Future of

Performance Measurement
Version 2.0
Date: April 2010
Produced by: Dr. Stefan J. Illmer

Agenda

(1/3)

1. What happened over the last 10 years?

1.1. Typical circumstances 10 years ago
1.2. Developments in performance measurement / attribution
1.3. Review of the last 10 years - what happened?
1.4. Current status of performance measurement
2. What are the current trends?
2.1. Hot topics on performance measurement
2.2. Increasing asset manager needs
2.3. Increasing client needs

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 2

Agenda

(2/3)

2.4. Increasing (self-)regulation

2.5. Increasing need for education and training
2.6. Increasing technical discussions / requirements
3. What will happen over the next 10 years?
3.1. Performance measurement
3.2. Performance attribution
3.3. Risk attribution
3.4. Risk models
3.5. Data management
3.6. Client reporting

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 3

Agenda

(3/3)

3.7. Certification and (self-)regulation

4. What is the biggest challenge in mastering the future?
4.1. Managing the expectation gap
5. Final remarks
5.1. Final remarks

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 4

1. What happened over the last 10 years?

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 5

Typical circumstances 10 years ago

Hardly any performance databases established.

No performance reporting tool.
Return attribution or risk attribution rarely provided.
Monthly return calculation on portfolio level using the original Dietz
method.
Trade date accounting or accrual accounting for dividends rarely
undertaken.
AIMR-PPS hardly known and implemented.
Performance monitoring or risk management framework, if at all,
only partly implemented.
No educational program for performance specialists.
...
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 6

Developments in performance measurement / attribution

Status quo /
best practice
time

Risk

Derivatives

Benchmark

Factors

"correct" return
methodology

Stocks
From
quarterly to
monthly

Return
Absolute
profit

Portfolio view

Performance measurement

Sectors
Asset classes
/ countries

From monthly
to daily

from ex post to ex ante

Detailed analysis
(Return and risk decomposition)

Performance attribution

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 7

Review of the last 10 years - what happened ?

Equities World BM MSCI active Mandates direct

Benchmark
No. of A/Cs
Composite Code

MSCI World (ri) in CHF

5
ZU-COMP250

Series Type
Inception Date
Reporting Date

Asset Weighted Gross Return

01 Jan 1997
31 Dec 2003

Reporting Currency
Market Value (m) End of Period

CHF
84.27

Indexed Cumulative Relative Returns

Periodical Returns in %
Benchmark

1.67
6.60
8.43
17.98
-12.65
-13.77
-13.70
-2.33
4.05

135

Relative

1.69
7.11
9.58
19.64
-10.46
-11.82
-11.83
-2.46
3.93

-0.03
-0.50
-1.15
-1.66
-2.18
-1.96
-1.87
0.13
0.12

130

Annual Risk Figures in %

Volatility over 1 Year
Volatility Since Inception
Sharpe Ratio over 1 Year
Sharpe Ratio Since Inception
Tracking Error over 1 Year
Tracking Error Since Inception
Information Ratio over 1 Year
Information Ratio Since Inception
Correlation over 1 Year
Correlation Since Inception

17.98
17.98
-35.32
-15.99
-13.46
60.21
21.29
22.50

Benchmark

Composite
16.90
22.98
1.06
0.10
2.12
4.69
-0.78
0.03
0.99
0.98

115

by MSCI Sector

110
105

95

Relative

19.64
19.64
-32.99
-14.47
-11.84
46.07
17.51
26.25

90

-1.66
-1.66
-2.33
-1.52
-1.62
14.14
3.78
-3.75

Incep

Aug 98

Jun 99

Apr 00

Feb 01

Dec 01

Oct 02

Aug 03

4
3

Benchmark
15.80
20.80
1.24
0.10
N/A
N/A
N/A
N/A
N/A
N/A

Oct 97

Monthly Relative Returns

in %

Composite

Benchmark

Risk Model : Global

Portfolio

Tracking Error

67

1'550

Total Risk (ex-ante)

