How can you use performance measurement to communicate investment results to clients?

As an investment banker, you need to communicate effectively with your clients about how their portfolios are performing and how you are adding value to their investments. Performance measurement and attribution are two tools that can help you achieve this goal. In this article, you will learn how to use these tools to show your clients the results of your investment decisions, compare them with relevant benchmarks, and explain the sources of return and risk.

1 What is performance measurement?

Performance measurement is the process of calculating and evaluating the return and risk of a portfolio over a specific period of time. It involves choosing an appropriate benchmark, such as an index or a peer group, that reflects the portfolio's objectives and constraints. Performance measurement also requires adjusting for factors such as fees, taxes, cash flows, and currency effects that can affect the portfolio's performance.

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Vivek Raj

▪️CFP®, CWM®, ACCA ▪️Queen Margaret University ▪️Career Architect ▪️Crafting Success-Your Monetary Guide ▪️Leading Launch of Startups ▪️Building Brands
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To tell clients how their investments are doing, use easy measures that make sense. Show if their money is growing or not in a simple way. Compare it to how others are doing so they can see if it's good or not. Use pictures like charts to make it clear. If things are good, explain why. If there are problems, be honest and say what you're doing about it. Keep them updated and answer their questions. By using simple ways to measure and being clear, you help clients understand how their investments are doing and trust what you say.

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2 What is performance attribution?

Performance attribution is the process of decomposing the portfolio's performance into different components that explain the sources of return and risk. It helps you identify how much of the performance is due to your asset allocation, security selection, market timing, or other factors. Performance attribution also helps you compare your portfolio's performance with the benchmark and understand the drivers of the differences.

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Vivek Raj

▪️CFP®, CWM®, ACCA ▪️Queen Margaret University ▪️Career Architect ▪️Crafting Success-Your Monetary Guide ▪️Leading Launch of Startups ▪️Building Brands
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Performance measurement is like checking how well your investments are doing. It uses numbers to see if they're making money or not, comparing them to goals or standards. Performance attribution is a closer look at why your investments did well or not so well. It breaks down the reasons, like if it was because of where you put your money, which specific things you picked, or when you did it. This helps you understand what worked and what didn't, making it easier to decide what to do next with your investments.

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3 How to use performance measurement and attribution to communicate with clients?

Performance measurement and attribution can provide your clients with clear and comprehensive reports that demonstrate your achievements, challenges, and value proposition as an investment manager. For instance, you can show how you outperformed the benchmark by selecting the right securities or sectors, or how you increased the portfolio's risk by taking on more leverage or concentration. Additionally, you can demonstrate how you delivered consistent and superior returns over time, or how you customized the portfolio to meet the client's specific needs and preferences. By presenting this information to your clients, you can build trust and confidence by increasing your transparency and accountability, showing that you are aligned with their interests and goals.

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Vivek Raj

▪️CFP®, CWM®, ACCA ▪️Queen Margaret University ▪️Career Architect ▪️Crafting Success-Your Monetary Guide ▪️Leading Launch of Startups ▪️Building Brands
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When you talk to clients about their money, use simple measures to show how things are going. Say if their money is growing or not and compare it to others. Use pictures like charts to make it easy to see. Also, explain why their money did well or not so well whether it's because of where it's invested or choices made. Tell them the truth about any issues and what you're doing about them. Keep them updated, answer their questions, and talk in a way that's easy to understand. This way, clients can understand how their money is doing and trust what you say.

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4 What are some best practices for performance measurement and attribution?

To use performance measurement and attribution effectively, it is important to follow some best practices. Choose a benchmark that matches the portfolio's characteristics and expectations - one that is investable, representative, transparent, and consistent. Additionally, use a consistent and standardized methodology for calculating and evaluating performance, such as the Global Investment Performance Standards (GIPS) or the CFA Institute's Performance Presentation Standards (PPS). When selecting a time horizon for measuring and attributing performance, consider the portfolio's investment strategy, objectives, and constraints, as well as the client's expectations and preferences. Finally, use clear and simple language and visuals to present and explain performance - avoid jargon, acronyms, or technical terms that may confuse or mislead the client. Utilize charts, tables, or graphs to illustrate the key points and trends.

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5 What are some challenges and limitations of performance measurement and attribution?

Performance measurement and attribution are not perfect tools, and they come with some challenges and limitations. These include data quality and availability, as accurate and timely data is necessary for measuring and attributing performance. However, this data may be incomplete, inconsistent, or unreliable, particularly for illiquid or complex assets or markets. Additionally, model assumptions and biases can introduce errors or biases when the model does not capture the reality or complexity of the portfolio or the market. Finally, interpretation and communication of the results of performance measurement and attribution can be misleading or misunderstood when results are noisy, volatile, or contradictory.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you use performance measurement to communicate investment results to clients?

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1 What is performance measurement?

2 What is performance attribution?

3 How to use performance measurement and attribution to communicate with clients?

4 What are some best practices for performance measurement and attribution?

5 What are some challenges and limitations of performance measurement and attribution?

6 Here’s what else to consider

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