Investment Performance Measurement
Evaluating and Presenting Results
Published on 27. April 2009
984 pages
978-0-470-47370-2 (ISBN)
Description
Praise for Investment Performance Measurement
"This volume contains the insights of more than fifty prominentauthorities on performance measurement. It is a must-have,must-read book for anyone involved in measuring, analyzing, orexplaining investment results."
--John Schlifske, CFA,
President and Chief Executive Officer, Russell Investments
"Investment Performance Measurement: Evaluating and PresentingResults should be required reading for investors as well asinvestment performance professionals. This collection convenientlybrings together some of the definitive texts on performance andrisk analysis that are core to the investment profession."
--Frances Barney, CFA,
Managing Director, BNY Mellon Asset Servicing Performance &Risk Analytics
"It is vitally important that performance analysts remain wellversed in the academic work that has been published in their field.This book is unique in that it assembles some of the most importantpapers in the field of performance measurement into one volume.This book should be read by all performance analysts who areserious about advancing in their field."
--Neil Riddles, CFA, CIPM,
Hansberger Global Investors, Inc.
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05/2009
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Persons
Philip Lawton, PhD, CFA, CIPM, heads the Certificate inInvestment Performance Measurement (CIPM) program at CFA Institute.His previous experience includes serving as vice president at StateStreet Analytics, where he supported the investment consultingfirms that belong to the Independent Consultants Cooperative, andat Citibank, where he headed U.S. performance measurement inWorldwide Securities Services. Lawton is a frequent speaker oninstitutional investing and performance measurement at industryconferences.
Todd Jankowski, CFA, is Director of CurriculumDevelopment for the Certificate in Investment PerformanceMeasurement (CIPM) program at CFA Institute. Prior to joining CFAInstitute, he was head of investment research in the WealthManagement division of Northwestern Mutual Life Insurance Company,where he had earlier held investment management positions in theRetail Advisory and Institutional Private Placement divisions.
Content
- INVESTMENT PERFORMANCE MEASUREMENT: Evaluating and Presenting Results
- CONTENTS
- FOREWORD
- INTRODUCTION
- OVERVIEW
- PERFORMANCE MEASUREMENT
- PERFORMANCE ATTRIBUTION
- PERFORMANCE APPRAISAL
- GLOBAL INVESTMENT PERFORMANCE STANDARDS
- SUMMARY
- PART I: OVERVIEW OF PERFORMANCE EVALUATION
- CHAPTER 1: EVALUATING PORTFOLIO PERFORMANCE
- THE IMPORTANCE OF PERFORMANCE EVALUATION
- THE THREE COMPONENTS OF PERFORMANCE EVALUATION
- PERFORMANCE MEASUREMENT
- EXAMPLE 1.1 Rate-of-Return Calculations When There Are No External Cash Flows
