A client asked about the “general landscape among financial companies in terms of usage of different performance engines/performance calculations.” Specifically whether true daily or Modified Dietz is prevalent when it comes to portfolio and security level returns. I admire his due diligence in trying to obtain this information as they move forward with their own decisions.

When we use the term “best practice” what exactly do we mean? Unfortunately the GIPS(R) standards (Global Investment Performance Standards) uses this term for recommendations, suggesting that they are “best practice,” but fails to define what “best practice” means? Is it:

• what is most commonly done (hardly, I would argue, the best basis for “best practice”)
• what the leading firms do (again, not necessarily the best “best practice” source)
• what a few individuals on the GIPS Executive Committee think is what firms should be doing (arguably not “best practice,” as the mix of members can change, would could cause a total redefinition as to what the term means).

Not knowing makes it a little mysterious and murky, does it not? I hesitate to offer my own definition, but may post this question on one or more of the Linkedin groups in the hopes that we might arrive at some consensus. But moving on to the questions at hand.

My thoughts:

• Portfolio level performance: it is evident that the industry is moving to daily time-weighted performance at the portfolio level. This should (assuming there aren’t any data issues) result in the most accurate return. I would argue that the best approach would be to also have money-weighted returns at this level, so that the firm can provide multiple perspectives as to what is going on in the portfolio (i.e., how the manager did as well as the portfolio).
• Security, sector, asset class (i.e., sub-portfolio level) performance: here again we see a lot of firms employing time-weighting which I would say is the wrong approach (and I’m sure that some of my readers have heard this countless times from me and are thinking that I’m sounding like a “broken record,” whatever that is!). If we go with what everyone else is doing, then do time-weighting and ideally daily; but this, to me, is incorrect: there is only one way to measure sub-portfolio performance: money-weighting. If you want to use Modified Dietz, that will be an improvement over true daily.

I thank our client for providing me with material for this blog and invite your thoughts.

p.s., I will most likely take the broad topic of “best practice” up in our newsletter