School of StatPro: Five different ways to think about investment returns

Date: January 26, 2017

SP - School of Statpro
Past performance may be no guide to the future, but asset managers and investors still want meaningful data that tells them what has (or hasn’t) been achieved. 

Moreover, that data increasingly needs to be presented in different and more sophisticated ways to provide genuinely telling insights. This is where the new breed of performance measurement systems can add real value.

Here are five areas to consider:

1. Portfolio performance measurement is art as well as science

One important question for asset managers to address is what they mean by performance measurement. You’re attempting to evaluate the performance of your portfolio over a particular time-frame, but which time-frame is the right one? And are you looking for absolute performance (the total return achieved) or relative performance, where the returns are compared to a set benchmark? If it’s the latter, which benchmark? Meaningful portfolio measurement requires asset managers to think hard about such issues – particularly in the context of what investors, regulators and other stakeholders may have mandated.


2. What has the asset manager achieved?

Asset managers – of actively-managed funds at least – get paid for the additional value they bring to a portfolio, subject to the mandate they’re given. If a manager simply replicates the performance of the market, investors might as well be in a cheap passive fund.

“Attribution analysis” is the process of isolating the asset manager’s impact on performance – how its investment strategy, asset allocation, stock selection and trading activity contributed to the returns generated. In other words, is the return that is achieved down to luck or skill?

Good performance measurement and attribution systems can enable managers to address this question in a variety of ways. They can identify the allocation effect – the contribution of the fund’s tactical asset allocation – as well as the effect of the particular holdings chosen by the fund and the effect of any currency exposures. They can also combine such measures to look at overall impact.

3. Relative returns matter

For many investors, though not all, the performance of their portfolios relative to an agreed benchmark is important. It tells them whether they’re getting value for money from their asset manager – and whether the firm is delivering what it promised. In this context, “relative return” is all important, since it measures the proportional outperformance (or underperformance) of a portfolio relative to the benchmark. Sometimes known as the geometric excess return, or the geometric active return, it is the return of the portfolio divided by the return of the benchmark.

4. It’s all about allocation

Good performance measurement and attribution systems will also enable you to see where portfolio returns are coming from in an asset allocation context. The key measure here is “active weight”, which measures how the portfolio’s investment in a particular security or asset class varies from the benchmark. For example, if the benchmark suggests a 5 per cent weighting in technology companies and the portfolio holds 9 per cent of its assets in such stocks, its active weight to these assets is 4 per cent. The greater a portfolio’s active weight, the greater its divergence from the benchmark – and the greater the potential for a different level of performance.

5. Inflows and outflows can affect the data

A fund that is worth £100m at the start of the month and £99m at the end looks as if it has fallen by 1 per cent. But what if that drop was entirely the result of investors withdrawing £1m? Inflows and outflows into open-ended funds will confuse performance data, so it is useful to have a way to strip them out of the equation.

This is what a “true time-weighted rate of return” provides – it is a measure of portfolio return that is not sensitive to cash inflows and outflows. It therefore represents another way to identify exactly how much value the asset manager is delivering.





  • Portfolio performance is crucial, but investors and other stakeholders may be looking for a number of different types of measure
  • Good performance measurements systems enable asset managers to identify the value they are delivering to their clients – to prove they are skillful rather than lucky



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Join us for Part 2: Operationalizing the SEC's New Disclosure Rules, for Shareholders on December 12.