- EXAMPLE 1.2 Rate-of-Return Calculations When External Cash Flows Occur at the Beginning or End of an Evaluation Period
- EXAMPLE 1.3 Calculating Subperiod Rates of Return
- EXAMPLE 1.4 Calculating the TWR
- EXAMPLE 1.5 Calculating the MWR
- EXAMPLE 1.6 When TWR and MWR Differ
- EXAMPLE 1.7 An Example of LIRR
- EXAMPLE 1.8 Annualized Return
- BENCHMARKS
- EXAMPLE 1.9 Returns Due to Style and Active Management
- EXAMPLE 1.10 Returns from a Market Model
- PERFORMANCE ATTRIBUTION
- EXAMPLE 1.11 An Analogy to the Expression for Revenue
- EXAMPLE 1.12 Active Return Relative to a One-Factor Model
- EXAMPLE 1.13 The Pure Sector Allocation Return for Consumer Nondurables
- EXAMPLE 1.14 The Within-Sector Allocation Return for Technology
- EXAMPLE 1.15 The Allocation/Selection Interaction Return for Technology
- EXAMPLE 1.16 Fundamental Factor Model Micro Attribution
- PERFORMANCE APPRAISAL
- THE PRACTICE OF PERFORMANCE EVALUATION
- EXAMPLE 1.17 The Infl uence of Noise on Performance Appraisal
- NOTES
- REFERENCES
- PART II: PERFORMANCE MEASUREMENT
- CHAPTER 2: BENCHMARKS AND INVESTMENT MANAGEMENT
- FOREWORD
- PREFACE
- ORIGINS, USES, AND CHARACTERISTICS OF U.S. EQUITY BENCHMARKS
- USING BENCHMARKS TO MEASURE PERFORMANCE
- BUILDING PORTFOLIOS OF MANAGERS
- THE EVOLUTION OF MPT AND THE BENCHMARKING PARADIGM
- THE 1990s BUBBLE AND THE CRISIS IN MPT
- CRITIQUES OF BENCHMARKING AND A WAY FORWARD
- THE IMPACT OF BENCHMARKING ON MARKETS AND INSTITUTIONS
- U.S. EQUITY STYLE INDEXES
- FIXED-INCOME BENCHMARKS
- INTERNATIONAL EQUITY BENCHMARKS
- HEDGE FUND BENCHMARKS
- POLICY BENCHMARKS
- ACKNOWLEDGMENTS
- NOTES
- REFERENCES
- CHAPTER 3: THE IMPORTANCE OF INDEX SELECTION
- INDEX METHODOLOGIES
- INDEX COMPARISONS
- MANAGING TO INDEXES
- CONCLUSION
- NOTE
- CHAPTER 4: AFTER-TAX PERFORMANCE EVALUATION
- WHY THE AFTER-TAX FOCUS
- FACTORS AFFECTING TAX EFFICIENCY
- MEASURING AFTER-TAX PERFORMANCE
- CONCLUSION
- QUESTION AND ANSWER SESSION
- CHAPTER 5: TAXABLE BENCHMARKS: THE COMPLEXITY INCREASES
- STANDARD BENCHMARK RULES
- AIMR AFTER-TAX STANDARDS
- IMPORTANCE OF THE CAPITAL GAIN REALIZATION RATE
- CONVERTING A STANDARD PRETAX BENCHMARK
- SHADOW PORTFOLIOS
- CONCLUSION
- QUESTION AND ANSWER SESSION
- NOTE
- CHAPTER 6: OVERCOMING CAP-WEIGHTED BOND BENCHMARK DEFICIENCIES
- DIVERSIFICATION
- PREVALENCE OF CAP-WEIGHTED BENCHMARKS
- WHY MOST BOND BENCHMARKS ARE FLAWED
- ANALYSIS OF THREE CAP-WEIGHTED INDICES
- HIGH-YIELD SECTOR
- BEYOND CASH BONDS
- EMERGING MARKET BOND INDICES
- NEEDS SHOULD DICTATE THE BENCHMARK
- ALTERNATIVE BENCHMARKS
- CONCLUSION
- QUESTION AND ANSWER SESSION
- REFERENCES
- CHAPTER 7: YIELD BOGEYS
- APPROXIMATING PORTFOLIO YIELD
- TREASURY YIELD BOGEYS
- ARE YIELD BOGEY MISMEASUREMENTS A WASH?
- CONCLUSION
- NOTES
- REFERENCES
- CHAPTER 8: JUMPING ON THE BENCHMARK BANDWAGON
- IS IT APPROPRIATE?
