Insights and opinions from an internationally recognized authority on investment performance measurement
Tuesday, November 26, 2013
Annualizing performance attribution
I was in Australia (both Sydney and Melbourne) last week, (1) speaking at a conference, (2) conducting a conference workshop, and (3) teaching our two-day attribution class. It was a very hectic time, and I failed to do any posting, which is a bit unusual for me.
Yesterday, we held our monthly "Think Tank" session, and one caller asked about "annualizing attribution." I found this to be quite an intriguing topic.
It occurred to me that there are three issues that must be considered:
Should we even be reporting attribution for periods greater than a year?
If yes, should we annualize?
If yes, how (i.e., what are the mechanics)?
At the present time, I'm not sure that it's advisable to extend attribution past a year, but need to give this some more thought, as well as discuss the topic with a few colleagues. My concern is that longer period results might "smooth out" the details and provide little benefit to the recipient. However, they may also prove to be quite insightful! In addition to chatting, I will most likely conduct some testing, too, to discover what we might learn.
In the mean time, if you have any thoughts, please let me know.
Glad to see you posting again. I believe that reporting attribution for periods greater than a year is highly desirable. After all, every active manager's premise is that their clients should expect long term outperformance relative to the passive benchmark. This claim should be substantiated with BOTH the active return differential AND the explanation of the sources of that excess return. In our shop, our active process involves tactical shifts in market exposure as well as active investment selection. We present the long term performance record relative to the benchmark, along with the attribution of this excess return to our tactical allocation decisions and our manager selection decisions. This is the only way to substantiate our long term claims and to validate that we have delivered on our investment process.
As to annualizing attribution for less than a year: two thumbs down on this. Just as it is unethical to create performance out of thin air by stretching out a short period to a year by annualizing, it is equally prohibited to manufacture excess returns that haven't been earned.
David, If you recall, I gave a presentation at one of your conferences on this very topic and at the time you said that you were going to mull over my explicit approach to the annualization of all properties, including attribution values. I also contributed a chapter on the exact same same topic to one of Carl Bacon’s books. If attribution results (say, for different funds) are to ever be compared for periods of different durations, either for longer or for shorter than a year, then annualization is necessary. As to the issue of smoothing out information, I find that this is best solved by presenting, as is done by Opturo, a graph of the cumulative impact of each attribute over time. This does not require annualization and also provides a visual measure of the volatility of the attribute values. However, while such graphs are very informative for a single fund, they do not provide a ready basis for comparing funds. Andre
Andre, thanks for sharing your thoughts. I vaguely recall our earlier discussion, but not the details; sorry. I will take into consideration your points as I ponder this further; thanks!
is an internationally recognized authority on investment performance measurement. He's the founder and Chief Executive Officer of The Spaulding Group, Inc. (www.SpauldingGrp.com), and founder and publisher of The Journal of Performance Measurement. He's the author, contributing author, and co-editor of several investment books. He's actively involved in the investment performance industry, serving on numerous committees and working groups.
Dave earned his BA in Mathematics from Temple University, his MS in Systems Management from the University of Southern California, an MBA in Finance from the University of Baltimore, and a doctorate in Finance and International Economics from Pace University.
For more information please visit www.spauldinggrp.com/the-company/david-spaulding.html
Friends, colleagues, associates: by signing up, you'll be notified of new postings
Dave is available...
Dave Spaulding is available for keynotes, corporate seminars, conferences, user groups, and interviews with well established media outlets. To schedule or discuss, please contact Chris Spaulding at (732) 873-5700 or via email CSpaulding@SpauldingGrp.com.
Are you truly a Performance Measurement Professional?
Two important indicators of you truly being a Performance Measurement Professional:
#1 - That you subscribe to The Journal of Performance Measurement. This publication has been the "bible" of performance measurement for over a decade. It's where new ideas are presented, debates are held, information shared. To learn more about the journal and to receive a complimentary copy, visit www.SpauldingGrp.com or contact Patrick Fowler (PFowler@SpauldingGrp.com) or Chris Spaulding (CSpaulding@SpauldingGrp.com). Subscribe now!
#2 - That you dress like a performance measurement professional. For the latest in fashion contact Patrick Fowler (PFowler@SpauldingGrp.com) or Chris Spaulding (CSpaulding@SpauldingGrp.com)
TSG's Guide to the Performance Presentation Standards
Our latest book is now available: TSG's Guide to the Performance Presentation Standards. This is a revision of an earlier book, that has been significantly enhanced. To learn more contact Christopher Spaulding (CSpaulding@SpauldingGrp.com).
Ask how you can get a free copy!
Don't miss out ... sign up for our newsletter
The Spaulding Group's critically acclaimed, complimentary monthly newsletter, Performance Perspectives, is in its 9th year. Each issue contains more in-depth analysis and ideas than can typically be provided in a Blog post. If you're not already a recipient, please sign up today. Contact Patrick Fowler at PFowler@SpauldingGrp.com.
.png)
Glad to see you posting again. I believe that reporting attribution for periods greater than a year is highly desirable. After all, every active manager's premise is that their clients should expect long term outperformance relative to the passive benchmark. This claim should be substantiated with BOTH the active return differential AND the explanation of the sources of that excess return. In our shop, our active process involves tactical shifts in market exposure as well as active investment selection. We present the long term performance record relative to the benchmark, along with the attribution of this excess return to our tactical allocation decisions and our manager selection decisions. This is the only way to substantiate our long term claims and to validate that we have delivered on our investment process.
ReplyDeleteAs to annualizing attribution for less than a year: two thumbs down on this. Just as it is unethical to create performance out of thin air by stretching out a short period to a year by annualizing, it is equally prohibited to manufacture excess returns that haven't been earned.
Thanks for your comments; this will help with my analysis.
ReplyDeleteFrom Andre Mirabelli:
ReplyDeleteDavid,
If you recall, I gave a presentation at one of your conferences on this very topic and at the time you said that you were going to mull over my explicit approach to the annualization of all properties, including attribution values. I also contributed a chapter on the exact same same topic to one of Carl Bacon’s books.
If attribution results (say, for different funds) are to ever be compared for periods of different durations, either for longer or for shorter than a year, then annualization is necessary.
As to the issue of smoothing out information, I find that this is best solved by presenting, as is done by Opturo, a graph of the cumulative impact of each attribute over time. This does not require annualization and also provides a visual measure of the volatility of the attribute values. However, while such graphs are very informative for a single fund, they do not provide a ready basis for comparing funds.
Andre
Andre, thanks for sharing your thoughts. I vaguely recall our earlier discussion, but not the details; sorry. I will take into consideration your points as I ponder this further; thanks!
ReplyDelete