This course on the fundamentals of investment performance measurement provides all attendees with a grounding in the tools and techniques used to calculate investment performance. Students will be taken through practical examples. The class is conducted over two full days. Students will walk away with a working knowledge of the concepts that define investment performance measurement. If you are a CFA or CIPM, you will receive 12 CE credits for this class. The class typically runs from 8:30 am – 5:00 pm.

Fundamentals of Investment Performance Measurement

Locations and Dates

AGENDA

Note that the class is highly interactive. Examples are used throughout to demonstrate the various methods. In addition, students are given exercises to do, to help understand the way calculations are performed. We try to “pace” the class in such a way to ensure that students understand the material. Time is also provided for students to ask questions, either during the instruction itself or during the breaks.

Because the instructor has several decades’ experience, he will, in addition to teaching the class, share insights, anecdotes, trivia, practical issues, challenges and difficulties, history, why things were or are done in certain ways, fallacies, common areas of confusion, and much more.

Time is also provided to allow students to discuss challenges they may be facing, as well as questions and concerns they may have or be facing.

PERFORMANCE MEASUREMENT CONCEPTS:

• Develop a solid grounding on what performance measurement is all about
• What performance measurement means
• Quantitative vs. subjective assessments
• Relevance
• We will review the evolution of all aspects of performance measurement.

RATE OF RETURN CALCULATIONS: Learn the various formulas to derive performance, understand the impact of cash flows and learn about time- and money- weighting. Students also learn geometric linking, annualization, and much more.

• Why we measure performance the way we do
• Insights into the history of rates of return, in general, and time-weighting, in particular
• The history review will include a discussion on the contributions of Peter Dietz, and the evolution of the approaches he developed, as well as those of the Bank Administration Institute, and the methods they developed and recommended.
• An in-depth discussion of both approximation and exact time-weighting methods, with examples and exercises
• An introduction to the internal rate of return and its different approaches.
• A discussion on what the differences are between time- and money-weighting, and when should be used.
• A review of real-life examples to contrast time- and money-weighting, so that the students can better understand their strengths and shortcomings
• We will go over the mechanics behind compounding, and why we compound the way we do
• We will go over the mechanics to annualize rates of return, how we accomplish it over variable time periods, and the general rules surrounding its usage.
• We will review of examples where returns “don’t make sense,” and explain why this is the case, as well as why, in reality, they do (or don’t)
• We discuss how to calculate gross- and net-of-fee returns, whether the fees are extracted from the account or paid separately.
• The class will discuss the two main approaches to deriving returns at the subportfolio level
• We will discuss income accruals, for both interest and dividends. We will address why we accrue as well as how accruals are handled. We will provide examples of both.
• We will go over the different approaches to handling cash flows, and the impact they may have on the accuracy and appropriateness of the resulting returns.

BENCHMARKS: Gain the insights into the primary performance measurement benchmarks (indexes, peer groups, absolute, and custom) and the importance of each.

• We will review the general criteria used to assess benchmarks
• We will discuss the various approaches to creating market indexes, including the different approaches to weighting the underlying securities, as well as how to blend them.
• We will discuss the effects of turnover on indexes, the impact of security or sector concentration, and other concepts.
• The class will discuss the benefits and shortcomings of peer groups, to include survivorship bias.
• We will spend time discussing absolute benchmarks, why and when they’re appropriate, as well as they’re advantages and disadvantages.
• We will discuss custom benchmarks and review an approach to create them.

RISK MEASUREMENT: Learn the importance of risk measurement and the various formulas available.
We begin by discussing risk, in general, and the reason it’s an important component of performance measurement, as well as the challenges in appropriately assessing risk.

