Wednesday, October 7, 2009

Consolidated reporting

Many firms like to group a client's accounts together, to provide a consolidated report that presents the client with the "overall picture" of what they hold. This is commonly done in the brokerage arena, as well as by others. So, how does one calculate performance for such an arrangement?

Well, what question are you trying to answer? I believe it's "how am I (the client) doing, overall?

And if so, then the answer is quite simple: a money-weighted return. Ideally, we'd use the internal rate of return to do this, though Modified Dietz would work as an approximation to the IRR.


  1. Assuming there were huge flows moving within the sub accounts. Modified Dietz would probably not give reasonable expected results. Would you care to elaborate how the sub IRR returns would emerge in this situation?

  2. The problems hit when you try to show TWR for managers/funds but DWR for asset class composites as well as Total Assets. But this can certainly be done.

    Where simplicity is turned on its head is when third party reporting shops had the bright idea to rush into the 'daily performance Market' with their custodian bank / accounting hats on.

    The following are a few examples on which I'd very much appreciate your thoughts:

    - Mixing daily data with private investments that report monthly (at best).
    - Daily performance with a management fee charged one just one of those 90 days.
    - Do flows occur beginning of day or end of day? How can either decision make sense for mutual funds, Partnerships, and intraday traded securities? Further, how will the decision match the timing of the flow with a cash account?
    - Generating Total Returns when flows are hard-coded to reconcile with cash recognition as provided by a custodian.

    Feel free to delete this entire comment; I rambled on. That being said, I've read each of your archived articles and check this blog daily waiting for you to touch on this very subject. I hope you've come across similar so-called performance reporting experts and thus understand exactly the predicament their methodogy poses on an investment consulting firm (clients ranging from Endowments/Foundations to High Net Private Clients).

    I very much appreciate all the time and effort you put into your craft.

    Take Care.

  3. Every equation has its own limitation. Concerning the other Anonymous person (not the first one, that was me. I know the answer to my question but would like to see other people's comment) wrote, I would classify this as an accounting issue. Depending on the date, flows and the equation use, the results could change. I remember telling people that return is nothing more than a "Growth Rate" or a mere "Ratio". A better wealth measurememnt is simply looking at the market value (I know Mr. Spaulding disagreed last time).

    Apparently, everyone that I spoke to in the past thought I was from another plant. Sure, performance is an easily task as long as you don't need to explain or identify and fix the results. Maybe in the next CIPM examination, the test would rquire more reading in accounting or GAAP 101.

    You might be able to find some helpful information from this author "Peter Vann" - An Analysis of a source of Erros in Performance Measurement. I don't know if GIPS took down 2010 comments, I do remember reading several topics related to performance / accounting.

    Maybe someday I'll write and submit a paper to Journal of Performance call: "How I beat the benchmark using daily time weighted return!" Will that interest anyone?


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