Investment Performance Success Criteria
Evaluating the success of an investment program is very important. Investment performance is typically measured using three criteria: goal achievement, process consistency, and portfolio performance. It is important to note that an investment program is successful only if it meets all three criteria.
On this page, we discuss in detail the investment performance success criteria that should be met jointly.
The first criterion is goal achievement. An investment is considered a success if the investment fulfills a client’s goals within the specified risk parameters. Due to the ongoing nature of the investment program, the appropriate criterion for success is whether it is still likely to meet the client’s longer-term goals without a significant change in the original strategy.
As an example, if a program now requires a client to contribute more to meet the initial goal, then the program is unlikely to be considered a success.
The second criterion is process consistency. The following issues are typically considered in evaluating process consistency.
- Has the manager implemented an investment strategy that is consistent with the client’s goals and investment preferences?
- Is the manager maintaining regular communications with the investor?
- How have recommended investment submanagers performed?
- Has the use of tactical asset allocation (TAA) improved the performance?
- Has the rebalancing process followed the investment policy statement guidelines?
- Has the manager tried to reduce costs?
- What tax-efficient strategies were used to improve the after-tax performance of the portfolio?
The final criterion is portfolio performance. Performance can be assessed either to an absolute performance benchmark or relative to a passive benchmark. The impact of risk should also be considered. To do this, the risk-adjusted performance of the client’s portfolio versus an appropriate benchmark should be computed. Next, we should also analyze downside risk. Note that many investors prefer to compare to benchmarks they are familiar with and we should take this preference into account.
Wealth managers and their clients should ideally agree on the measures of success at the inception of the investment program to avoid misunderstanding down the line. Finally, we stress again that an investment program is only considered successful if it achieves success on all three criteria.