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Transaction vs. Holdings-Based Performance Calculations

Date: June 20, 2019

Whilst performance attribution plays a critical role in the analysis of any portfolio, calculating performance (which is a necessary input to this analysis) plays an equally important role. Which performance calculation methodology should be used? Is a transaction-based approach the best fit for your firm or does a holdings-based approach make more sense? It’s important to understand the pros and cons of each method before making this decision. Let’s start with the simpler holdings-based method.

Holdings-based Calculations

Transaction vs holdings based performance calculations - quoteBecause the holdings-based approach uses less data (the calculations only require periodic holdings data), it is easier to implement when compared to the transaction-based approach. While the thought of an easy implementation may seem enticing, the less stringent data requirements limit the accuracy of this method, which can make drawing conclusions on the portfolio’s performance more difficult. However, historically holdings-based performance returns have often been used to provide a preliminary intra-month early view of performance, particularly for the front-office consumption, before fully reconciled valuation data is available.

Transaction-based Calculations

Transaction-based calculations require both holdings and transaction data and this data must be comprehensive and accurate in order to gain any real insight. While this clearly makes implementation more burdensome and time-consuming, it enables security level calculations to be fully reconciled to total portfolio performance returns and provides more detailed and accurate outputs. The source holdings and transactional data can also be reconciled, providing confidence in the accuracy of the final performance numbers that are published.

Conclusion

Transaction and holdings-based calculations both have their strengths and weaknesses, but a transaction-based approach will offer more accurate returns, allowing for better insight into a portfolio’s performance. It may be worth considering a vendor that offers both holdings-based and transaction-based performance calculation capabilities, which would allow a firm to implement quickly whilst retaining flexibility for full accuracy via transaction-based performance calculation longer term. Performance measurement ultimately boils down to data management and it is important that your performance analysis platform is designed with simplicity, scalability and customization in mind.

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