Performance Measurement and Benchmarking

Abstract

Performance measurement is a critical part of the management process in almost every sophisticated organization, and it is particularly important in the investment world. This chapter discusses performance measurement and benchmarking tasks of a Fiduciary Manager. The role of the Fiduciary Manager is to bring its expertise to bear on the task of measuring results and finding the meaning of those results. By combining technical expertise in measuring results with communication skills in helping an institution understand the full meaning of the results, the Fiduciary helps the institution formulate the right questions and move toward the right answers in formulating and modifying its investment policies and approaches. In the context of Fiduciary Management, there are three levels of benchmarking: liability driven, strategic, and detailed benchmarking. The distinction between these three originates from the planning cycle of an institutional investor. Benchmarks clearly indicate the extent to which managers add value. When evaluating the managers’ contribution, it is important to measure risk as well as return. In fact, only the risk adjusted net return of managers should be relevant to the fund.