Wednesday, November 27, 2013

Happy Thanksgiving & Happy Chanukah

Apparently, this is the first time since 1888 that Thanksgiving and Chanukah overlapped (I wasn't around, but my friends Steve Campisi and Herb Chain recalled the event; both are significantly older than I) , and it won't occur again for 70,000+ years (I doubt that I'll see that event). And so,...

Tuesday, November 26, 2013

Introducing Sonia Renza-Elizabeth Spaulding

So proud, I'm showing off; hope you don't mind.

Our third grandchild and first granddaughter.

Born to our son, Christopher, and his lovely wife, Monica.

  • Born 11/25/2013
  • At 4:18 pm
  • 8lbs. 13oz
  • 21 inches
  • Renza in name = Monica's mom
  • Elizabeth in name = Chris' mom; aka, my wife, Betty

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:
  1. Should we even be reporting attribution for periods greater than a year?
  2. If yes, should we annualize?
  3. 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.

Friday, November 15, 2013

Topology and performance attribution

It may seem like a stretch, but the very esoteric and complex mathematical area topology and performance attribution have something in common: mapping. Topologists map points from one surface to another, while PMPs (Performance Measurement Professionals) map weights and returns from the portfolio to the benchmark.

The following graphic should give you an idea of the mapping we do:
I will have more to say about this topic in this month's newsletters.

Tuesday, November 12, 2013

More on reporting standards, guidance, principles

I have had the opportunity to engage in conversation with several folks over the past month or so regarding the CFA Institute's "Principles for Investment Reporting." I remain generally opposed; actually, perhaps more so.

For a document that promotes "transparency," it hardly lives by that principle, given its own lack of transparency (who are its members?).

At no time have the views of the public been solicited regarding the content of the principles.

Interestingly, although the document is intended for the asset management firm's clients, the committee, as I understand it, has no members that work for a pension fund, foundation, endowment, etc. How can you ensure you're providing the right principles without seeking the input from these very persons?

In a recent conversation regarding its "five principles," one, in particular, garnered a lot of attention: "Client preferences are reflected in the investment report." Think about it, how difficult will it be to be able to check off this principle? Are asset managers expected to solicit feedback regarding their performance from their clients? What if the firm decides they can't justify the expense to modify their reports to meet their "client preferences"? This principle, while sounding quite attractive and perhaps even reasonable, will no doubt open up a huge "can of worms."

The industry has yet to be asked if they think this is a good idea; and yet, whenever we've surveyed the market, we have found general opposition to anything that looks like a reporting standard.

I am unclear as to what "principles" are supposed to be; guidance would, I believe, be more welcome. And, I think avoiding having managers feeling obligated or compelled to say that they "comply" would be preferred.

Monday, November 11, 2013

Investing in employees through training

Yes, this IS a dilemma: do you invest the money into providing your performance and risk measurement team the training they need to do a good job, and run the risk they'll leave, or avoid teaching them and save the money?

Fortunately, most firms see the wisdom in providing the education. It not only enhances the team's ability to do an effective job, it also helps boost their morale. Having skilled employees means that they benefit the firm, but also become more marketable to others; this is a fact, but one all firms must confront.

Retaining good employees can always be a challenge, no doubt. But one way to do this is by making such an investment.

The Spaulding Group has been offering training for more than 20 years. Next week, I'll be teaching a class in Melbourne, Australia. John Simpson and Jed Schneider also regularly conduct classes. And this week, we're offering a webinar dedicated to attribution. To learn more about our offerings, please contact us.

Monday, November 4, 2013

Flourishing as an objective

I have begun to read Mass Flourishing, by Edmund Phelps, a Nobel Laureate in Economics. He begins with the following:
“Flourishing is the heart of prospering – engagement, meeting challenges, self-expression, and personal growth…A person’s flourishing comes from the experience of the new: new situations, new problems, new insights, and new ideas to develop and share.”

To flourish is, in my view, a worthy goal. Is it not a great way to live one's life?

One of the reasons the world of investment performance and risk measurement appeals to many of us is its dynamics: it constantly provides new situations, new problems, new insights, and new ideas. It is, in reality, a place to flourish. I hope you agree.

Saturday, November 2, 2013

Buy high and sell low isn't a recipe for success, but it's the strategy most investors seem to follow

In this weekend's WSJ, Jason Zweig discusses how investors too often make poor contribution/withdrawal decisions (see "How Investors Leave Billions on the Table").

He mentions how Pimco's Total Return fund had a 12-month return (as-of September 30) of -0.74%, that outperformed its index (Barclays U.S. Agg) by more than 100 bps. And yet, the average investor had a return of -1.4%, still better than the index (that had a -1.89% return), but far below the fund itself. And why? Because they decided to withdraw $7.3 billion in May and June, just before the fund rebounded.

"Buy low, sell high" is the mantra one should practice, but too often, because of emotions, we observe "buy high, sell low."

Jason's citing of the average investor experience is acknowledging the value of a money-weighted alternative, that takes cash flows into consideration. All funds should provide their investors with their respective personal rate of return. If it outperforms the fund itself, bravo - good timing of cash flows! But if it didn't, well, they goofed. It also wouldn't hurt to provide a comparable index, that takes these flows into consideration. Meaning, the investor will see (1) how the fund did, relative to the time-weighted index and (2) how they, the investor, did, using a money-weighted return, alongside the index presented in a money-weighted fashion.

Friday, November 1, 2013

"A stunning implication..."

The words in this post's title appear in Nobel Laureate in Economics Leon Lederman's The God Particle. I can't say exactly why, but when I read it those words struck me.

A stunning implication.

I once read that good writers write one word at a time; I believe Lederman does exactly that.

We are, if you will, in the "implication" game. That is, we regularly assess the implications of actions taken by portfolio managers. While we call this "performance attribution," that is essentially what is being evaluated: the implications of the actions taken.

In their 1986 FAJ paper, Brinson, Hood & Beebower pointed out how while attribution wasn't new, it was evolving. I've commented that it has evolved considerably since then. The question we should ponder: is it still evolving or evolving enough? Have we thought that it's as good as it gets? I would hope not.

We haven't seen any many new linking methods introduced of late, nor multicurrency models. Perhaps Menchero, Frongello, CariƱo's, and GRAP's are adequate for most people's needs, so it's possible that no additional linking methods are justified. But I believe that multicurrency should be able to grow beyond what we have today.

At a minimum, we should have a framework around which such models can be used and claimed. For example, one of our clients said they offered Karnosky-Singer, but only produce a single currency effect. We've concluded that this cannot legitimately be K-S, as the beauty of the model Denis and Brian crafted is that this effect is bifurcated between what happens in the underlying market and the contribution from the currency forwards that are included.

Perhaps it's time for another "GRAP." An initiative to sit back and ask
  • what are we doing right,
  • what are we doing wrong,
  • what don't we still not understand,
  • what can be improved upon,
  • what is truly lacking,
  • and what else?
Something to reflect upon, perhaps, as we begin to bring to a close another calendar year.