists of many different components, all with a carefully assigned weighting.
This highly sensitive weighting in return must correspond as closely as possible to
the strategy pursued by the investor. The process of tactical asset allocation itself is
considerably sophisticated and delicate. For a better understanding, the investment
process must be seen as a permanently active circuit, a vivid cycle, like an
organism, which oscillates between investment decisions and their readjustment.
One mathematical approach to this cycle is `the M
ARKOWITZ
Model'
5
, in which
every single market and asset must be represented by their returns, variance and co-
variance respectively. The weighting of assets itself is being calculated with the
"Mean Variance Optimizer". The required amount of data of this approach usually
swells up to an entire ocean of figures. That is why we renounce on the complete
presentation of this topic, which would undoubtedly go beyond the scope of this
thesis. The concrete functioning and the calculus behind it fill entire bookshelves
full of volumes. Therefore, this short remark only shall give a faint idea about these
models. Nevertheless, single-and multiindex models are quite a thrilling topic that
offers an interesting
approach to various
questions in the world of
investments.
In being an important and
helpful tool in asset
allocation, this was not but
the first point for
performance measurement
to interact. In the
explanation of
5
See L
UENBERGER
, 1998, pp.157.
E
XHIBIT
I.4.
T
HE
C
LOSED
C
IRCUIT OF
I
NVESTMENT
P
ROCESS
1. Setting the Investment Goal
2. Strategic Asset allocation
- Benchmark Definition
3. Portfolio Creation:
Asset Allocation, Selection of
Markets, Sectors and Titles
4. Tactical Asset Allocation
5. Readjustment
and Revision
6. Reorientation
and Redefinition
PERFORMANCE
MEASURMENT
Source:auther's origin, based on Zimmermann
11
p.6 and Bickel p.14
I
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ERFORMANCE
M
EASUREMENT
M
EASUREMENT
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RESENTATION
S
TANDARDS
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HAPTER
I
B
ASICS ON
P
ERFORMANCE
8
Z
IMMERMANN
6
the process of asset allocation appears as a permanent repositioning
process (see E
XHIBIT
I.4), circulating between tactical movement and strategical
readjustment. Performance measurement occupies a key stone position as a
indicator. Later on, the chapters will be the questioning about how the measured
result has been achieved and, if necessary, what steps must be taken to ameliorate
it.
To draw a better image of the multidimensional character of performance
measurement, the differences between internal and external performance
measurement shall be explained next.
I.2.1.
External and Internal Performance Measurement
This differentiation reflects the different spheres, from where the performance
measurement process may take place. Either choice depends on the type and
quantity of data available for performance analysis.
Starting with External Performance Measurement, `portfolio returns are known, but
no information is available on constituents liek [sic!] for example sector weights or
stock-level returns.'
7
This form of analysis is strongly focused on the market, on
benchmarks as well as on peers - brief, on guidelines placed outside the manager's
sphere of influence. It uses Risk-Adjusted Measures, Market Timing Models as
well as Style Analysis for its purposes.
Different to this, the Internal Performance Measurement assumes knowledge about
`the weights and returns of portfolio as well as benchmark constituents.'
8
It seeks to
determine precise facts about Return Contribution and Performance Attribution.
While interpreting the results of the performance, the manager or the investor
intend to locate the source and the reason for any occurred result. While being a ex
post backward looking process, performance measurement nevertheless provides
meaningful information for any future behavior, strategy or investing decision.
6
See Zimmermann/Rudolf/Jaeger/Zogg-Wetter, 1996, p.6.
7
See Performance Analysis Forum/External Analysis.
(http://www.andreassteiner.net/performanceanalysis/?External_Analysis)
8
See Performance Analysis Forum/Internal Analysis.
(http://www.andreassteiner.net/performanceanalysis/?Internal_Analysis)
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P
ERFORMANCE
M
EASUREMENT
9
CHAPTER II
P
ERFORMANCE
M
EASUREMENT
The term `Performance Measurement' refers to an entire process rather than a
single-step procedure. The definition of F
EIBEL
(2003, p.6) points it out quite
precisely:
`The calculation of return, risk and derived statistics stemming from
the periodic change in market value of portfolio positions and
transactions made into and within a portfolio, for use in the
evaluation of historical fund or manager performance.'
