Bruce Feibel, author of Investment Performance Measurement, spoke at the Performance Measurement Forum’s North America chapter’s Fall meeting on the topic of risk. I was quite pleased when he expressed his support for the risk-adjusted measure, M-squared, also known as Modigliani-Modigliani, named for its designers, Franco and Leah. This grandfather/granddaughter duo developed what Bruce and I feel is a superior metric to evaluate risk.

Unlike the other risk-adjusted measures, its results are highly intuitive. To me there’s a parallel to the way we show gross and net performance, as well as pre- and after-tax results. For example, from a gross/net perspective we might see:

• Gross return = 17.45%
• Net return = 16.68%.

The net result reflects the impact of the advisor’s fee. From a tax perspective:

• Pre-tax return = 19.35%
• After-tax return = 16.45%.

Well, with M-squared we could see:

• Before adjusting for risk = 18.27%
• After adjusting for risk = 16.45%.

Granted, we might not label our  results this way, but I’m simply trying to convey how the results align with what we often see today. Our return has been adjusted for risk, unlike the other measures. And unlike the other measures, its reported in percentage terms, which are much clearer to comprehend.

If you’re not including M-squared in your reporting, you should be!

And, if you’d like more information on this measure, send me a note.