Future of Performance Measurement Presentation

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

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

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

1. What happened over the last 10 years?

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.
...
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

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
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%

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.
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.
...
2. What are the current trends?

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

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
=> ...
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
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.)
=> ...
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

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
=> ...
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
=> ...
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
=> ...
3. What will happen over the next 10 years?

Performance measurement
Comprehensive performance
measurement framework established
(1/4)
All kind of performance

analytics available
(2/4)
Instruments
Asset classes
Portfolios
Total assets
Absolute and relative

return contributions
Level of detail
Absolute and relative

risk contributions
"Slice & dice" performance

analytics available
(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

(4/4)
Risk Model : Global
Portfolio
Tracking Error
18.81%
2.57%
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

Risk attribution
Portfolio
Benchmark
Risk Model : Global
Portfolio
Tracking Error
67
1'550
18.81%
2.57%
18.66%
1.50%
Risk Model : Global
- Region
11.50%
0.18%
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
18.66%
18.18%
2.39%
1.02%
2.57%
Relative Value at Risk

R-squared
Beta-adjusted Risk
3'570'469
0.98
18.64%
18.21%
Predicted Beta
1.02
1.86
2.01
28.39
26.00
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
Risk models
Model 1
Reality
Model 3
Model 2
Different risk models available to

analyze risk and its contributions from
different angles

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
Client reporting
Performance
Compliance
Fees
Transactions
Assets
Comprehensive client reporting

covering all aspects of performance
analytics

Certification and (self-)regulation
MiFID
Performance
examinations
Process reviews
Increased (self-)regulation
Broader acceptance of external /
independent verifications or certifications
4. What is the biggest challenge in mastering the future?

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
Portfolio Value
Value at Risk (at 97.7%)
R-squared
Beta-adjusted Risk
Predicted Beta
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

5. Final remarks

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!

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Future of

1. What happened over the last 10 years?

Produced by: Dr. Stefan J. Illmer

2.4. Increasing (self-)regulation

Produced by: Dr. Stefan J. Illmer

3.7. Certification and (self-)regulation

Produced by: Dr. Stefan J. Illmer

1. What happened over the last 10 years?

Produced by: Dr. Stefan J. Illmer

Typical circumstances 10 years ago

Hardly any performance databases established.

Developments in performance measurement / attribution

from ex post to ex ante

Produced by: Dr. Stefan J. Illmer

Review of the last 10 years - what happened ?

Equities World BM MSCI active Mandates direct

MSCI World (ri) in CHF

Asset Weighted Gross Return

Indexed Cumulative Relative Returns

Annual Risk Figures in %

Monthly Relative Returns

Risk Model : Global

Total Risk (ex-ante)

Factor Specific Risk

Risk Model : Global

Calendar Year Returns in %

Total Risk (ex-ante)

- Factor Specific Risk

- Stock Specific Risk

Tracking Error (ex-ante)

Stock Specific Risk

Relative Value at Risk

Predicted Dividend Yield

P/E Ratio (E: 12 months)

P/B Ratio (B: year-end)

Produced by: Dr. Stefan J. Illmer

Current status of performance measurement

Performance databases established and performance reporting

Current status of performance measurement

CIPM Program as the first certification program for performance

2. What are the current trends?

Produced by: Dr. Stefan J. Illmer

Hot topics on performance measurement

increasing requirements from

increasing issues because of

increasing requirements for

Produced by: Dr. Stefan J. Illmer

Increasing asset manager needs

Increasing client needs

increasing requirements by the regulators

increasing need for guidance on performance related issues

valuation of illiquid securities

Produced by: Dr. Stefan J. Illmer

Increasing need for education and training

Increasing technical discussions / requirements

increasing debates on the shortcomings and the appropriateness

Increasing technical discussions / requirements

increasing need for daily securities and benchmark data

3. What will happen over the next 10 years?