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Investment - The Performance Evaluation Process
Performance Evaluation
Investors are interested in knowing how their investments have performed. For retail investors, the success of their investments may determine whether they will experience a happy retirement, if they will have enough money to send their children to university, or whether they can finance their ideal getaway. Likewise, pension plans, foundations, and other institutional investors want to monitor the performance of their investments to guarantee that the assets will be sufficient to meet their spending needs.
The performance of a fund is also crucial to an investing firm. Measuring and analyzing fund performance is crucial to controlling and enhancing the investing process.
But knowing the return achieved by a fund is only half of the process of performance review. Investment management is a competitive industry.
Both investors and investment businesses will want to know how funds have done relative to key financial market benchmarks (e.g., a stock index like the S&P 500 Index in the United States or the Hang Seng Index in Hong Kong) and comparing to their peers.
" " In addition, interested parties will want to know how the fund manager accomplished the performance – for example, if the performance was the consequence of talent or luck, or possibly even excessive risk-taking.
It is only via the rigorous evaluation of investment performance that investors and investment firms can make informed judgments about their investments. After reviewing a fund’s performance, investors can decide whether they wish to continue to invest in the fund or sell all or part of their investment in the fund. Similarly, an investment firm can analyze the fund’s performance to see whether the fund is performing as predicted given its strategy and market conditions or whether changes need to be made to the investment process.
The performance evaluation process contains four discrete, but connected, components:
measure absolute returns
measure relative returns
alter returns for risk
attribute performance
Performance Evaluation
Investors are interested in knowing how their investments have performed. For retail investors, the success of their investments may determine whether they will experience a happy retirement, if they will have enough money to send their children to university, or whether they can finance their ideal getaway. Likewise, pension plans, foundations, and other institutional investors want to monitor the performance of their investments to guarantee that the assets will be sufficient to meet their spending needs.
The performance of a fund is also crucial to an investing firm. Measuring and analyzing fund performance is crucial to controlling and enhancing the investing process.
But knowing the return achieved by a fund is only half of the process of performance review. Investment management is a competitive industry.
Both investors and investment businesses will want to know how funds have done relative to key financial market benchmarks (e.g., a stock index like the S&P 500 Index in the United States or the Hang Seng Index in Hong Kong) and comparing to their peers.
" " In addition, interested parties will want to know how the fund manager accomplished the performance – for example, if the performance was the consequence of talent or luck, or possibly even excessive risk-taking.
It is only via the rigorous evaluation of investment performance that investors and investment firms can make informed judgments about their investments. After reviewing a fund’s performance, investors can decide whether they wish to continue to invest in the fund or sell all or part of their investment in the fund. Similarly, an investment firm can analyze the fund’s performance to see whether the fund is performing as predicted given its strategy and market conditions or whether changes need to be made to the investment process.
The performance evaluation process contains four discrete, but connected, components:
measure absolute returns
measure relative returns
alter returns for risk
attribute performance
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