Performance Analysis Is on the Up

Financial News, January 17, 2004 | Go to article overview

Performance Analysis Is on the Up


Byline: Phillipa Leighton-Jones

Fund managers are stepping up their efforts to adopt a more sophisticated approach to measuring the performance of their portfolios but much work is required, according to Gavin Little-Gill, an analyst at TowerGroup, the US analysis firm."It is probably a stretch to call the performance analytics market 'hot', and discussion of the topic at parties remains taboo," he said.

"Despite these hurdles, TowerGroup believes asset management firms should be placing the topic on top of their initiatives list for 2004 as regulatory, market, competitive and client pressures elevate consideration of these solutions to the executive levels of asset management firms."

Performance analytics is a complex analysis of many facets, while performance measurement answers the question of what happened to the performance of a portfolio, and provides return calculation for investment products.

Performance composites facilitate the aggregation and presentation of portfolio measurement and comparison information in a way that meets Global Investment Performance Standard (GIPS) requirements. Performance attribution tries to answer why certain things happen to securities within a portfolio and looks at the performance of a portfolio compared to a benchmark or peer group based on a segmentation of the portfolio on the basis of geography, currency or industry sector, for example.

Asset managers have always used performance attribution tools to evaluate the absolute and relative risk exposures of portfolios and to provide reports for clients.

Many of these tools - even the most sophisticated - have centred on Microsoft Excel spreadsheets, which provide adequate measures for fund managers and clients with equity portfolios but which do not support portfolios of fixed-income or derivative securities, or mixed-asset class portfolios.

They also do not provide a sophisticated measure of overlap between performance and risk or support the regulatory standards, which are about to become relevant for fund managers.

These include the proposed 2005 GIPS requirements for performance measurement; the Sarbanes-Oxley Act, which has focused on reporting financial results, validation and accountability; the Association for Investment Management and Research Performance Presentation Standards; and the International Accounting Standards Board proposed amendments to IAS 32 and IAS 39 for better performance measurement. …

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