Thursday, April 24, 2014

Let's put the end to the rumors ... yes, it's true!

The Spaulding Group is going into the 

jewelry business.

The rumors (rumours for our UK friends) have been circulating for months. Rarely does a day go by when one of us isn't asked "are you guys starting a jewelry line?"  

It makes us wonder, are our phones bugged, is the NSA on our tail, is Tiffany or Bulgari spying on us?

Well, we've gotten tired of avoiding all the questions, and so must confess that the answer is:

YES! YES! YES!

There, I've said it. Are you happy now?

We are going into the "bling" line, big time!

Both Patrick Fowler, our company's president, and Chris Spaulding, EVP, have urged me, dare I say, pleaded with me, repeatedly to keep it a secret, but I cannot any longer. I'm tired of dealing with the constant and continuous inquiries. I can't take it anymore. 

The stress is killing me! I'm tired of sleepless nights, trying to figure out the best way to respond. Ask my wife, she'll tell you of the endless rolling over, tossing and turning, that have been a standard nightly ritual for me for months. I'm tired of Jed Schneider's, John Simpson's, et al's constant pleading for us to acknowledge what many have suspected. They, like I, have been pestered by colleagues, clients, and even competitors! "What's up at TSG, I hear you're going to start a jewelry line." When we show up at a verification client, we don't hear "what's new with GIPS?," but rather, "is it true, is it true, are you going into jewelry???" 

Sorry,  but I can't take the stress, the strain, the subterfuge we've had to deploy to keep our biggest secret secret!

One of our dearest friends and clients, who participated in a review of the initial design, has been asking "when will it come, when can I get mine?" The NDA we made her sign is tearing her apart. Well, the wait is nearly over.
 
Our first creation, which will no doubt be a "hot seller," sought by all investment performance men and women who appreciate the finer things in life, will be unveiled at this year's PMAR conferences

And because the North American event precedes the European by only a month, we will ask the attendees to please be silent, so that their European counterparts aren't denied the chance to see first hand for themselves what we expect to be an award winning design. 

That's it. I've said it. But that's all I'll say until next month.

Mum's the word.

Sorry, Patrick and Chris, but I had no choice. Please forgive me, my weakness. I can't take keeping this secret secret any longer. Please forgive me. No wonder I had a difficult time in the army whenever we did survival training ... I'm weak at heart.
 

Wednesday, April 23, 2014

Please no! Compounding excess returns???

We are pleased to present a "guest blog" post from our friend, Stephen Campisi, CFA.

I am absolutely flabbergasted by this. I encountered a client situation where a reasonable question was raised: “Why doesn’t the stated annualized excess return of 119 bps equal the difference between the annualized portfolio return (6.06%) and the annualized benchmark return (5.12%) or 94 bps?”

I looked at the performance report and saw a cumulative inception to date total return for the portfolio and the benchmark (ITD = 5 years and 10 months) along with cumulative arithmetic attribution effects for allocation, selection and total excess return. Everything adds up and ties together nicely, as one would expect for any single-period analysis. Then I looked at the annualized numbers in the next column and saw that the stated excess return was larger than the difference between the annualized total returns. This is because the stated annualized excess return was simply the annualized value of the cumulative excess return.

I contacted the performance group (from this unnamed firm) and explained that while total returns can be compounded and annualized (and otherwise tortured to confess what we want to hear) this cannot be done with partial returns. I received a rather puzzling response that not only dismissed these statements but also attributed such client questions to the lack of sophisticated knowledge on the part of clients. I guess this also implies that sophisticated portfolio analysts don’t really expect attribution effects to add up, and that these numbers really bear no relationship to each other. I guess I’m just confused, and worse, I really don’t know very much about performance at all. It’s rather discouraging…

Here’s the performance report that gave rise to these new and compelling insights:

And here is an excerpt from the response I received:

“Thanks for the input. We have certainly heard this before and understand the challenges of presenting this to clients that have a limited knowledge of performance measurement. The challenge we have found does not reside solely on the client side of the table, a fact to which our inboxes will attest.
 

We have contemplated all of these suggestions already in the past. Proportionality never felt intellectually honest to us because if you compounded the ITD numbers you would get different numbers than displayed using this method.  We felt it was it better to leave them as is as they were the 'correct' numbers on some level.  

I think candidly we realized that this is one of the reason why you don’t see more published attribution work from fund managers.
 

"I am happy to discuss it with you, but we have found that trusting people to understand complex issues and then demonstrating it to them is the best policy. When you show them that it is just how math works, they tend to get it.”

Tuesday, April 22, 2014

Why geometric excess return? Yes, WHY?

When I'm presented with the same question in relatively short period of time, I suspect it's something I should opine about, even if I've done so before.

I was teaching our Fundamentals of Investment Performance Measurement class for an asset owner (large pension fund) recently, and was asked by a couple folks there what the benefits are of geometric excess return; it seems they have a UK manager who insists on presenting them their excess returns geometrically. They've attempted to understand why it's supposed to be better, but haven't had any luck.
 