To put it into a nutshell, performance measurement opposes the reached results to
the initially endeavored results for the investment, and provides insight for the
future steps to be taken.
Although there are many different components that belong to performance
measurement process as can be seen above, the text directly moves forward to the
core piece.
E
XHIBIT
II.1.
T
HE
P
ERFORMANCE
M
EASUREMENT
P
ROCESS
Source: (modified) See F
EIBEL
, 2003, p.7.
P
P
ORTFOLIO
ORTFOLIO
A
A
SSET
SSET
V
V
ALUATION
ALUATION
P
P
ERFORMANCE
ERFORMANCE
M
M
EASUREMENT
EASUREMENT
R
R
ETURN
ETURN
C
C
ALCULATION
ALCULATION
P
P
ERFORMANCE
ERFORMANCE
A
A
TTRIBUTION
TTRIBUTION
R
R
ISK
ISK
D
D
ETERMINATION
ETERMINATION
R
R
ELATIVE
ELATIVE
R
R
ISK
ISK
R
R
ETURN
ETURN
P
P
EER
EER
G
G
ROUPS,
ROUPS,
M
M
ARKET
ARKET
I
I
NDECES
NDECES
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
M
EASUREMENT
P
RESENTATION
S
TANDARDS
C
HAPTER
II
P
ERFORMANCE
M
EASUREMENT
10
II.1.
P
ERFORMANCE
M
EASUREMENT
R
EQUIREMENTS
The term `requirement' in this context splits into two different meanings. On the
one hand, they figure the features and functions the measure tool has to have i.e.
as the users want them to be.
Second, also this chapter also takes a look at the necessary "ingredients", the
logical input, to create an intelligent device. So, requirements denote the questions
"What features do users of measures require i.e. expect of the measures?" as well
as "What input is necessary so that measures fulfill these expectations?". For a
better understanding, the terms
`User Requirements' and `Measure
Prerequisites' shall be used. This differentiation is a crucial presumption of further
explanation and is carefully to keep in mind.
II.1.1.
User Requirements
For people working with performance measurement `statements about the success
of investing and the universal comparability function form the very core of the
measurement purpose. Right next to that, results should represent reality as close
as possible and free of any inconsistencies.'
9
Surrounding these center concepts,
J
AEGER
(2003, pp.29) and W
OLFERT
(2003, p.129) derive a listing of additional
characteristics:
·
CLEAR - Performance measurement has to be organized in an
clearly structured, overview, suitable for effective and reliable
result interpretation.
·
UNIFORM - Provided data must be presented in a generally
accepted standard in order to guarantee perfect comparability.
·
ACCURATE - Performance figures with any different origin
than the investment manager's impact such as coincidences or
investor decisions, etc. should be ruled out from the presented
result. Thus, Performance measures have to be analyzed by
significance of the respective results.
9
See W
OLFERT
, 2003, p128.
I
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11
·
TRUE - Similar to the significance recognition, the asset
selectivity and the timing behavior must be held transparent and
accessible to permanent analytical research.
·
CHEAP - Last but not least, the expenses for measurement
should be held as close as possible.
So, in order to obtain a sensible and useful measurement tool, any measurement
standard has to contain these basic features, among others to come on a more
specific level. This subsequently leads us to the next question: which steps have to
be taken in order to set up these features?
II.1.2.
Measure Prerequisites
`Performance Measurement works much the same way across asset classes and
management strategies. It is [...] common to all combinations of investor, vehicle,
strategy and asset class.'
10
A performance measurement tool roughly consists of
some basic, generalized components which may be adapted to specific asset
characteristics, if necessary The description of the components is quite trivial.
According to Z
IMMERMANN
/R
UDOLF
/J
AEGER
/Z
OGG
-W
ETTER
(1996, p.8ff.) `each
performance measurement tool has to contain the following seven features :
10
See F
EIBEL
, 2003, p.5.
E
XHIBIT
II.2.
R
EQUIREMENTS FOR
P
ERFORMANCE
M
EASUREMENT
S
OURCE
: T
HE
A
UTHER'S
O
RIGIN
.
