Performance presentation

What Is Performance Presentation?

Performance presentation refers to the comprehensive process by which investment firms and professionals communicate the historical portfolio performance of their strategies, portfolios, or pooled funds to existing or prospective clients. This crucial aspect of investment management falls under the broader category of financial reporting and aims to provide clear, accurate, and fair representations of investment results. Effective performance presentation is essential for building transparency and trust within the financial industry, allowing investors to make informed decisions by evaluating a firm's past success in meeting its stated objectives.

History and Origin

The need for standardized performance presentation emerged as the investment industry grew in complexity and global reach. Historically, there was a lack of consistency in how investment firms calculated and presented their rate of return, leading to potential confusion and difficulties in comparing different managers. In response to these challenges, the Association for Investment Management and Research (AIMR), the predecessor to the CFA Institute, developed the Performance Presentation Standards (PPS) in 1987. These voluntary guidelines for U.S. and Canadian firms aimed to promote fair representation and full disclosure of investment results,¹¹.

Recognizing the increasing globalization of financial markets, the CFA Institute led the initiative to create a single, globally accepted standard. This led to the introduction of the Global Investment Performance Standards (GIPS) in 1999, which superseded the AIMR-PPS in 2006,¹⁰. The GIPS standards are a practitioner-driven set of ethical principles designed to ensure fair representation and full disclosure of investment performance across firms worldwide, fostering greater investor confidence⁹,⁸. The most recent major update to the GIPS standards, the 2020 edition, became effective on January 1, 2020, reflecting ongoing industry evolution⁷,⁶.

Key Takeaways

• Performance presentation is the process of communicating historical investment results to clients and prospective clients.
• It is governed by ethical guidelines and regulations, such as the Global Investment Performance Standards (GIPS) and SEC marketing rules.
• The primary goal is to ensure fair representation, full disclosure, and comparability of investment performance.
• Key elements include presenting net-of-fee returns, adhering to specified time periods, and avoiding misleading practices.
• Transparent performance presentation is vital for investor due diligence and informed decision-making.

Interpreting Performance Presentation

Interpreting performance presentation requires an understanding of the underlying methodologies and disclosures. Investors should look for clear, consistent, and complete information, enabling a meaningful evaluation of an investment strategy or manager. A well-presented performance record will typically include returns calculated net of all fees, presented over various time periods, and compared against an appropriate benchmark. It is crucial to examine the context of the returns, including the strategy's investment objective, the level of risk taken (often indicated by risk-adjusted returns), and any significant changes in investment personnel or methodology during the reporting period. Fair performance presentation helps investors assess a firm's ability to consistently generate returns relative to its stated goals and market conditions.

Hypothetical Example

Consider "Horizon Capital," an investment firm that manages a balanced growth strategy. For their quarterly performance presentation to potential clients, they compile a report detailing the strategy's returns over the past one, three, five, and ten years, as well as since inception.

Horizon Capital ensures that all returns are calculated after deducting management fees and other expenses. They present these returns alongside the performance of a relevant industry benchmark, such as a composite index of 60% global equities and 40% global bonds. The presentation includes a clear disclosure of the methodology used for calculating returns, the specific benchmark employed, and any limitations, such as the fact that past performance is not indicative of future results. They also provide a narrative explanation of significant market events during the period and how the asset allocation decisions impacted the portfolio's results. This comprehensive approach allows prospective clients to understand the firm's historical performance within its appropriate context.

Practical Applications

Performance presentation is a core component across various facets of the financial industry. In investment management, firms rely on robust performance presentation systems to attract new clients, report to existing ones, and demonstrate adherence to fiduciary duty. Regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC), impose strict rules on how investment advisers advertise performance, prohibiting misleading statements and requiring specific disclosures. For instance, the SEC's marketing rule generally requires that whenever gross performance is presented, net performance must also be shown with at least equal prominence⁵,⁴.

For institutional investors like pension funds and endowments, performance presentation is vital for monitoring their investment managers and making informed allocation decisions. Platforms like Morningstar provide independent analysis and data that assist investors in comparing reported performance across various investment products³. Performance presentation also underpins the selection process for consultants advising clients on manager selection, ensuring that managers’ reported track records are consistent and verifiable.

Limitations and Criticisms

Despite the push for standardization through initiatives like the GIPS standards, challenges and criticisms remain regarding performance presentation. One significant limitation is the potential for firms to engage in "cherry-picking," where only the best-performing accounts or time periods are showcased, or "survivorship bias," where poorly performing portfolios are excluded from aggregates. ²Although regulations and standards aim to prevent such practices, ongoing vigilance is necessary.

The SEC, for example, has taken SEC's enforcement actions against investment advisers for violations of its marketing rule, including advertising misleading model performance or hypothetical performance without adequate policies and procedures. ¹Another critique revolves around the complexity of calculating and verifying performance for certain asset classes, particularly illiquid investments or those in private funds, where valuations can be subjective and less frequent. Even with rigorous standards, the art of interpreting reported performance remains critical for investors and requires careful review of disclosures and methodologies.

Performance Presentation vs. Investment Performance Reporting

While closely related, "performance presentation" and "investment performance reporting" refer to distinct but interconnected aspects of communicating investment results.

Investment performance reporting primarily focuses on the calculation and measurement of investment returns. This involves the quantitative process of determining the actual financial gains or losses of a portfolio or strategy over a specific period, often using established methodologies for computing rates of return, such as time-weighted or money-weighted returns. It's about generating the raw numbers and detailed breakdowns that accurately reflect the investment's financial outcome.

Performance presentation, on the other hand, refers to the communication and display of these calculated performance figures to clients, prospective clients, or other stakeholders. It encompasses the design, content, and context of the materials (e.g., pitch books, fact sheets, client statements) used to convey the performance information. This includes decisions about which metrics to highlight, the visual layout, narrative explanations, and crucially, adherence to regulatory and ethical standards (like GIPS) to ensure the information is fair, accurate, and not misleading. Essentially, reporting is the engine that produces the data, while presentation is the vehicle that delivers it in a clear and compliant manner.

FAQs

What are the Global Investment Performance Standards (GIPS)?

The GIPS standards are a set of voluntary, ethical principles developed by the CFA Institute for investment management firms. They provide a standardized, industry-wide approach for calculating and presenting historical investment results, ensuring fair representation and full disclosure to prospective clients. Adhering to GIPS allows investors to more easily compare the portfolio performance of different firms globally.

Why is fair performance presentation important for investors?

Fair performance presentation is critical for investors because it enables them to conduct proper due diligence and make informed investment decisions. Without consistent and transparent reporting, investors would struggle to accurately assess a manager's true capabilities, compare different investment opportunities, or understand the actual risks and returns associated with a strategy. It fosters investor confidence and helps prevent misleading claims.

Does performance presentation include future projections?

No, performance presentation typically focuses on historical results. While some marketing materials might discuss investment objectives or potential future scenarios, regulated performance presentations strictly deal with past financial statements and returns. Investment firms are generally prohibited from guaranteeing or projecting future returns.