- "A HELL OF A DISCUSSION"
- MEASURING "PURE ALPHA"
- TOUGH CHOICES
- CONSTRUCTING A SYNTHETIC UNIVERSE
- A COLLABORATIVE EFFORT
- PART III: PERFORMANCE ATTRIBUTION
- CHAPTER 9: DETERMINANTS OF PORTFOLIO PERFORMANCE
- A FRAMEWORK FOR ANALYSIS
- DATA
- RESULTS
- RETURN VARIATION
- IMPLICATIONS
- NOTES
- CHAPTER 10: DETERMINANTS OF PORTFOLIO PERFORMANCE II: AN UPDATE
- FRAMEWORK
- RESULTS
- INTERNAL VERSUS EXTERNAL RISK POSITIONING
- CONCLUSION
- NOTES
- CHAPTER 11: DETERMINANTS OF PORTFOLIO PERFORMANCE-20 YEARS LATER
- CHAPTER 12: EQUITY PORTFOLIO CHARACTERISTICS IN PERFORMANCE ANALYSIS
- USES OF PORTFOLIO CHARACTERISTICS
- DATA AND CALCULATION ISSUES
- TYPES OF CHARACTERISTICS
- MANAGER MONITORING AND STYLE ANALYSIS
- ATTRIBUTION ANALYSIS
- LIMITATIONS OF PORTFOLIO CHARACTERISTICS ANALYSIS
- NOTES
- CHAPTER 13: MUTUAL FUND PERFORMANCE: DOES FUND SIZE MATTER?
- WHY FUND SIZE MATTERS
- SAMPLE DESCRIPTION
- DESCRIPTIVE STATISTICS
- NET EFFECTS OF FUND SIZE
- FUND SIZE AND INVESTMENT STYLE
- FUND SIZE AND STYLE CONSISTENCY
- CONCLUSION
- NOTES
- REFERENCES
- CHAPTER 14: MULTIPERIOD ARITHMETIC ATTRIBUTION
- ARITHMETIC VS. GEOMETRIC MEASURES
- SINGLE-PERIOD SECTOR-BASED DECOMPOSITION
- METHODS' CHARACTERISTICS AND PROPERTIES
- ARITHMETIC ALGORITHMS
- CONCLUSION
- APPENDIX 14A: NATURAL SCALING FROM SINGLE-PERIOD TO MULTIPERIOD CASE
- NOTES
- REFERENCES
- CHAPTER 15: OPTIMIZED GEOMETRIC ATTRIBUTION
- SINGLE-PERIOD ATTRIBUTION: REVIEW
- MULTIPERIOD ATTRIBUTION
- GEOMETRIC ALGORITHMS
- ADJUSTED PURE GEOMETRIC METHOD
- CONCLUSION
- APPENDIX 15A: DERIVATION OF OPTIMIZED GEOMETRIC ATTRIBUTION
- NOTES
- REFERENCES
- CHAPTER 16: CUSTOM FACTOR ATTRIBUTION
- GENERAL ATTRIBUTION
- PERFORMANCE ATTRIBUTION FOR CUSTOM FACTORS
- RISK ATTRIBUTION FOR CUSTOM FACTORS
- RISK-ADJUSTED PERFORMANCE ATTRIBUTION
- EXAMPLE
- CONCLUSION
- APPENDIX 16A: OPTIMAL EXPECTED RETURNS
- APPENDIX 16B: FORMULAS FOR VOLATILITIES AND CORRELATIONS
- APPENDIX 16C: REMOVING COLINEARITIES THROUGH RESTRICTED LEAST SQUARES
- ACKNOWLEDGMENTS
- NOTES
- REFERENCES
- CHAPTER 17: RETURN, RISK, AND PERFORMANCE ATTRIBUTION
- EXAMPLE 1
- EXAMPLE 2
- EXAMPLE 3
- CONCLUSION