· RETURN FIGURES
· RISK FIGURES
· BENCHMARK
· MARKET DATA
· ATTRIBUTION TO ASSETS
· TIMING CONSISTENCY ANALYSIS OF RESULTS
· INDEPENDENCE
I
NPUT NECESSARY FOR MEASURING
I
NVESTMENT
P
ERFORMANCE
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
M
EASUREMENT
P
RESENTATION
S
TANDARDS
C
HAPTER
II
P
ERFORMANCE
M
EASUREMENT
12
II.1.3.
Absolute Return
The thoughts and theories attached to this term are fairly extensive so that it has
been shrunken down to a minimum size.
The overall term `return' stands for a factor, which, in order to produce
meaningful information, has to be split up and adjusted according to the different
sources of origin. The final goal of return calculation in this concern is to
distinguish what friction of the return directly goes to the account of the fund
manager.
The most basic differentiation of the returns are stand-alone absolute returns, only
derived with internal data, and, alternatively, returns relative to their surrounding
environment.
The core parts of the absolute returns are the Time-Weighted and the Money-
Weighted Return, derived further down, created for different purposes.
As for the absolute returns, the major task is to precisely exclude any return
effective events from the return figures which have any other origin than the
manager's work. Such events can be e.g. cash contributions or withdrawals, but
also dilutions caused by a careless treatment of the factor time, i.e. how long the
capital-at-risk could produce returns over multiperiod time.
Transactions
Besides securities, a fund usually shows up a cash account. As long as there have
been no movements into or out of this cash account from outside the fund, any
changes among the fund's securities do not affect the return at all. The
explanation for this is the `closed' character of the fund. Any purchase of a new
security therefore presumes the sale of former one - and vice versa. Thus, any
realized or unrealized gains are being directly reflected in the fund's overall
performance.
Contribution and Withdrawals
Contrary to the transactions within the portfolio, any contribution or withdrawal
from the investor, thus from outside the fund, actively affects return figures. As
shown in I.3., contributions are treated as costs to performance by increasing the
invested capital whereas withdrawals are considered as benefits. Since these
I
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P
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13
movements have nothing to do with the managers work, but simply with the
investors own behavior, they risk falsifying the fund performance and therefore
have to be extracted.
Contributions and Withdrawals often are in cash, but can take place in stocks or
any other asset as well. When such a movement takes place some time during the
period, the value used for calculation has to be the current market value. A
adjusted figure of return is the Return on Investment (ROI):
II.1.
(
) (
)
100
1
1
×
+
+
-
+
=
-
-
C
V
C
V
W
V
ROI
n
n
n
V
n
... Ending Market Value
V
n-1
... Beginning Market Value
W ... Current Market Value of Withdrawal
V ... Current Market Value of Contributions
The ROI already produces quite convenient numbers, yet it is not the end of the
line. It still ignores an important factor, which can interact decisively into
investment activity: timing.
Timing
Time and money each stand in a very special relation to each other. This topic is
huge and shall only be touched as far as necessary, mainly the calculation of
compounded interests.
In the ROI formula, it seems that it doesn't matter at all if investments are being
done at the beginning, sometime in the middle or at the very end of a period. This
however is a wrong impression. In fact, the rate of return reacts quite strong on
the timing. Roughly spoken, one can observe a higher return, the later a
contribution into the fund takes place. Speaking in mathematical terms, the reason
for this behavior lies in a higher denominator of the ROI formula ( II.1., p.13). In
logical terms, this means that the earlier a contributions is being made, the longer
a higher amount of capital remains at risk. Amazingly enough, even when the
monetary result might be the same amount, the actual rate of return of the fund
I
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ERFORMANCE
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S
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P
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14
still turns out different. So what measures shall be taken to still get a realistic rate
of return?
Except for the case where the manager and the investor are one and the same, a
first segregation becomes necessary. Since any contributions to the fund solely
depended on the investor's decision, any return due to contribution must be
attributed to the investor. The partial of the return, which was produced by asset
allocation and security selection, goes to the manager's account. This segregation
creates the first two major components in return splitting.
T
ABLE
II.1.
