Tuesday, October 26, 2010
Consistency in performance
Years ago, while attending an ROTC officer training summer camp, I experienced similar swings in directives from the officer who was in charge of my group. There was a huge swing in his approach the second time I was evaluated compared with the first. This was frustrating and impossible to deal with.
With performance measurement, consistency is often thought of as an important criteria to employ. Changing the rules in a conflicting manner can be a huge problem.
That doesn't mean we can't make changes, but they should be understood, rationalized, justified, and communicated. For example, going from Brinson-Hood-Beebower to Brinson-Fachler for your equity attribution will result in some pretty big changes in the allocation effect. Knowing this, understanding it, and communicating what may occur is very important.
Introducing money-weighted returns isn't a contradiction with consistency because we wouldn't introduce it to measure the manager's performance; rather, it would be to supplement what is done and to provide the client with the return on their portfolio (i.e., how they performed).
Consistency is something to be mindful of when employing performance measurement systems and approaches.