Practical Portfolio Performance Measurement and Attribution, Second Edition

Appendix H

Calculation Methodology Guidance Statement¹⁴

Revised Effective Date: 1 January 2006 Adoption Date: 4 March 2004 Effective Date: 1 June 2004 Retroactive Application: Not Required Public Comment Period: Aug-Nov 2002

GUIDANCE STATEMENT ON CALCULATION METHODOLOGY (REVISED)

Introduction

Achieving comparability among investment management firms’ performance presentations requires as much uniformity as possible in the methodology used to calculate portfolio and composite returns. The uniformity of the return calculation methodology is dependent on accurate and consistent input data, a critical component to effective compliance with the GIPS^® standards. Although the GIPS standards allow flexibility in return calculation, the return must be calculated using a methodology that incorporates the time-weighted rate of return concept for all assets (except private equity assets). For information on calculating performance for these assets, see the separate Private Equity Provisions and Guidance.

The Standards require a time-weighted rate of return because it removes the effects of cash flows, which are generally client-driven. Therefore, a time-weighted rate of return best reflects the firm’s ability to manage the assets according to a specified strategy or objective, and is the basis for the comparability of composite returns among firms on a global basis.

In this Guidance Statement, the term “return” is used rather than the more common term “performance” to emphasize the ...