FUND
R
EACTION TO
I
NVESTOR
B
EHAVIOR
Transaction...
...before Asset
Value goes...
Fund
Performance
Contribution
+
Contribution
-
Withdrawal
-
Withdrawal
+
Source: (modified)
F
EIBEL
,
2003,
P
.37.
I
NVESTMENT
P
ERFORMANCE
M
EASUREMENT
M
EASUREMENT
P
RESENTATION
S
TANDARDS
C
HAPTER
II
P
ERFORMANCE
M
EASUREMENT
15
II.1.3.1.
Money-Weighted Returns
The return that is experienced by the investor is called Money-Weighted Return
(MWR), sometimes it is also known as Dollar-Weighted Return. It represents the
initial investment plus its interest as well as any further investments plus their
respective interests and the timing.
As displayed in Exhibit II.3., the MWR respects each one of the different Cash
Flows (CF) and their timings
by creating specified sub-
returns (as can be seen in the
green frame.). Thus, the
added up end value, V
n
,
represents a quite precise
result. It is important to
retain that the MWR actually
is a good performance
measure for the investor, but
yet only to him. `Also, since there are no identical investors with exactly the same
investments, the MWR doesn't suit for comparison. Thus each MWR is a
personalized data-tool.'
11
Facing the many sub-rates of return, which the MWR produces, the question
might come up, if this heap of rates can not be simplified to a certain extend. The
answer to that question is `the Internal Rate of Return' (IRR). It is the averaged
return, which describes the growth rate of every money unit between the
beginning and the end value of the measurement period. The input data for the
IRR is slightly different than for the MWR, and its calculation more complex. It
requires the 'beginning and the ending market values, the cash flows into or out of
the portfolio and the date that these cash flows occurred.'
12
As can be observed in
formula II.2., the IRR has to be principally derived by approximation.
11
See F
EIBEL
, 2003, p.41.
12
See F
EIBEL
, 2003, p.39.
E
XHIBIT
II.3.
T
HE
M
ONEY
W
EIGHTED
R
ETURN
Source: Auther's Origin.
Initial Investment
at time 0 :
Additional Investment
at time n-a :
Additional Investment
at time n-b :
Endvalue at Maturity n:
V
n
= V
0
× (1+r) + CF × (1+r
x
)
(n-x)/n
r
i
... Internal Rate of Return
V
0
... Value at Beginning
V
n
...
Value at Maturity
CF
100
10
15
MWR
(1 + r)
n
(1 + r
a
)
(n-a)/n
(1 + r
b
)
(n-b)/n
n ... Length of Period
(n-x) ... Fraction of Period
where Capital at Risk
I
NVESTMENT
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ERFORMANCE
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16
II.2.
(
)
n
i
n
a
n
i
a
m
a
n
r
V
r
CF
V
+
+
+
=
-
=
-
1
)
1
(
1
1
r
i
... Internal Rate of Return
V
n-1
... Beginning Market Value
V
n
... Ending Market Value
CF ... Cashflows of Contributions/Withdrawals and
Dividends at time a
Fortunately, this calculation nowadays is passed on to computer software tools,
which produce highly precise figures in a fraction of a second. However, a
method to derive it "by hand" without nightmare-inspiring calculations shall be
briefly explained. The method is known as the Modified D
IETZ
Return (MDR)
13
:
II.3.
100
.
1
1
×
+
-
-
=
-
-
adj
n
n
n
CF
V
CF
V
V
MDR
WHEREAS
×
=
Days
Total
Risk
at
Days
,...
2
,
1
CF
CF
adj
13
See D
IETZ
, 1966 (quote F
EIBEL
, 2003, p.41.)
Details
- Seiten
- Erscheinungsform
- Originalausgabe
- Jahr
- 2005
- ISBN (eBook)
- 9783832493103
- ISBN (Paperback)
- 9783838693101
- DOI
- 10.3239/9783832493103
- Dateigröße
- 956 KB
- Sprache
- Englisch
- Institution / Hochschule
- Universität Wien – Wirtschaftswissenschaften
- Erscheinungsdatum
- 2006 (Februar)
- Note
- 2,0
- Schlagworte
- gips management sharpe ratio risk money
