I just read an article that will be included in the proceedings of the GIPS Standards Annual Conference that was held in San Francisco this past September. The proceedings are scheduled to be published in March. The article is available on the CFA Institute website. I highly recommend the article to anyone who advises clients whose investment objectives include a spending policy.
Stephen Campisi, CFA, Director of Institutional Investments at Bank of America Merrill Lynch, gave a presentation that advocates presenting performance focused on the spending goals of the client. The cornerstone of the presentation is a notional portfolio that reflects the spending and portfolio growth objectives (e.g spending policy of 5% of portfolio value + portfolio growth equal to inflation) from the portfolio. This notional portfolio is then compared with the performance of a benchmark portfolio (reflecting investment allocation policy) and the actual portfolio experience. The difference between the notional portfolio and the benchmark portfolio is attributable to market conditions, over which the client, advisor, and money managers have no control. The difference between the benchmark portfolio and the actual portfolio can be credited to the decisions of the investment team. The article presents several tables and charts that can be used to present the data in simple client friendly manner.
This focus on the client's objectives is consistent with the theme of Charles Ellis' Investment Policy: How to Win the Loser's Game. While the performance figures are nice, and actually have a lot of information, ultimately performance is only a means to the goal of spending, be it college expenses for a child, pension payments to retirees, or support payments for a charitable organization. Meeting those specific objectives over a reasonable time horizon can, and should, be the greatest measure of success. Excess return is cocktail party fodder.
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