- QUESTION AND ANSWER SESSION
- CHAPTER 18: GLOBAL ASSET MANAGEMENT AND PERFORMANCE ATTRIBUTION
- FOREWORD
- PREFACE
- INTRODUCTION
- THE GENERAL FRAMEWORK
- GLOBAL PERFORMANCE ATTRIBUTION
- INTERPRETATION OF GLOBAL PERFORMANCE ATTRIBUTIONS
- GLOBAL BALANCED PORTFOLIOS
- CONCLUSION
- APPENDIX 18A
- APPENDIX 18B
- NOTES
- REFERENCES
- CHAPTER 19: CURRENCY OVERLAY IN PERFORMANCE EVALUATION
- PORTFOLIO DECOMPOSITION AND PERFORMANCE MEASUREMENT
- ATTRIBUTION ANALYSIS
- CONCLUSION
- APPENDIX 19A: PERFORMANCE MEASUREMENT EXAMPLES
- APPENDIX 19B: PORTFOLIO PERFORMANCE
- APPENDIX 19C: COVERED INTEREST RATE PARITY
- APPENDIX 19D: ATTRIBUTION VARIABLES
- ACKNOWLEDGMENTS
- NOTES
- REFERENCES
- PART IV: PERFORMANCE APPRAISAL
- CHAPTER 20: ON THE PERFORMANCE OF HEDGE FUNDS
- DATA AND SAMPLE STATISTICS
- FUND FEATURES AND PERFORMANCE
- HEDGE FUND PERFORMANCE AND RISK
- HEDGE FUNDS VERSUS MUTUAL FUNDS
- SURVIVORSHIP BIAS
- CONCLUSION
- ACKNOWLEDGMENTS
- APPENDIX 20A: HEDGE FUND STRATEGIES
- NOTES
- REFERENCES
- CHAPTER 21: FUNDS OF HEDGE FUNDS
- GROWTH OF FUNDS OF FUNDS
- ADDED VALUE FROM FUNDS OF FUNDS
- FUND-OF-FUNDS PERFORMANCE
- EFFECTS OF STYLE AND MANAGER CHOICE
- PROSPECTS FOR MULTISTRATEGY FUNDS
- CONCLUSION
- QUESTION AND ANSWER SESSION
- REFERENCES
- CHAPTER 22: HEDGE FUND DUE DILIGENCE
- PAYING CAREFUL ATTENTION
- SHINING A BRIGHT LIGHT
- CREATING A MOSAIC
- HANDSHAKE BUSINESS
- CHAPTER 23: PUTTING RISK MEASUREMENT IN CONTEXT
- MAKING THE GRADE
- LEVERAGING RISK
- MAXIMIZING VAR
- CHAPTER 24: CONDITIONAL PERFORMANCE EVALUATION, REVISITED
- FOREWORD
- PREFACE
- CONDITIONAL PERFORMANCE EVALUATION, REVISITED
- REVIEW OF CONDITIONAL PERFORMANCE EVALUATION
- MEASURING THE STATES OF THE ECONOMY
- EMPIRICAL MODELS
- DATA
- PERFORMANCE OF BROAD FUND GROUPS
- INDIVIDUAL FUND PERFORMANCE
- PERFORMANCE AND INDIVIDUAL-FUND CHARACTERISTICS
- MARKET TIMING
- IMPLICATIONS FOR PRACTICING FINANCIAL ANALYSTS
- SUMMARY AND CONCLUSIONS
- APPENDIX 24A: ADDITIONAL TABLES
- NOTES
- REFERENCES
- CHAPTER 25: DISTINGUISHING TRUE ALPHA FROM BETA
- THE DIMENSIONS OF ACTIVE MANAGEMENT
- DO HEDGE FUNDS CHARGE ALPHA FEES FOR BETA PERFORMANCE?
