Practical Portfolio Performance Measurement and Attribution, 3rd Edition

1Introduction

We learn more by looking for the answer to a question and not finding it than we do from learning the answer itself.

Lloyd Alexander (1924–2007)

Who questions much, shall learn much, and retain much.

Francis Bacon (1561–1626)

WHY MEASURE PORTFOLIO PERFORMANCE?

Whether we manage our own investment assets or choose to hire others to manage the assets on our behalf we are keen to know “how well” our collection or portfolio of assets is performing.

The process of adding value via benchmarking, asset allocation, manager selection, security analysis, portfolio construction and executing transactions is collectively described as the investment decision process. The measurement of portfolio performance should be part of the investment decision process, not external to it.

Clearly there are many stakeholders in the investment decision process; this book focuses on the investors or owners of capital (asset owners) and the firms managing their assets (asset managers¹ or individual portfolio managers). Other stakeholders in the investment decision process include asset consultants tasked with providing advice to asset owners, custodians, independent performance measurers and audit firms (asset servicing firms).

Portfolio performance measurement answers the three basic questions central to the relationship between asset managers and asset owners:

1. What is the return on their assets?
2. Why has the portfolio performed that way?
3. How can we improve performance?

Portfolio performance ...