18.81%

2.57%

Number of Currencies

Factor Specific Risk

18.66%

1.50%

-0.89%
0.36%
-0.21%
-0.30%
0.51%
1.07%
-1.12%
-0.35%
0.03%
0.36%
-0.78%
-1.32%

Portfolio Value

- Region

11.50%

0.18%

Risk Model : Global

120

100

Calendar Year Returns in %

YTD
2003
2002
2001
2000
1999
1998
1997

Portfolio

Number of Securities

Total

125
Indexed Returns

Composite
1 Month
3 Months
6 Months
1 Year
2 Years
3 Years
4 Years
5 Years
Since Incep.

Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecomm Services
Utilities
Cash
Total

Asset
Allocation
0.00%
0.05%
0.00%
-0.10%
0.20%
-0.04%
-0.21%
0.01%
-0.11%
0.02%
-0.78%
-0.96%

Stock
Selection
-0.86%
0.28%
-0.19%
-0.21%
0.35%
0.99%
-0.91%
-0.28%
0.21%
0.74%
0.00%
0.13%

Interaction
-0.03%
0.03%
-0.02%
0.01%
-0.03%
0.12%
0.01%
-0.08%
-0.08%
-0.41%
0.00%
-0.49%

84'334'091

Total Risk (ex-ante)

18.81%

18.21%

- Country

6.98%

0.83%

- Factor Specific Risk

18.66%

18.18%

- Industry

2.64%

0.77%

- Stock Specific Risk

2.39%

1.02%

- Fundamental

1.44%

0.78%

Tracking Error (ex-ante)

2.57%

- Currency

8.42%

0.27%

- Covariance (+/-)

9.35%

0.52%

Stock Specific Risk

2.39%

2.08%

Relative Value at Risk

R-squared

3'570'469
0.98

Beta-adjusted Risk

Predicted Beta

1.02

Predicted Dividend Yield

1.86

2.01

P/E Ratio (E: 12 months)

28.39

26.00

P/B Ratio (B: year-end)

2.58

2.56

-1
-2
-3
-4
Jan 97

Nov 97

Sep 98

Jul 99

May 00

Mar 01

Jan 02

Nov 02

Sep 03

18.64%

18.21%

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 8

Current status of performance measurement

(1/2)

Performance databases established and performance reporting

tool implemented.
Return attribution for equity and fixed income portfolios is common
practice.
Risk attribution for equity and fixed income portfolios established in
part.
Specific performance analytics for specific products partially
performed.
Daily return calculation on portfolio, as well as, stock level.
Trade date accounting and accrual accounting for dividends.
GIPS as the global PPS is broadly known and implemented.
Performance monitoring and/or risk management framework
partially implemented.
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 9

Current status of performance measurement

(2/2)

CIPM Program as the first certification program for performance

specialists.
Performance measurement seen as important support function for
marketing and controlling / compliance departments.
More often, performance measurement is seen as value added
function.
Performance measurement, data management and client reporting
moved together more closely.
Industry organizations addressing performance measurement and
presentations.
Regulators started to look at performance measurement and
presentations.
...
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 10

2. What are the current trends?

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 11

Hot topics on performance measurement

increasing needs of
- asset managers
- clients

increasing requirements from

- regulators
- industry organizations

increasing issues because of

lack in
- know-how / experience
- training programs for clients

increasing requirements for

- data providers
- software vendors

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 12

Increasing asset manager needs

increasing requirements on performance analytics
=> increased level of detail
=> better data and herewith reporting quality
=> better coverage of the managed portfolios, including multiasset class portfolios, hedge funds, derivatives, etc.
=> ...
increasing reporting needs
=> more detailed information
=> more flexibility on analytics and report design
=> higher frequency of report delivery
=> more reports available online
=> ...
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 13

