Guy Lotem

Performance reporting in financial services isn't one-size-fits-all. Investors demand transparency in financial reporting. Transparency in the current investment climate requires availability and presentation of often complex information; benchmarks, with which to compare asset performance; and appropriate, stress-tested tools to analyze it.

Importantly, standard benchmarks (those standards with which the managed assets are compared or measured), as opposed to potentially distorted ones when using in-house benchmarks, best serve investors. (In-house benchmarks may distort reality if they are used inaccurately.)

Standard Financial Benchmarks

Investors use tried and true benchmarks like the Dow Jones Industrial Average, Russell 2000, and S&P 500 to compare stock performance. Bond issues or bond funds may be compared to benchmark or bellwether bonds (such as the U.S. treasury 10-year maturity) or indices.

Data Quality

Clean transactional data affords the ability to make decisions, such as reinvestment choices, and helps to reduce errors concerning asset values and liabilities. In a complex investment arena, providing simple and transparent data is essential.

Aligning risk models with risk information architecture is critical to high data quality. Risk governance, for new products and transaction approvals, is crucial. Simplifying the steering of risk and capital models, along with limit-systems, is required by regulators and investors alike.

Analytics

Market risk involves variables such as equity price, credit spreads, Forex rates, interest rates, and many others. To understand and then manage market risk, analysts use comparison tools such as value-at-risk (VAR) as standards:

Prevention of financial catastrophes relies upon the ability to appropriately assign and manage risk. Products like correlation trades, dual currency swaps, and multiple asset options require updated tools. "Stress-testing" tools like VAR is key.
Transparent financial performance reporting also relies upon investors' access to and knowledge of "the Greeks." These classic risk identification and P&L benchmarks help investors know how to position and trade time-decaying and other volatile assets.
Assessment of current asset price to "worst" comparative data helps investors gauge performance.

Multiple Asset Class Performance

Most investors own more than a single asset class. By investing in multiple asset classes (along with negative or no risk correlations), investors hope to realize higher returns. Sharing detailed multiple asset class performance helps investors to understand the efficient frontier theory in practice: lower portfolio volatility combined with higher returns is the performance goal.

The Impact of Corporate Actions

The impact of corporate actions on issued or anticipated securities' price is well-known. In a complex investment arena, providing information about significant corporate activity as it relates to investment performance fully advises the investor.

Risk Management

Understanding portfolio risk helps investors to make decisions. A portfolio with a higher than market beta average may assist the investor to make higher returns in rising market conditions. In a declining market, a lower than market beta helps the investor to protect capital. Portfolio risk management tools assist the investor in growing the value of assets over time.