1-Oct-05
The measurement and reporting of investment performance is an intriguing subject. On the one hand, measurement is intuitively straightforward, as it is based on mathematics. Conversely, the presentation of statistics is widely perceived as being something of an art form, based most typically on ‘marketing’ objectives.
While appreciating that performance statistics are very important to those within wealth management organisations, this article looks at the subject from the perspective of the investor, aiming to finally consider what the market might expect in the future.
To start at the beginning – we should consider why are investors interested in performance? Put simply, a wealth manager is typically tasked with preserving and growing the value of its clients’ investments. Temporarily parking the question of relative performance, one needs to consider the different ways of answering the investors’ requirements.
Firstly, investors like to know whether they experienced gains or losses over a period for each investment and on their portfolio as a whole. An appealing measure intuitively is the Holding Period Return, where the difference between end value and start value is simply divided by the starting value. The attraction lies in its simplicity and, of course, this comes with limitations. In fact, this method is only really suitable if nothing changes in a portfolio over the period in question…
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