Increasing client needs

increasing pressure to provide analytics also from the client's point
of view
=> client return versus portfolio manager analytics
=> addressing the absolute and less the relative analytics,
especially for private clients
=> ...
increasing pressure to provide analytics also for client's total
assets
=> including external assets (real estate, private equity, assets held
with other custodians, advisory accounts)
=> ...
providing more reporting and analytics to clients to meet their MIS
and data needs
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 14

Increasing (self-)regulation

(1/2)

increasing requirements by the regulators

=> for example in Europe UCITS or MiFID
=> more protection of the investors by requiring more
transparency
and
through
addressing
performance
presentations and risk measurement aspects
=> ...
further development of the performance presentation standards
=> GIPS 2010
=> new areas to be covered (performance attribution, client
reporting, valuation, etc.)
=> other performance presentation related standards (mutual
funds, private equity, real estate, etc.)
=> ...
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 15

Increasing (self-)regulation

(2/2)

increasing need for guidance on performance related issues

valuation of illiquid securities

performance fees

hedge funds
derivatives
risk measurement

performance attribution

structured products
performance reporting to
existing clients

client reporting

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 16

Increasing need for education and training

broader acceptance and use of educational / training programs
=> like the CIPM program
=> ...
integration of performance analytics or performance monitoring in
portfolio management training
=> as part of the investment process
=> as part of the quality assurance process
=> ...
more training programs for the (end-)investors
=> not only tailored to a portfolio manager perspective
=> to address the client specific analytics as well
=> ...
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 17

Increasing technical discussions / requirements

(1/2)

increasing debates on the shortcomings and the appropriateness

of certain calculation methodologies
=> development of a comprehensive return and risk calculation
framework
=> economical interpretation of calculation techniques
=> ...
increasing needs for developing risk models
=> to better reflect existing products or investment processes
=> to better address the risk view from clients
=> ...
increasing pressure on software vendors to provide the necessary
tools for the performance analytics
=> ...
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 18

Increasing technical discussions / requirements

(2/2)

increasing need for daily securities and benchmark data

=> reference data as well as prices
=> look-through for indirect investments or structured products
=> ...
increasing need to automatically incorporate "external" data
=> from different sources / custodians or other externally held
investments
=> ...
increasing need for integrated solutions
=> consistent use of calculation methodologies
=> consistent data throughout all systems and analytics
=> ...
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 19

3. What will happen over the next 10 years?

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 20

Performance measurement

Comprehensive performance
measurement framework established
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 21

Performance attribution

(1/4)

All kind of performance

analytics available
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 22

(2/4)

Instruments

Asset classes

Portfolios

Total assets

Performance attribution

Absolute and relative

return contributions
Level of detail

Absolute and relative

risk contributions

"Slice & dice" performance

analytics available
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 23

Performance attribution

(3/4)

Return and risk contribution

Return and risk attribution
Contributions to return and risk (absolute or relative)
Equities

Bonds

etc.

USA

Europe

etc.

Financials

Telecom

etc.

AAA

AA

etc.

Value

Growth

etc.

USD

JPY

etc.

Asset allocation

Stock picking

etc.

All kind of investment processes can

be analyzed
Consistent return and risk attribution

Investment process

Benchmark

Benchmark

SAA

SAA

TAA

TAA

Stock picking

Stock picking

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 24

Performance attribution

(4/4)

Risk Model : Global

Portfolio

Tracking Error

Total Risk (ex-ante)

18.81%

2.57%

Factor Specific Risk

18.66%

1.50%

- Region

11.50%

0.18%

- Country

6.98%

0.83%

- Industry

2.64%

0.77%

- Fundamental

1.44%

0.78% 3.0%

- Currency

8.42%

0.27%

- Covariance (+/-)

9.35%

0.52%

Risk and return measurement not

only on a static but dynamic basis

2.0%

1.5%

1.0%

0.5%

0.0%

2.0%

-0.5%

Stock Specific Risk

2.39%

2.08%

-1.0%

-1.5%

2.5%

1.5%

31.01.2003 28.02.2003 31.03.2003 30.04.2003 31.05.2003 30.06.2003 31.07.2003 31.08.2003 30.09.2003 31.10.2003 30.11.2003 31.12.2003

