What is a performance record?

A performance record shows a firm’s or portfolio’s investment results over a period in the past. It is a type of “report card” for a firm or portfolio, and has become common in the investment industry.

Does P.R. Herzig & Co. maintain compliance with CFA Institute standards?

No. We have tracked the time-weighted performance of individual accounts since the mid 1980s, long before it was common to  do so. However, complying with all the technicalities of CFA Institute PPS® and GIPS® would require us to hire an investment consultant to “scrub” data going back 10 years or more. We believe our presentation gives a fair, accurate, and complete picture of our performance. Rather than repackaging the past, we prefer to focus our resources on making money for our individual and small institutional clients in the present and the future.

What does “time-weighted rate of return” mean, and why is it used?

Time-weighted calculations remove the effect of contributions and withdrawals, giving a clearer picture of an investment manager’s performance. Without these adjustments, a portfolio that happened to receive a large contribution just before a market upturn would look different from an account that received a similar contribution at a different time, perhaps just before a market downturn.

How do I tell a good performance record from a bad one?

It is not as easy as it seems. The numbers may look good, but the market may have done even better, much like getting an “A” on a report card when everyone else in the class got an “A-plus”. Usually you will want to compare the investment returns to an appropriate benchmark, similar to grading on a curve.

What is an appropriate benchmark?

An English test score should be graded on a curve of other English scores, not math scores. Similarly, the nature of the investments determines the right benchmark. Performance presentations for portfolios holding mainly U.S. stocks often use a stock market index such as the S&P 500 as a benchmark.

Do numbers that “outperform” or “beat the benchmark” mean the manager is hot?

Not necessarily. Investing is a more random process than studying English or math, meaning that results are less predictable. Outperformance, particularly over relatively short periods of time, could simply be the result of chance. Or choosing the wrong benchmark. Or taking lots of risks.

How do I tell if the firm or the manager is taking a lot of risk?

There is no easy way. Individual holdings that look risky by themselves can be reasonable investments in the context of a portfolio. Good companies can be risky stocks. Bad companies can be good stocks. Investment consultants have devised formulas to measure return in relation to risk.¹ The more variable of the returns, so the theory goes, the higher the risk. If the numbers are all over the map, swinging even more than the market, then the manager may be taking more risk than the norm. Use of margin lending, or other forms of leverage such as certain derivatives, can also indicate higher risk.

If a manager or firm has outperformed for a long time, does that mean outperformance will continue?

Not necessarily. After expenses most managers underperform the market averages over time. The phrase at the bottom of this page, mandated by the SEC, appears to have a strong empirical basis. Numerous studies suggest that managers who outperform in one period are no more likely than other managers to outperform in subsequent periods.

Then where is the value in looking at performance records?

In getting a sense of a firm’s or manager’s approach, and judging whether it fits your individual situation.

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS

¹The two most common are the Sharpe ratio and the Treynor measure, rarely used for presentations to individual investors.