Performance Transparency

We have another special posting from Michael Lissner today, who will be writing Daily Insights more regularly.  Also, there was a large typo yesterday, which said that we had traded $223.2 billion worth of stocks and ETFs.  Far from it: we traded $223.2 million in stocks and ETFs, which is still a lot, but less than what I wrote, which makes more sense given our $1.2 billion in assets under management.  My apologies for the error. – David 

Last week I commented on the genius of John Wanamaker who, over 100 years ago, built a hugely successful retail business based on honesty and transparency (see the article here).  At his death in 1922 he was worth about $100 million dollars; today he would be a billionaire.

While few of us know of him, he is credited with inventing the price tag, clearly marking each product and in the process saving his customers and salesmen negotiation time.  He also invented the money-back guarantee and was a major philanthropist and humanitarian.

As a follow-up to last week’s article on Time and (Fee) Transparency, I wanted to comment on Performance Transparency.

It is common for prospects to give us a copy of their existing portfolio statement to review and comment on.  A couple of the things I routinely comment on, both good and bad, are diversification and fees.

Some portfolios are well diversified, but often times we find that diversification has been misunderstood.  (For example, owning five large cap growth funds is not very well diversified.)

Regarding fees, sometimes they are reasonable, sometime not.  Often the fees are hidden and we have to dig a little to find them.  In my experience, the harder it is to uncover the fees, the higher the fees are.  The more transparent they are, the lower they are.

When reviewing prospect’s portfolio, one observation I have failed to comment on is performance transparency, or lack thereof.  I guess because my expectations are too low.

Most managers only report performance in terms of starting balance and ending balance.  We believe they should report performance in percentage terms and do so relative to a realistic benchmark.  Bad on me; I will try to do a better job of highlighting this for prospects in the future.

Process is very important, as is having “decent” performance.  Acropolis does not (and cannot) time the market and therefore will not consistently out-perform the market.  I do not believe that anyone can consistently do that.

Most investment managers I’ve met during various conferences and or in the community claim two things.  First, they say that performance is important, and second they say that they “out-perform” the market.

When asked if they report the clients’ performance on their statements, the answer is almost universally “No”.

This discrepancy may seem confusing.  However, the manager is either fooling themselves or trying to fool me when they claim they out-perform.  If they really are confident that they outperform, they would report it.  Even if they underperform, but think it is important, then they would report it.

From our first day, Acropolis has reported the actual performance of the portfolio (after fees) and the performance relative to a similar benchmark.  (Just saying you are up 12% says something much different if the market is up 5% or 20%.)

A few good questions to ask are:

  • How important is performance?
  • Do you clearly report the performance (net of fees) for the quarter, year and since inception?
  • Do you show the net performance relative to a similar benchmark?

If they say performance is important, and it is not on your reports, it is reasonable to ask why (remember, it’s not hard, Acropolis was able to do it as a start-up and, to the best of my knowledge, all portfolio accounting software packages calculate performance).  There are no “technical” reasons to avoid reporting performance; it is a choice.  And a choice that speaks volumes about the manager.

So why does almost no one report performance?  Because most advisors underperform the benchmark.  Putting it on the statement in black and white makes it much harder to weave a narrative about how well the manager and client are doing.

Why is Acropolis transparent with performance when almost none of our competitors are?  Because, like the visionary John Wanamaker, it is the right thing to do.  We believe in transparency and understand that the trust part of the relationship is as important as the performance.  Honesty and transparency are fundamental to everyone at Acropolis.