Performance Analysis: How to Compare Apples with Apples, Not Oranges

Performance analysis is an important part of any due diligence before hiring an investment advisor. However, “quick and dirty” performance comparisons oftentimes lead to confusion and misinterpretation. In our opinion, there are at least seven important questions to ask before any conclusions can be drawn from such an analysis.

  1. Is this real performance or theoretical, aspirational results? Understand whether the results presented are reflective of an actual strategy that was implemented, not just a hypothetical result. Remind yourself that no one has ever seen a bad “back test.”
  2. Are the results being evaluated net of fees? Be sure that you are comparing either gross of all fees or net of the same costs. “Fees” is a broad term and can encompass advisory fees, implementation costs, trading costs and custody fees.
  3. Is the performance representative of all accounts with similar client characteristics? Be sure that these results do not come from a “cherry-picked” account that is not representative of all clients with similar profiles. In other words, does the performance represent strategies for all clients of the investment advisor?
  4. Are the returns adjusted for risk? This is our biggest pet peeve. Reviewing a performance report that has not been risk-adjusted is like buying a house without ever visiting the neighborhood. What is often a great characteristic of a superior long-term track record is the focus on downside capture. Minimizing this allows returns to compound on low volatility to narrow the range of outcomes. It speaks to consistency and steadiness.
  5. Has the track record been generated over at least a full market cycle (in our opinion, seven years)? If so, how many? This will allow for a more complete attribution and contribution of returns when corroborating an advisor’s purported value-add (for example, asset allocation v. implementation).
  6. Have you taken into account the effects of cash flow on returns? Are you comparing time-weighted returns? The experience of a day one fully-invested client can be very different from a client who contributes and/or withdraws from portfolios meaningfully and regularly.
  7. Make sure there are appropriate benchmarks. The purpose of a benchmark is to provide context to assess whether clients are on course to meeting their investment goals and to evaluate the decisions an investment advisor makes to achieve those objectives. In our opinion, an absolute benchmark is necessary because it most clearly speaks to whether clients are making progress to plan.  At a secondary level, a blend of market indices can be used to measure opportunity and relative volatility over shorter time frames – but not whether the portfolio is keeping up “with the market” or the “Joneses” over a short time frame such as a month, quarter or year.

While the investment industry continues to move towards greater transparency on this issue[1], it is still often difficult to avoid misinterpreting performance comparisons because of the inconsistency with which the data is often presented. Asking these seven questions will help investors compare apples with apples – not apples with oranges – and should provide a more complete picture of an investment firm’s capabilities and track record.

[1] These seven suggestions encompass the spirit of the CFA Institute’s standard of GIPS compliance. Please see for more information.

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