Measuring Investment Performance Part 1

Trustees of charities need to regularly monitor the returns of their investment portfolios. Returns can be measured in different ways and it is important Trustees understand what is being presented to them.

 

Investment returns can be measured by an arithmetic mean or geometric mean. An example below highlights the difference.

 

Initial investment: $1000

Year 1: +20% return increases investment value to $1200.

Year 2: -18% return reduces investment value to $984.

 

The arithmetic mean 2-year return is +1% per year. This is calculated by taking the average of the first year return of +20% and the second year return of -18%.

 

The geometric mean 2-year return is -0.8% per year. This is the return that, if achieved in both years, would result in the final investment value of $984.

 

In this example the arithmetic mean 2-year return is positive but the investor lost money. This highlights how arithmetic mean returns can provide an overly favourable impression of performance.

 

When reporting to clients, Trust Management presents geometric mean returns. Geometric mean returns are lower than arithmetic mean returns, but provide a fairer representation to investors of the growth in the value of their portfolio.

 

A subsequent article will cover the difference between time-weighted and money-weighted returns.

 

Want to know more?

Trust Management can provide advice to charities about measuring the returns on their investment portfolios and achieving their investment objectives.

 

If you have any questions, or would like to know more about measuring your investment returns, please do not hesitate to contact John Williams on (09) 550 4046.

Contacts

Grant Hope

Chief Executive Officer

09 550 4044

 

 

 

 

 

 

 

 

Shane Coward

General Manager

09 550 4045

 

 

 

 

 

 

 

John Williams

Investment Manager

09 550 4046

 

 

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