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  • Stuart Fowler

Benchmarking performance


Performance measurement and interpretation pose problems generally:

  • Is the measured return accurate?

  • Are the bases of comparison fair and are portfolio managers making mischief or even honest mistakes?

  • Do the numbers tell everyone what they want to know, both about the client’s own contribution to performance and the manager’s limited scope to add or destroy ‘value’?

  • How are clients supposed to reconcile the requirements under financial services regulation i) for an appropriate benchmark to enable them to assess a firm’s performance and ii) for statutory warnings about the limited relevance of past performance?

  • Is it even possible to distinguish between random noise and useful information?

These general problems are even greater for portfolios designed not to compete in a race with other comparable portfolios but rather to deliver explicit outcomes for a client-defined goal, within agreed ranges at defined future dates. These outcomes may be required cash flows (such as to meet retirement spending) or future real wealth levels, and possibly a combination of both.

In a new paper we explain how we benchmark goal-based ‘Defined Outcome Portfolios’ to overcome these problems. Against these benchmarks we show throughout the paper Fowler Drew representative actual performance. We also show an example of the form of reports for an actual client, using both backward-facing performance comparisons and probabilistic modelling of future outcomes to measure progress towards goals and the changing funding position.

With nearly seven years of consistent history, performance looks good, and better than its benchmarks. Because the sources are decisions relying on the predictive information in our modelled investment approach, it probably is not just random. But for clients the most important contribution was not performance but risk management: ensuring consistency at every stage with their own preferences for long-lived plans that define explicit combinations of resources applied, time horizons and ranges of satisfactory outcome. They now see it as a journey, not a race.

This paper serves as an explanatory note for clients (or prospective clients) of Fowler Drew. We are posting it here because it should interest and indeed challenge any reader who currently assigns some value to past performance and who makes comparisons with indices or other managers. They may do so as investors themselves or because, as professional service firms such as lawyers and accountants, they monitor investment managers so they can make recommendations to their clients.

#investmentprocess #ldi #models #performance #regulation

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