Just the facts, ma'am (original) (raw)

2003, Fertility and Sterility

Once an investment portfolio has been designed and implemented, the main job of an investor and its advisors is to monitor the portfolio to be certain it is performing as it was designed to perform. Almost nothing that can usefully be done with an invested portfolio can be done intelligently if its performance is imperfectly understood. Proper monitoring can disclose when a manager should be terminated or given more money, if the portfolio is in or out of balance versus its target strategy, whether tactical moves might be productive, whether the overall portfolio design needs to be revisited, and so on. Unfortunately this apparently straightforward process is actually fraught with multiple perils, some of which are technological, some of which are conceptual, and some of which are behavioral. The purpose of this paper is not to present an exhaustive discussion of the vastly complex topic of investment performance reporting, but simply to outline how the process works, to identify the major challenges, and to suggest how some of the challenges might best be handled. 1 Varieties of performance reports First, a quick note about the kinds of performance reports investors are likely to receive, since one of the challenges we face is deciphering very different types of reports from different sources and reconciling real or apparent discrepancies among them. Most investors will receive at least three kinds of reports: reports from the money managers themselves, reports from the custodian holding our cash and securities, and reports from an overall advisor of some kind, typically, but not always, an investment consultant. Manager reports. All money managers send account statements to their clients, and most of these reports will be consistent with AIMR guidelines. 2 But that is the end of the similarity. Some managers send monthly reports, some send quarterly reports, some (especially some hedge funds and private equity partnerships) send only annual reports. 1 Parts of this paper are based on the discussion in Creative Capital: Managing Private Wealth in a Complex World, by Gregory Curtis (iUniverse Press, 2004), especially Chapter 16. 2 Association for Investment Management Research, now known as the CFA Institute. AIMR guidelines are designed to ensure that managers report their returns in a manner that is both internally consistent and that is consistent from manager to manager.