Can anyone explain why? I would have thought net of fees would be more indicative of performance…
I had the same thought when I read this.
I think it is because they are more easily comparable to the benchmark returns as well as other firm’s returns
screwed up in my own thought process…
don’t know but net makes sense don’t really care if you can beat the index by 2% if you’re costs are 4%/year
The Gross of fees is after actual direct trading costs and before other fees . The net of fees will exclude other bundled fees. I think that you would want to see the return after direct trading costs but not including the bundled costs (excluding trading costs), because you are presumably getting some other benefit from it.
I dunno - I think the gross of fees is right on. The goal of GIPS is not to help identify after-fee value added managers, but to provide a consistent and accurate method for calculating performance. I think it makes sense to exclude management fees, which have no bearing on the actual return of the securities in your portfolio.
Who is the end user of GIPS? If they are designed for individual investors then I don’t think it makes sense to use gross returns because that isn’t what they put in their pocket. Net of fees makes more sense for them in my mind, but I don’t know if that is the explicit (or implicit) purpose of the GIPS.
good point, dubbs - it seems like the audience would be key.
I’m guessing GIPS main objective is to make firms comparable on their actual performance …rather than how beneficial they are …in terms of profit …to their clients…and so using gross of fees would make more sense… as someone mentioned above…the additional fees are indicators of some other additional benefit…not directly related to the performance of the securities in your portfolio…for example you could be putting your money in a well known manager…who you can trust more…and who therefore might have higher management feess…kinda like paying for brand quality…versus putting your money with a smaller investment firm…where the manager’s performance may not be as reliable in the future…
This is an explanation from the real-world…doesn’t have to match the “CFA-Answer”, but it helps because it is straightforward. In the institutional investor world (I’m assuming GIPS are mostly used for professional investors), mgmt. fees for management of segregated accounts are always negotiated. To be able to compare asset managers on their performance alone when you are trying to select one, you look at gross returns. Including mgmt. fees would bias the (performance) analysis because portfolios with different mgtm. fees according to various clients would be included in the composite. You leave the mgmt. fee (thus, net returns) out of the performance analysis and put it to the end, when negotiation of fees start.
Good explaination hk…
I agree with HK, very much. The “intended audience” for GIPS compliant presentations has almost always been the institutional investment community. And management fees are not set, but rather negotiated. Maybe you’d rather have manager A at a 20 bps fee than manager B at 15 bps. You need to see gross returns to make this comparison.
sv102307 Wrote: ------------------------------------------------------- > I think it is because they are more easily > comparable to the benchmark returns as well as > other firm’s returns The best simple answer. Period. They do not care if you paid you PM more because he is good looking or she is a killer. But how are you doing as compare to your specific benchmark. And guess what, your benchmark does not pay managment fees.Therefore, gross of fee is best. In fact, this is the reason, they sometime said that they expect the benchmark to do a bit better than your porfolio on a net fee basis. got it dude!
makes sense hk. thanks.