Friday, May 16, 2014

We've moved!

To a new home: you can find us at 

BlogSpot, though a decent blog provider, has some limitations. We've wanted to move my blog to Word Press for some time. We hired someone to not only move my blog and John Simpson's blog, but also our website! This site will be dismantled at some point. Almost all of the blog history has been moved over to the new site, and no new postings will be placed here.

Hope to see you there!

The new address for my blog is

No need to be looking here going forward, as we're migrating. I won't begin blogging on the new site until I'm "given the go-ahead," and although most of the history has been ported, there are a few recent posts that still need to be, but we're almost there! But this new site is where I'll be going forward.

Wednesday, May 7, 2014

GIPS Alert!!!

Our slightly delayed April newsletters are going out this week, and you'll notice the "lead story" deals with the suggested requirement for GIPS(R) (Global Investment Performance Standards) firms to, in essence, register with the CFA Institute on an annual basis, and to share details about their firm. The online version has been posted, and is available for your purview. 

I want to mention that my comments have been significantly toned down, as the result of input from a half dozen colleagues (both within and without TSG) who, for the most part, suggested some modification in the wording (one said to use what I had, but I felt inclined to be a bit circumspect in my language).

Suffice it to say, I find the idea quite disturbing, and urge all compliant firms and verifiers to comment. Since they're asking for our opinion, we should be willing to share it. Whether you agree or disagree with my objections, you should be heard.

Monday, May 5, 2014

A novel way to learn about analysis

I'm sure that I'm not the only frequent traveler who has rituals when visiting certain cities. I was in London last week for the umpteenth time, where I made my standard pilgrimage to Jermyn Street and then to the wonderful bookstore, Hatchards, on Picadilly. As is often the case, I found a couple books to purchase, The Truth About The Harry Quebert Affair being one. Note that the cover above isn't the same as mine; in fact, if you visit Amazon you'll see that the book, at least in America, isn't available yet; probably because it's written by Joël Dicker, a writer from Geneva, and published in London. 

To put this into perspective, the book numbers some 615 pages, and I managed to cover them in just a few days. While some of the writing is a bit tedious (I didn't care much for the dialogue between the "writer" (the main character of the book) and his mother, for example), for the most part it's a suspenseful and gripping novel that is difficult to put down. 

As I approached the end it occurred to me that this is a great book for analysts, any kind of analyst; that is, for folks who are expected to, well, conduct analysis: to investigate, research, unearth, discover. I include GIPS(R) verifiers in this group, too, since much of what we do is analysis.

I can't say much more without screaming "spoiler alert," and so will leave it at that. I don't read many novels, and only picked this one up because the cover information made it sound intriguing; I wasn't disappointed, and am sure you won't, either. It'll make for good summer reading, or spring reading, if you're ready to delve into it now (though you'll have to wait until the end of the month to get a copy, unless you're in or visiting London).

Monday, April 28, 2014

Aint technology grand?

I arrived in London this morning, the first leg of my first-ever circumnavigation of the globe (I will do a GIPS(R) (Global Investment Performance Standards) verification here, and then onto New Zealand (via Hong Kong), where I'll do a consulting assignment, before heading home).

When I arrived, I Facetimed my wife on my iPad. This afternoon, we had our monthly "Think Tank," and I accessed it through my lap top and my hotel room's wireless network, and my PC's microphone. And now, I'm reading the Wall Street Journal via my iPad. There's much more going on here, too, but these are just three things which demonstrate the impact technology has had. Pretty cool, overall!

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:


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.