Well, join the crowd!  

This week I received an email from the head of performance for a large institution, who also inquired into this subject.

Some, though not many, believe it's a better way to represent the manager's outperformance. The math for both methods is pretty simple:
If, for example, the portfolio's return is 7.00% and the benchmark's 5.00%, the arithmetic excess return is 2.00%, while the geometric's is 1.90 percent. 

We can also look at the differences by using money. If the portfolio began with $1 million, for example, the 7% return would add $70,000. Had the money been invested in the benchmark, it would have returned a profit of $50,000. If we subtract $50,000 from $70,000, we get $20,000; if we then divide this by what we began with ($1 million), we'd get our 2.00% excess return. Geometric, however, would have us divide the $20,000 by where we would have been, had we been in the benchmark (i.e., $1,050,000), which yields our 1.90% geometric excess return. 

To me, the one legitimate advantage of geometric is that it's proportionate. For example, if one manager beats his benchmark 50% to 49%, while another outperforms her benchmark 2% to 1%, arithmetic yields a 1.00% return for both. Geometric, however, would give us a 0.67% return for the first manager, and a 0.99% for the second. To me, this is a legitimate advantage; however, it isn't sufficient to overcome the challenges in understanding it, thus the almost universal preference for arithmetic.

The UK is the bastion for geometric excess return. Ironically, our research has shown that while the portfolio managers there prefer geometric (by roughly a two-to-one margin), their clients prefer arithmetic (by the same two-to-one margin). 

Geometric attribution is different from arithmetic because it reconciles to a geometric excess return. It's more complicated to execute and more difficult to discern and explain. And while I wouldn't argue for something simply because it's easy to explain, given that after many attempts, I've yet to see the true benefit of geometric, I remain solidly in the arithmetic camp.

Thursday, April 17, 2014

A proposed GIPS change you MUST pay attention to

The CFA Institute is proposing to MANDATE, REQUIRE, COMPEL firms that claim compliance with the GIPS standards to submit information regarding their firm to them on an annual basis. 

To say the least, I am seriously concerned by this idea.

You can learn about it by going here. It's a fairly non-intuitive process to (a) get to the details behind what they propose and (b) to submit your thoughts. 

I will offer a fairly detailed explanation of what this is, as well as my candid views on it in this month's newsletters. Suffice it to say, I STRONGLY disapprove. 

An interview

I was very flattered when BI-SAM recently asked to interview me for their online newsletter. I'm the one who normally conducts interviews (for The Journal of Performance Measurement(r)), so it was nice to be on "the other side."

You can read the interview here.

I thank BI-SAM for this privilege honor.

Wednesday, April 16, 2014

A reason for performance measurement professionals to celebrate!

The Wall Street Journal posted the following yesterday:

Well, to me this is a reason for performance measurers to celebrate. 

Why?, you might ask: because:
 
we're mathematicians

Wikipedia defines a mathematician as "a person with an extensive knowledge of mathematics who uses this knowledge in their work, typically to solve mathematical problems. Mathematics is concerned with numbers, data, collection, quantity, structure, space, models and change." 

The reality also is that many of us in the field have degrees in math (or, as the British say, maths). My undergraduate degree is from Temple University and is in mathematics. My colleague, John Simpson, CIPM, holds a BS in Applied Mathematics from UCLA (he couldn't get into USC ... it's a sore subject ... don't go there). And my colleague, Jed Schneider received a B.S. in Applied Mathematics from the State University of New York at Stony Brook. (I guess because mine is in pure or theoretical math, I'm more like Sheldon Cooper, who decries those who work in the "applied" area, although I've adapted to the applied side (or, as Sheldon might call it, the "dark" side)). 

I suspect that no one in performance measurement "hates" or "dislikes" math; many, like John, Jed, and I like or even love math. Plus, I'm sure that many of us are here because it involves mathematics, equations, formulas, models, data, analysis, etc.

And so, to learn that it's seen in such a positive light is worth celebrating!

 For the full WSJ article, go here!

Tuesday, April 15, 2014

Buddy, can you spare ... two minutes? Our "mini" survey won't even take THAT long! And yet, your views are highly desirable

We're wrapping up our "mini" GIPS® survey, but first want to hear from you! It's REALLY fast to do; we only ask four questions:

1. Your Name/ Company/ Title

2. Does your firm currently claim compliance with the GIPS® standards?

3. Do you want to see a guidance statement that will outline “sunset” provisions for various GIPS required disclosures, where “sunset” provisions refer to the minimum amount of time a disclosure would be required to be shown?

4. Do you favor new rules being introduced via Q&As? 

Oh, and we also give you a chance to 
comment further, if you wish:

5. Please enter any other comments, questions, or concerns you might have in the following box. 

That's it! Pretty simple, right? And so, please visit our survey site  right now, and take the two minutes (or less) to answer these simple questions. You'll have a chance to win a $25 Amex gift card, too!

Thanks!