We are just one week away from our [almost] all day training webinar titled “Performance Measurement Trivia & Oddities.” This class will definitely teach you quite a bit: we guarantee it!
We’ve already had folks sign up for individual, site, and global licenses!
I taught this webinar in Sydney last month, where I’ve been doing workshops for the past few years. I thought it’d be fun, informative, and creative to explore some performance measurement’s trivia and oddities.
Mistakes and misconceptions abound
As I stated in this month’s newsletter, over the years I’ve observed, way too often, mistakes and misconceptions about such things as:
- what time-weighting means
- why we geometrically link returns
- the true advantages and disadvantages of the alternative approaches to attribution
- how we frequently do calculations that are in conflict with the model designer’s intentions.
Is it too much to expect …
Shouldn’t, for example, a performance measurement professional be able to:
- explain why a portfolio had a positive return, even though it lost money?
- explain why subtracting the year’s net-of-fee return from its gross-of-fee return may be higher or lower than the annual fee?
- what residuals mean and where they most likely come from?
- discuss what risk-adjusted returns represent?
Can CIPM certificants answer these questions?
My guess is that 95% of the individuals who’ve obtained the CIPM cannot correctly answer or explain:
- what does the term “time-weighting” actually mean?
- explain why it took more than 30 years after its birth for the exact method to begin to catch on.
- contrast the internal rate of return, linked IRR, and exact method, in terms of
valuations and treatment of cash flows. - differentiate the major risk-adjusted measures and explain how they do or do not adjust returns for risk.
- provide an example to demonstrate what compounding means, so that a layman will understand why subperiod returns aren’t simply added together in order to extend the result across time.
- explain what the numerator of the Sharpe and Treynor ratios represents.
- discuss the two general approaches to the Sharpe ratio: Sharpe’s original method vs. what is commonly done in the industry.
- contrast arithmetic and geometric attribution, to include the benefits and drawbacks of each.
- identify the organization that first published rate of return standards.
- explain why order dependence doesn’t matter when it comes to linking rates of return.
- explain why, when linking returns rates of return, no provision is necessary
to account for differences in each return’s time period, though they may vary
considerably. - why we annualize rates of return.
- discuss the two types of attribution residuals and their likely causes.
- contrast the Brinson-Fachler and Brinson-Hood-Beebower methods.
- explain why it is not possible for an investor in a multi-currency strategy to report an overall “local” return.
- explain why, when we subtract a portfolio’s net-of-fee return from its gross-of-fee return the result may be higher than the annual fee. Might this mean the client is being overcharged?
- explain what the aggregate method to asset-weight a composite’s return represents (in contrast to the other approaches, which you should also be able to explain).
I could go on a bit further, but this is sufficient.
Does this sound like useless performance trivia?
Is it unreasonable to expect performance measurement professionals to have sufficient
expertise to answer such questions? I think not.
And so, the class I taught in Sydney isn’t just “fun and games.” It has a great deal of
practical benefits, as it enhances the knowledge and expertise of the students, making
them more appreciative of the methods we employ, and able to respond to questions as
well as do a better job of analysis, when necessary.
Because the class was so well received we decided to make it an <almost> all-day webinar. It
will be held this coming Tuesday, November 28, from 10 AM to 4 PM EST. To learn more, please
go here! But hurry, you only have one more week to act!