- POLICY IMPLICATIONS FOR PENSION FUNDS AND OTHER INVESTORS
- QUESTION AND ANSWER SESSION
- NOTE
- CHAPTER 26: A PORTFOLIO PERFORMANCE INDEX
- ALTERNATIVES TO THE SHARPE RATIO
- SHARPE RATIO MAXIMIZATION
- BEHAVIORAL HYPOTHESIS
- FINDING THE OPTIMAL PORTFOLIO: A DISTRIBUTION-FREE APPROACH
- EMPIRICAL EXAMPLE
- CONCLUSIONS
- ACKNOWLEDGMENTS
- NOTES
- REFERENCES
- CHAPTER 27: APPROXIMATING THE CONFIDENCE INTERVALS FOR SHARPE STYLE WEIGHTS
- A PRIMER ON STYLE ANALYSIS
- THE SIMULATION PROCEDURE
- CONCLUSION
- APPENDIX: APPROXIMATING THE CONFIDENCE INTERVAL FOR SHARPE STYLE WEIGHTS
- REFERENCES
- CHAPTER 28: THE STATISTICS OF SHARPE RATIOS
- IID RETURNS
- NON-IID RETURNS
- TIME AGGREGATION
- AN EMPIRICAL EXAMPLE
- CONCLUSION
- APPENDIX 28A: ASYMPTOTIC DISTRIBUTIONS OF SHARPE RATIO ESTIMATORS
- ACKNOWLEDGMENTS
- NOTES
- REFERENCES
- CHAPTER 29: RISK-ADJUSTED PERFORMANCE
- THE PROBLEM
- LUCK VERSUS SKILL
- CORRELATION-ADJUSTED PORTFOLIO AND THE M-3 MEASURE
- THE M-3 MODEL
- RANKING MUTUAL FUNDS
- EXTENSION TO MULTIPLE MUTUAL FUNDS
- ADJUSTING FOR TIME
- CAVEATS
- CONCLUSIONS
- APPENDIX 29A: DETERMINING a AND b
- APPENDIX 29B: MULTIPLE MUTUAL FUNDS
- NOTES
- REFERENCES
- CHAPTER 30: INDEX CHANGES AND LOSSES TO INDEX FUND INVESTORS
- INDEX CHANGES AND RETURN PATTERNS
- LOSSES TO INDEX FUND INVESTORS
- CORROBORATING EVIDENCE
- LIMITATIONS OF TRACKING ERROR
- IMPROVING INDEX CONSTRUCTION
- CONCLUSION
- ACKNOWLEDGMENTS
- NOTES
- REFERENCES
- CHAPTER 31: INFORMATION RATIOS AND BATTING AVERAGES
- THE GAME
- RESULTS FOR VARIOUS INVESTMENT STRATEGIES
- GOOD BATTERS ARE SKEWED
- CONCLUSION
- APPENDIX 31A: FINDING THE IR FROM THE BATTING AVERAGE
- ACKNOWLEDGMENTS
- NOTES
- REFERENCES
- CHAPTER 32: THE INFORMATION RATIO
- THE RATIO DEFINED
- INTERPRETATIONS OF THE RATIO
- THE SHARPE RATIO AND THE INFORMATION RATIO
- INFORMATION RATIOS AND t-STATISTICS
- ANNUALIZATION
- EMPIRICAL EVIDENCE ON INFORMATION RATIOS
- CAVEATS
- CONCLUSION
- NOTES
- REFERENCES
- CHAPTER 33: DOES ASSET ALLOCATION POLICY EXPLAIN 40, 90, OR 100 PERCENT OF PERFORMANCE?
- FRAMEWORK
- DATA
- QUESTIONS AND ANSWERS
- CONCLUSION
- ACKNOWLEDGMENTS
- NOTES
- REFERENCES
- CHAPTER 34: FUND MANAGEMENT CHANGES AND EQUITY STYLE SHIFTS
- DATA
- RESEARCH METHODS
- RESULTS
- CONCLUSIONS
- NOTES
- REFERENCES
- CHAPTER 35: MANAGING PERFORMANCE: MONITORING AND TRANSITIONING MANAGERS
- BACKGROUND
- SELECTING AN INVESTMENT MANAGER
- MONITORING AN INVESTMENT MANAGER
- CATALYSTS FOR CHANGING A MANAGER
- TRANSFERRING A TAXABLE PORTFOLIO TO A NEW MANAGER
- CONCLUSION
- QUESTION AND ANSWER SESSION
- CHAPTER 36: DOES THE EMPEROR WEAR CLOTHES OR NOT? THE FINAL WORD (OR ALMOST) ON THE PARABLE OF INVESTMENT MANAGEMENT
- EQUITY STRUCTURE
- METHODOLOGY
- RESULTS
- TIME DEPENDENCY
- FIXED-INCOME STRUCTURE
- INVESTMENT IMPLICATIONS
- CONCLUSIONS
- REFERENCES
- CHAPTER 37: DOES HISTORICAL PERFORMANCE PREDICT FUTURE PERFORMANCE?
