Performance Perspectives Blog

Behold, I have prepared my case. I know that I am in the right.

by | Jun 24, 2010

The title for this post comes from the book of Job (chapter 13, verse 18). It occurred to me that this is quite applicable when we consider the debate on money- vs. time-weighting. I know that some of you are saying “no, not again!!!,” but it’s a topic which I believe continues to be an important one. We have definitely seen movement to adopting money-weighting by many firms, especially in the brokerage community, but opportunities exist for further employment of this approach.

As I explained at PMAR Europe earlier this month, the argument for money-weighting can be seen from three perspectives:

  1. Documentation: there are many, many articles and books which through the years have shown how money-weighting is quite appropriate. Peter Dietz, the “father,” if you will, of time-weighting, never abandoned money-weighting: he saw how it had applicability. Time-weighting was to be used to judge the manager. The Bank Administration Institute, too, in their 1968 standards, saw room for money-weighting, and the ICAA, in their 1971 standards, saw how money-weighting could be applied at the sub-portfolio level.
  2. The numbers: all one needs to do is look at a few examples of positive returns when clients lose money and other nonsensical scenarios to show how money-weighting is a justified return to include along with time-weighting. And examples abound as to how money-weighting is superior and justified at the subportfolio level.
  3. Logic: like it or not, the justification for time-weighting is based on the desire to eliminate the impact of cash flows that aren’t controlled by the manager. And the inverse holds: when the manager does control the cash flows, time-weighting is inappropriate. To argue to the contrary simply obviates the first premise, and therefore says that there is no link whatsoever to cash flow controls as the basis for time-weighting, meaning that Peter Dietz, the BAI, ICAA, AIMR, GIPS(R) (Global Investment Performance Standards), and others are wrong!

What more is needed to convince the industry?

p.s., I expounded on this topic further in our June newsletter.

Free Subscription!

The Journal of Performance Measurement

The Performance Measurement Resource.

Click to Subscribe