Investors today are taking a greater interest than ever before in how their money is being invested and who is accountable for the performance of those investments. In fact, investors aren't just requesting this information -- they are demanding it.
The practice of performance measurement allows investors and advisers to see both historical rates of return as well as a fund's performance relative to its peers, using industrywide or customized benchmarks. With this information in hand, firms can demonstrate why an investment produced a certain outcome as well as how to make corrections to improve the return on that investment.
With investors' appetites for performance metrics in mind, 15 financial institutions participated in the CutterBenchmarking report on performance measurement, including Freddie Mac, AIG Global Asset Management, Deutsche Bank, Fidelity, ING, JPMorgan Chase, Merrill Lynch, Morgan Stanley, Putnam and Pioneer.
When it comes to performance measurement of investments, Cutter says industry best practices dictate that firms should ensure that all calculations are compliant with the global industry performance standards (GIPS); that firms have the ability to calculate daily returns; that they can calculate principal and income returns, as well as pre- and post-liquidation after-tax returns; that they can compare performance returns to either a benchmark or a peer group; and that they can calculate returns in the native currency of the security, portfolio and asset management firm.
The Cutter study found that the firms varied widely in their performance measurement capabilities, although the consulting firm reports no relationship between asset managers' performance measurement capabilities and their overall size or predominant asset type. In general, the participating firms demonstrated strength in their abilities to calculate benchmarks and report results. Their abilities to aggregate performance data, however, varied widely. Perhaps most significant, many firms admitted that they have limited automation, and at times, none at all.
A Helping Hand
Nearly one-third of the firms in the Cutter study reported that they still use a manual process for handling new security types, which naturally leads to higher labor requirements for calculating performance. Further, the benchmarking study found multiple instances in which firms use spreadsheets instead of a vendor or in-house application to calculate performance, and only 20 percent of the firms use automated checks.
"I was struck by the fact that firms that dedicate more employees to the performance management process scored higher in the benchmark study," Cutter associate James Hollis notes. "It means they have a way to go to make the process more automatic."
According to Hollis, "Spreadsheets are still being used to calculate performance on different types of securities." He points out that while firms are expected to have a fully automated system for the customization of benchmarks at all levels, two-thirds of the participating firms were not able to achieve that goal.
Meanwhile, though most of the firms said they are able to calculate return data down to at least the index level, 50 percent conceded "some limitation" in their abilities to report returns both with and without fees. In addition, despite the current global trend of multigeographic trading, 68 percent of the firms reported some type of shortcoming in reporting returns in various currencies. Finally, there also were substantial gaps in firms' abilities to calculate principal and income returns -- only 20 percent of firms achieved best practices in the area -- and many companies reportedly struggle with after-tax reporting.
"Less than half the firms could calculate data returns on all levels," says Hollis. "Less than half could calculate performance for a user-defined period and user-defined sectors. And 33 percent could only accept benchmark data at the index level. So there is not a lot of flexibility with their databases."Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio