Question: If I have a portfolio which is up 10% this year against a benchmark return of 8%, what is my relative performance?
a) +2% (i.e. 10% - 8%)
b) +1.85% (i.e. 1.1 / 1.08)
Does GIPS have anything to say about this? Is there an industry standard?
Just to follow up with an example of where this might matter. Say at the end of October your performance year to date is +10% and on a 3 year rolling basis is +40%. Let’s say the benchmark portfolio has been +8% and +35% respectively. Now in November, let’s your portfolio return is +5% but the benchmark is flat. So now your portfolio return is +15.5% year to date and +47% on a rolling 3 year basis (let’s say). Your bechmark return stays at +8% year to date and +35% (again assume this to be true). So in method a) year to date relative performance goes from +2% to +7.5% (+5.5%) whereas your rolling 3 year return goes from +5% to +12% (+7%). Using method b) ytd relative performance goes from 1.85% to 6.94% (+5.1%) and the 3 year rolling return goes from +3.7% to +8.9% (+5.1%). So method b) shows the same proportional change in relative performance whereas method a) exagerrates the changes in relative outperformance (or underperformance) each month. For clarity, these numbers are not real but the situation is. We currently report relative performance numbers monthly using method a) and I am wondering if it would be better to switch to method b).