A Worksheet Technique for Measuring Performance

Abstract

RECENT issues of the Financial Analysts Journal and other professional publications have included many articles on measuring performance of accounts. These articles have accurately pointed out that competition among investment advisors is increasing sharply, and that customers are very much aware of the relative performance of their accounts. Under these circumstances every portfolio manager needs some unequivocal measure of performance against a reasonable standard. Such a measurement technique accomplishes two purposes. First, it keeps the customer from comparing performance of his account only against widely publicized successes which have achieved exceptionally high capital gains. The composition of such portfolios is not likely to be consistent with the stated objectives of the account, and no doubt involve more risk than the customer would be willing to accept before the fact. Second, performance measurement serves an internal purpose; it provides the means for control of investment policy and for appraisal of personnel and/or investment advisory services. Excellent work has been done in defining the standards and techniques of measurement, in articles and in discussions at professional meetings. However, almost all of the techniques proposed are too complex and too costly to apply widely. Most imply a computer program designed for the particular purpose. A case in point is the recent example given by Mobil Oil.' The approach is excellent but does not lend itself readily to widespread application. The objective of this article is to outline a simple technique for measuring performance. It requires no THEODORE H. SCHNEIDER, C.F.A., is Trust Investment Officer, Southern Arizona Bank & Trust Co., Tucson, Arizona. He is responsible for all trust investment functions at that bank. He holds a BSBA and MBA from the University of Denver and is a graduate of the Stonier Graduate School of Banking. The author gratefully acknowledges the help of William Gish and Edmund A. Mennis, C.F.A., who read an early draft of this article. The responsibility for remaining errors of theory or calculation, however, rest solely with the author. 1. Footnotes appear at end of article.