Practical Portfolio Performance Measurement and Attribution / Edition 2

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Thoroughly revised and substantially enhanced, the second edition of Carl Bacon’s work is indispensable for serious investment performance professionals.

—Philip Lawton, CFA, CIPM Head, CIPM Program, CFA Institute

He’s a standout, a true expert in the field. In an industry rife with interpretive necessity, Carl stays the course with useful instruction, experienced guidance, and well organized references to the mechanics of performance measurement and attribution. It’s a practical resource that will continue to garner the audience it deserves."

—Tobin S. Cochran, Partner/President, Ashland Partners & Company LLP

Carl Bacon is one of the most knowledgeable professionals I know on the subject of performance measurement. He has been a pioneer, leader, and teacher at the forefront of developments in global investment performance measurement and attribution, risk measurement, and industry standards. I am very pleased he has significantly updated this timely and useful book with new emphasis on fixed income attribution, hedge funds, and derivatives. It is a great reference for all investment management professionals.”

—James Hollis, Managing Director, Cutler Associates

Carl has updated his book with further developments and to reflect his extensive travels and discussion about Performance Measurement. This second edition is now the most comprehensive guide to calculation and reporting techniques around the world and should be a feature on the desk of anyone working in, or using, Performance Measurement.”

—Brian Chapman, Director and Leader of GIPS related services, KPMG

Carl’s first edition is a renowned reference manual. The second edition not only enhances each and every chapter but also addresses many of the latest topics in our industry. Carl’s books always deliver unassailable help in an exceptionally effective manner; a compelling instructional handbook.”

—Mark Goodey, Head of Performance, Morley Fund Management (AVIVA Investors)

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Product Details

  • ISBN-13: 9780470059289
  • Publisher: Wiley
  • Publication date: 7/15/2008
  • Series: Wiley Finance Series, #546
  • Edition number: 2
  • Pages: 400
  • Product dimensions: 6.90 (w) x 9.80 (h) x 1.10 (d)

Meet the Author

CARL BACON CIPM, is Chairman of StatPro, a data and software development specialist providing services for the asset management industry. He also runs his own consultancy business providing advice to asset managers on various risk and performance measurement issues.

Prior to joining StatPro, Carl was Director of Risk Control and Performance at Foreign & Colonial Management Ltd., Vice President Head of Performance (Europe) for J P Morgan Investment Management Inc., and Head of Performance for Royal Insurance Asset Management.

Carl holds a B.Sc. Hons. in Mathematics from Manchester University, is an executive committee member of and also an associate tutor for 7city Learning. A founder member of both the Investment Performance Council and GIPS®, Carl is ex-chair of the IPC Interpretations & IPC Verification Sub-Committees, and is a member of the Advisory Board of the Journal of Performance Measurement.

Author of the first edition of Practical Portfolio Performance Measurement & Attribution published in 2004 as part of the Wiley Finance Series, Carl is also Editor of Advanced Portfolio Attribution Analysis.

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Read an Excerpt

Practical Portfolio Performance Measurement and Attribution

By Carl Baron

John Wiley & Sons

ISBN: 0-470-85679-3

Chapter One


The more precisely the position is determined, the less precisely the momentum is known in this instant, and vice versa. Heisenberg, The Uncertainty Principle (1927)


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 are performing.

The process of adding value via benchmarking, asset allocation, 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 and the firms managing their assets (asset managers or individual portfolio managers). Other stakeholders in the investment decision process include independent consultants tasked with providing advice to clients, custodians, independent performance measurers and audit firms.

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

(1) What is the return on assets?

(2) Why has theportfolio performed that way?

(3) How can we improve performance?

Portfolio performance measurement is the quality control of the investment decision process and provides the necessary information to enable asset managers and clients to assess exactly how the money has been invested and the results of the process. The US Bank Administration Institute (BAI) laid down the foundations of the performance measurement process as early as 1968. The main conclusions of their study hold today:

(1) Performance measurement returns should be based on asset values measured at market value not at cost.

(2) Returns should be "total" returns (i.e., they should include both income and changes in market value - realized and unrealized capital appreciation).

(3) Returns should be time-weighted.

(4) Measurement should include risk as well as return.


The vocabulary of performance measurement and the multiple methodologies open to performance analysts worldwide are extremely varied and complex.

My purpose in writing this book is an attempt to provide a reference of the available methodologies and to hopefully provide some consistency in their definition.

Despite the development and global success of performance measurement standards there are considerable differences in terminology, methodology and attitude to performance measurement throughout the world.

Few books are dedicated to portfolio performance measurement; the aim of this one is to promote the role of performance measurers and to provide some insights into the tools at their disposal.

With its practical examples this book should meet the needs of performance analysts, portfolio managers, senior management within asset management firms, custodians, verifiers and ultimately the clients.

Performance measurement is a key function in an asset management firm, it deserves better than being grouped with the back office. Performance measurers provide real added value, with feedback into the investment decision process and analysis of structural issues. Since their role is to understand in full and communicate the sources of return within portfolios they are often the only independent source equipped to understand the performance of all the portfolios and strategies operating within the asset management firm.

Performance measurers are in effect alternative risk controllers able to protect the firm from rogue managers and the unfortunate impact of failing to meet client expectations.

The chapters of this book are structured in the same order as the performance measurement process itself, namely:

(1) Calculation of portfolio returns.

(2) Comparison against a benchmark.

(3) Proper assessment of the reward received for the risk taken.

(4) Attribution of the sources of return.

(5) Presentation and communicating the results.

First, we must establish what has been the return on assets and to make some assessment of that return compared with a benchmark or the available competition.

In Chapter 2 the "what" of performance measurement is introduced describing the many forms of return calculation, including the relative merits of each method together with calculation examples.

Performance returns in isolation add little value; we must compare these returns against a suitable benchmark. Chapter 3 discusses the merits of good and bad benchmarks and examines the detailed calculation of commercial and customized indexes.

Clients should be aware of the increased risk taken in order to achieve higher rates of return; Chapter 4 discusses the multiple risk measures available to enhance understanding about the quality of return and to facilitate the assessment of the reward achieved for risk taken.

Chapter 5 examines the sources of excess return with the help of a number of performance attribution techniques.

Finally, in Chapter 6 we turn to the presentation of performance and consider the global development of performance presentation standards.


Excerpted from Practical Portfolio Performance Measurement and Attribution by Carl Baron Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents


1. Introduction.

2. The Mathematics of Portfolio Return.

3. Benchmarks.

4. Risk.

5. Performance Attribution.

6. Multi-currency Attribution.

7. Fixed Income Attribution.

8. Multi-period Attribution.

9. Further Attribution Issues.

10. Performance Measurement for Derivatives.

11. Performance Presentation Standards.

Appendix A. Simple Attribution.

Appendix B. Multi-currency Attribution Methodology.

Appendix C. EIPC Guidance for Users of Attribution Analysis.

Appendix D. European Investment Performance Committee - Guidance on Performance Attribution Presentation.

Appendix E. The Global Investment Performance Standards.

Appendix F. Guidance Statement on Composite Definition.

Appendix G. Sample Global Investment Performance Standards Presentation.

Appendix H. Calculation Methodology Guidance Statement.

Appendix I. Definition of Firm Guidance Statement.

Appendix J. Treatment of Carve-outs Guidance Statement.

Appendix K. Significant Cash Flow Guidance Statement.

Appendix L. Guidance Statement on Performance Record Portability.

Appendix M. Guidance Statement on the Use of Supplemental Information.

Appendix N. Guidance Statement on Recordkeeping Requirements of the GIPS Standards.

Appendix O. Useful Websites.



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