• We review the major risk measures (e.g., standard deviation, downside deviation, beta, tracking error, and drawdowns).
• We review the major risk-adjusted measures (e.g., Sharpe ratio, Treynor measure, Jensen’s alpha, Sortino ratio, Information ratio, Modigliani-Modigliani (M-squared), and value at risk).
• We will discuss the advantages and disadvantages of the various measures (both risk and risk-adjusted).
• For each, where there are two or more approaches, we will review and contrast them.
• We close out the section by discussing risk management and monitoring, and why it’s important, as well as the challenges. We will also review an approach to managing risk.

PERFORMANCE ATTRIBUTION: Develop an appreciation and understanding of attribution.

• The class covers both absolute (contribution) and relative attribution, with most of the time spent on the latter.
• We explain why we measure attribution, and the benefits it provides
• From an equity perspective, we will discuss and contrast the two major methods (Brinson-Fachler and Brinson, Hood, Beebower). Examples will be provided so that the students understand the impact of the subtle, but significant, differences between them.
• We will discuss the interaction effect, and why some firms prefer not to include it, and how this is done, as well as its benefits.
• We will review the three “laws” of relative attribution
• We will discuss fixed income attribution, to include an explanation as to why such models are needed, by contrasting the fine points of equity and fixed income investing.
• We will present and discuss a fixed income model, so students will better understand how these models can be employed to provide insights into the impact of manager decisions.
• We will discuss currency attribution, and review a naive approach to accomplishing it. And while we will briefly touch on Karnosky-Singer, due to time constraints we will not delve into great detail on this model.
• We will contrast arithmetic and geometric attribution, and the core differences between them, as well as their respective benefits and shortcomings.
• We will briefly contrast holdings and transaction-based attribution.
• We will explain the appropriateness of using daily vs. monthly attribution.
• We will briefly discuss the concept of multi-period attribution and touch on major approaches that can be employed to extend attribution across time. This discussion will also contrast geometric and arithmetic, and why arithmetic requires additional models to facilitate linking.

The GIPS® Standards: Establish fundamental knowledge about the Global Investment Performance Standards, its history, and its many concepts and requirements.

• We begin with a discussion on the history of the Standards, to include an explanation as to why it was necessary to develop them, as well as how they’ve evolved over the past three decades.
• We discuss an approach to use to become compliant.
• We discuss the concepts of firm definition, composites, discretion, and dispersion. Other aspects of the Standards, such as minimum account size and composite creation date, are discussed.
• We discuss the importance of policies and procedures, and many of the parts that must be addressed.
• We discuss error correction guidance, and why firms may not want to employ all of the suggested levels.
• We review the different approaches to calculate composite returns.
• We go over the reporting requirements.
• We review what is meant by and the role of verification.
• We discuss the various approaches to measure dispersion.
• As to standard deviation, we explain how it can be used for both dispersion and volatility.
• We discuss fair value, and the various approaches to be employed to derive it.
• We discuss supplemental information, to include what it is and how to deal with it, as well as how it’s changed (and is changing)
• We review the advertising guidelines.
• We discuss the role of guidance statements.

THE INVESTMENT PERFORMANCE MEASUREMENT PROFESSIONAL/ THE INVESTMENT PERFORMANCE MEASUREMENT ORGANIZATION

• We will briefly discuss the evolution and expansion of the performance measurement function within asset management firms and asset owner organizations
• We review the basic approaches to establishing the performance measurement function within an organization
• We review the CIPM program, its history, and importance.

In addition to receiving a student guide that contains the details of the class presentation, each student receives supporting reference material to take back with them, including:

• A complimentary copy of The Handbook of Investment Performance Measurement: A User’s Guide, Second Edition by David Spaulding, CIPM (TSG Publishing, 2011)

• TSG’s Performance, Attribution, and Risk Measurement Reference Guide, a handy pocket reference

• A copy of the GIPS standards and, …

• Because this is a hands-on class, students receive a calculator too!

This two-day course was initially based on David Spaulding’s first book, Measuring Investment Performance, which was published by McGraw-Hill 20 years ago, but has since been expanded considerably.