- PREVIOUS RESEARCH
- PERFORMANCE MEASURES
- STYLE ANALYSIS
- SURVIVORSHIP BIAS
- THE DATA
- METHODOLOGY
- EQUITY RESULTS
- FIXED-INCOME RESULTS
- ACCOUNTING FOR FEES AND EXPENSES
- SURVIVORSHIP BIAS
- SUMMARY OF RESULTS
- CONTEXT
- INVESTMENT IMPLICATIONS
- CONCLUSIONS
- NOTES
- CHAPTER 38: EVALUATING FUND PERFORMANCE IN A DYNAMIC MARKET
- A NUMERICAL EXAMPLE
- DATA
- TRADITIONAL MEASURES OF PERFORMANCE
- CONDITIONAL PERFORMANCE EVALUATION
- EXPLAINING BETA CHANGES
- CONDITIONAL MARKET TIMING
- CONCLUSIONS
- NOTES
- REFERENCES
- CHAPTER 39: INVESTMENT PERFORMANCE APPRAISAL
- TOTAL FUND PERSPECTIVE
- PERFORMANCE REPORTS
- PERFORMANCE RELATIVE TO THE BENCHMARK
- PEER GROUP COMPARISONS
- PORTFOLIO CHARACTERISTICS ANALYSIS
- PERFORMANCE ATTRIBUTION
- RISK ANALYSIS
- TAKING ACTION
- NOTES
- CHAPTER 40: THINKING OUTSIDE THE BOX: RISK MANAGEMENT FIRMS PUT A CREATIVE SPIN ON COUPLING THEORY WITH PRACTICE
- A SIMPLE REQUEST
- POWERFUL SOLUTIONS
- ANSWERING THE CALL
- THE 90/10 RULE
- STRESSING THE DATA
- SENSITIVITY ANALYSIS AND SIMULATIONS
- OUT OF THE BOX . . .
- . . . AND ONTO THE CUTTING EDGE
- NOTE
- PART V: GLOBAL INVESTMENT PERFORMANCE STANDARDS
- CHAPTER 41: GLOBAL INVESTMENT PERFORMANCE STANDARDS
- BACKGROUND OF THE GIPS STANDARDS
- PROVISIONS OF THE GIPS STANDARDS
- VERIFICATION
- GIPS ADVERTISING GUIDELINES
- OTHER ISSUES
- NOTES
- REFERENCES
- APPENDIX A: GLOBAL INVESTMENT PERFORMANCE STANDARDS (GIPS®)
- INVESTMENT PERFORMANCE COUNCIL (IPC) 2004-2005
- PREFACE: BACKGROUND OF THE GIPS STANDARDS
- I. INTRODUCTION
- II. PROVISIONS OF THE GLOBAL INVESTMENT PERFORMANCE STANDARDS
- III. VERIFICATION
- APPENDIX A1- SAMPLE GIPS-COMPLIANT PRESENTATIONS
- APPENDIX A2- SAMPLE LIST AND DESCRIPTION OF COMPOSITES
- APPENDIX A3- GIPS ADVERTISING GUIDELINES
- APPENDIX A4- PRIVATE EQUITY VALUATION PRINCIPLES
- APPENDIX A5- GIPS GLOSSARY
- APPENDIX B: CORRECTIONS TO GIPS STANDARDS 2005
- ABOUT THE CONTRIBUTORS
- INDEX