Total Monthly

0.04%

0.53%

-0.46%

0.49%

-0.99%

-0.08%

0.49%

-0.06%

-0.83%

-0.15%

-0.14%
1.0%

Asset Allocation Monthly

-0.12%

0.02%

0.16%

-0.63%

-0.12%

0.01%

0.05%

-0.15%

-0.17%

-0.07%

-0.02%

0.08%

Stock Picking Monthly

0.47%

0.47%

-0.55%

1.23%

-1.00%

-0.05%

0.41%

0.03%

-0.67%

0.04%

-0.05%

-0.18%

Interaction Monthly

-0.31%

0.04%

-0.07%

0.13%

-0.04%

-0.12%

0.03%

0.06%

0.01%

Total Cummulated

0.04%

0.57%

0.11%

0.60%

-0.39%

-0.47%

0.02%

-0.04%

-0.87%

-1.02%

Asset Allocation Cummulated

-0.12%

-0.10%

0.06%

-0.57%

-0.11%

-0.69%

-0.68%

-0.63%

-0.78%

-0.95%

-1.02%

-0.07%
-1.16%

0.5%
-1.04%

-0.14%

-0.04%
-1.30%
-0.96%

Stock Picking Cummulated

0.47%

0.94%

0.39%

1.62%

0.62%

0.57%

0.98%

1.01%

0.34%

0.38%

0.33%

0.15%

Interaction Cummulated

-0.31%

-0.27%

-0.34%

-0.45%

-0.32%

-0.36%

-0.33%

-0.27%

-0.26%

-0.38%

-0.45%

-0.49%

0.0%
Jan 03

Feb 03

Mrz 03

Apr 03

Mai 03

Jun 03

Jul 03

Aug 03

Sep 03

Total Tracking Error

Factor Specific

a) Region

b) Country

d) Fundamental

e) Currency

f) Covariance

Stock Specific

Okt 03

Nov 03

Dez 03

c) Industry

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 25

Risk attribution
Portfolio

Benchmark

Risk Model : Global

Portfolio

Tracking Error

Number of Securities

67

1'550

Total Risk (ex-ante)

18.81%

2.57%

Number of Currencies

Factor Specific Risk

18.66%

1.50%

Risk Model : Global

- Region

11.50%

0.18%

Total Risk (ex-ante)

18.81%

18.21%

- Country

6.98%

0.83%

- Industry

2.64%

0.77%

- Fundamental

1.44%

0.78%

- Currency

8.42%

0.27%

- Covariance (+/-)

9.35%

0.52%

Stock Specific Risk

2.39%

2.08%

Portfolio Value

84'334'091

- Factor Specific Risk

18.66%

18.18%

- Stock Specific Risk

2.39%

1.02%

Tracking Error (ex-ante)

2.57%

Relative Value at Risk

R-squared
Beta-adjusted Risk

3'570'469
0.98
18.64%

18.21%

Predicted Beta

1.02

Predicted Dividend Yield

1.86

2.01

P/E Ratio (E: 12 months)

28.39

26.00

P/B Ratio (B: year-end)

2.58

2.56

All securities can be mapped

Impact of liabilities and
leverage can be analyzed
All risk factors are relevant
for the decision makers
All risk factors are empirically
significant
Risk models have a high
degree of accuracy and very
small estimation errors
...

Risk attribution reflects full investment

universe and the whole investment process
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 26

Risk models
Model 1

Reality

Model 3

Model 2

Different risk models available to

analyze risk and its contributions from
different angles

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 27

Data management
All reference data is available for
securities - same for benchmark
constituencies - on a daily basis
Look-through is common
practice
Custodians and banks share the
necessary data and information
Standard interfaces
implemented for sharing data
and information
...
All needed data is available
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 28

Client reporting
Performance

Compliance

Fees

Transactions

Assets

Comprehensive client reporting

covering all aspects of performance
analytics

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 29

Certification and (self-)regulation

MiFID

Performance
examinations
Process reviews

Increased (self-)regulation
Broader acceptance of external /
independent verifications or certifications
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 30

4. What is the biggest challenge in mastering the future?

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 31

Managing the expectation gap

Portfolio

Return

Secondary Attribution
Groups of Country of
Incorp.

