The performance composite reported in marketing materials, Web sites and such performance databases as Mobius or Effron/PSN can be different and may address only one of many similar composites. In some cases, a manager will only report a composite of larger institutional accounts. These returns may be completely inappropriate for high-net-worth individuals.
Larger accounts also may distort returns in composites that include both institutional and high-net- worth accounts. For example, if a manager has 100 million-dollar accounts that returned 10% for the quarter and one $100 million-dollar account that returned 14% for the quarter, the asset-weighted composite performance would equal 12%. Under this scenario, if you had a million-dollar account, would you expect a 10% or 12% return for the period? The inclusion of both large institutional and smaller high-net-worth accounts distorts returns for the high-net-worth investor.
How The Analysis Is Done
In evaluating the composite returns of a private money manager, analysts consider what is represented in the composite returns. They first assess the percentage of the manager's portfolios and assets in the composite. Depending on which accounts are included, the ultimate reported performance would be influenced.
Additionally, the analyst assesses what types of assets were contributed to the composite performance in relation to their situation. Finally, the "reported dispersion" is analyzed, as well as the "expected dispersion," based on the composite construction. If the composite is constructed poorly, the reported dispersion is irrelevant.
To better illustrate this, following is a case study of three managers and the composites that they made available to major performance-reporting services. As can be seen, performance composites can be manipulated and must be studied to determine if they are adequately representative of the manager's performance history.
Manager A
The composite for this product includes 100% of all assets and 100% of all portfolios managed by the firm. However, the composite also includes both taxable and tax-exempt portfolios, which has the tendency to distort returns for the taxable investor. Furthermore, the composite includes substantial back-testing, which makes it non-AIMR compliant and possibly not representative of future individual portfolio performance. Portfolios are managed from a model portfolio, and as a result, dispersion should be minimal.
Manager B
The composite of the product is average in its representation of the performance of an individual portfolio. It contains approximately 95% of all assets managed in this style, but only 55% of the portfolios managed in this style, as well as portfolios with assets of $10 million or greater are included in the composite. It also contains taxable and tax-exempt portfolios, which can misrepresent performance for taxable investors. The composite has a low reported dispersion and is in compliance with AIMR Level II Performance Presentation Standards.