Pensions & Performance Measurement

Crisis Compels Economists To Reach for New Paradigm - WSJ.com#mod=todays_us_page_one: "The result was a new orthodoxy, known as 'rational expectations,' that still dominates, underpinning everything from the way pension funds invest to how financial analysts put values on securities."

In the same edition, some of the ways pension benefits can be manipulated was demonstrated along with the lead story about executive pensions rising in 2008 despite horrific company performance.

While pension calculations are not in the purview of today's performance measurement professionals, the idea of manipulating formulas is. Whether it is the underlying benchmark selection for attribution analysis or the choice of risk-free rates or pricing sources for securities, these inputs provide a substantial impact on the final product. The performance professional needs to be cognizant of the firmness of the foundations of his work before providing this data to the end user.

Taking Candy From A Baby

White House Tally Appears to Overstate Stimulus Jobs - WSJ.com: "Some Head Start preschool programs reported that stimulus money saved the job of every staff member who received a cost-of-living pay raise, according to their filings. Some colleges and universities counted every part-time student work-study position as a full-time job, according to their reports, which are published online at recovery.gov."

This really feels like piling on, but this measurement issues for the stimulus' effects offers an extreme example of what can happen when there are no performance standards involved. In an increasing quantitative world combined with demographic and fiscal inevitabilities, this may be the impetus to expand the expertise of performance measurement professionals from investment management to other less obvious fields.

Preaching To The Choir: Losses Are Harder To Recover

One Way to Dig Out of a Hole - WSJ.com: "If an investment declines 10%, it takes about an 11% gain to break even (assuming you don't pump in additional dollars). If the drop is 20%, you need a 25% gain to recover. A fall of one-third requires a rebound of 50%. And if your investment falls by half, 'you need a double,' or a 100% return, says Mr. Wiener, the New York-based editor of the Independent Adviser for Vanguard Investors. The recovery percentages grow exponentially because you have so few dollars working for you after a big loss."

This is the basic idea behind Nassim Taleb's Black Swan Theory. However, human nature is not wired to think about percentage gains and losses. One of the key areas performance measurement professionals can add value to the marketing process is working with the sales team to help them clearly demonstrate this.

Crying Out For GIPS

My Way News - Stimulus jobs overstated by thousands: "The AP review found some counts were more than 10 times as high as the actual number of jobs; some jobs credited to the stimulus program were counted two and sometimes more than four times; and other jobs were credited to stimulus spending when none was produced."

Performance Pet Peeve

Economics One: Despite claims, data continue to show small impact of stimulus:

"The table shows the latest Department of Commerce estimates of the contributions of consumption, investment, net exports, and government spending to the improvement in GDP growth from the first to second quarter. Growth improved by 5.7 percent (from -6.4 percent to -0.7 percent). Private investment was by far the major source. Government spending contributed 1.9 percentage points, but more than half of that was defense spending which was not part of the stimulus."

No, growth improved by 5.7 percentage points. Nevermind whether or not using percentages as ending and beginning values to calculate a percentage return is a proper way to express improvements.

GIPS Singapore Summary

GIPS Singapore Summary: "The GIPS Executive Committee (EC), the governing body for the Global Investment Performance Standards (GIPS), recently met in Singapore to review the comments received on the GIPS 2010 Exposure Draft and discuss proposed revisions."

Can Performance Presentation be Successfully Regulated Part II

From Trust and Delegation by Stephen Brown, William Goetzmann, Bing Liang, Christopher Schwarz First Draft: June 16, 2009

"Funds that strategically lie on their DD reports have higher performance than other funds after the DD report....perhaps these funds are better funds. However, since these managers appear to only strategically lie to the DD company, they may also choose to “game” the return data reported to investors, which causes these funds to appear superior to their peers.

We also find funds that have external pricing have lower performance than funds that price their own portfolios. Non-independent pricing allows the opportunity to inflate performance through “cherry picking” of model prices or outright fraud."

Operational definition of "strategic liar": managers who voluntarily disclosed past problems but Due Diligence firm found additional legal or regulatory problems that would have been expected to be disclosed.