Primary Attribution
Groups of FT Sector

Attribution Effects

NAME (ID)

Composite

Asset Allocation

-0.79%

0.09%

PM

Mister X

Return Portfolio

-4.45%

Stock Selection

-0.52%

-2.74%

BENCHMARK

Index Y

Return Benchmark

-2.89%

Interaction

-0.25%

1.09%

PERIOD

31.12.2001 - 30.04.2002

Return Relative

-1.56%

Total

-1.56%

-1.56%

Overweights Primary Attribution

Attribution Analysis - Groups of FT Sector

Asset Allocation

5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%

0.2%
0.0%
-0.2%
-0.4%

es
Uti
liti

O
th
er

576
0

-1.0%
Basic
Industries

Cyclical
Consumer
Goods

Cyclical
Services

Finance

General Information
Industries
Tech

Non
Cyclical
Cons
Goods

Non
Cyclical
Services

Resources

Utilities

Other
Assets

Total

Attribution Analysis - Groups of Country of Incorp.

Asset Allocation

Stock Selection

1.0%
0.5%

15.31%
15.20%
1.83%

0.0%
-0.5%
-1.0%
-1.5%
-2.0%

-2.5%

s
te

To
ta
l

Sta
te
d
U
ni

in

nd

K in
gd
om
d

U
ni
te

S
pa

er
la

S
w
ed
en

Sw
itz

Por
tu
ga
l

ly

nds

Ita

N
or
w
ay

em
bo
ur
g

re
ec
e

Ire
la
nd

N
et
her
la

Lux

nd

nce

any

la

Fra

er
m
G

Eur
o

Fin

tria

iu

us
A

15.31%

ark

-3.0%
Be
lg

99
5
227'447'728
15.76%
15.53%
2.72%
2.35%
10'878'425
0.98
15.59%
1.02
2.22
38.19
5.34

Benchmark

-0.8%

D
en
m

Number of Securities
Number of Currencies
Portfolio Value
Total Risk (ex-ante)
- Factor Specific Risk
- Stock Specific Risk
Tracking Error (ex-ante)
Value at Risk (at 97.7%)
R-squared
Beta-adjusted Risk
Predicted Beta
Predicted Dividend Yield
P/E Ratio (E: 12 months)
P/B Ratio (B: year-end)

Portfolio

As
se
ts

-0.6%

Ba
Cy
s ic
cli
ca
In
du
lC
str
on
ie
su
s
m
er
G
C
oo
yc
ds
lic
al
Se
rv
ic
es
Fin
G
en
an
era
ce
l In
du
In
str
fo
No
ie
rm
s
n
ati
C
yc
on
lic
Te
al
ch
Co
No
ns
n
G
C
oo
yc
ds
lic
al
Se
rv
ic
es
Re
so
urc
es

Risk Analysis (end period)

Stock Selection

0.4%

2.37
29.42
4.68

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 32

5. Final remarks

Produced by: Dr. Stefan J. Illmer

Date: April 2010 Slide 33

Final remarks
Invest more time in identifying and defining the needs of the asset
managers and of the clients.
Accept that clients have specific needs with respect to
performance analytics.
Address not only the possibilities but also the limits of performance
measurement and consequently create realistic expectations.
Increase transparency and present necessary disclosures.
Ensure that appropriate resources are available.
Be aware of the cost-drivers and their impact on the total costs.
=> Put more emphasis on education as performance measurement
and attribution is not as easy as it often appears!
Produced by: Dr. Stefan J. Illmer
Date: April 2010 Slide 34