The evolution of the performance team

Over the 21 years that I have been involved in performance measurement, the structure of the performance team and the essential technical skill set demanded of the staff have changed quite dramatically. The original role of data administrator has moved on. Performance analysts are now required to be experts in pensions, investments, the market place, the financial industry, regulations and complex calculations as well as index composition and decomposition, not to mention the interpretation of attribution and risk figures. The old picture of the 'nerd in a cupboard' has been updated to the 'nerd' who can stand in front of senior management and articulately present - indeed, argue - the vagaries of performance.

History

Twenty years ago, the average performance analyst needed nothing more than the ability to count and to problem solve. The daily role was one of data cleansing and data entry. It was dreary work, yet it was essential that it was all completed accurately and to timescale. Candidates for the job tended to have a degree, though this was not compulsory. Any degree was acceptable since it demonstrated the person could learn. I worked with people who graduated with various arts and sciences degrees - and even employed a few with qualifications in ancient Greek, sports sciences, mechanical engineering, textiles and archaeology. If the candidate did not have tertiary educational qualifications, then some banking or fund accounting experience was a viable alternative. If you managed to find someone who had an interest in, or knowledge of, the stock market and pensions that was a fabulous bonus.

The role of the performance team was historically very back office. Part of the role was providing data to and receiving data back from external performance measurers (WM Company and CAPS), churning out reports and keeping the client reporting wheels turning as best they could. Spreadsheets were the norm as proprietary systems were still in their creation phase. Standard fund and benchmark performance calculations were the bread-and-butter of the team.

The development

As the sector evolved, focus fell on attribution. First, the external performance measurers were relied on to produce this complicated analysis but, as time went on, fund managers needed more flexibility and timeliness than these companies could provide. At times of market stress, external costs were under intense scrutiny and fund managers set about expanding their performance team's remit to include this important analysis.

As a result, the skill set shifted. Analysts were required to be much more mathematically adept and financially aware. They had to understand the way funds were managed and how they matched - or did not match - the market indices in terms of coverage and rebalancing techniques. They had to produce and check these analyses, first to sector or regional level, and more latterly to stock level. At the same time, there was a huge move away from peer group benchmarks for institutional clients towards composite benchmarks. There was a need for a greater understanding of the way indices were calculated and compiled. Hedged benchmarks became the norm and were often adjusted in-house as index provider's ranges were sparse. Then the net and gross of tax variations came to the fore, with fund managers desperate to be compared on a like-for-like basis. As some index series did not - and in some cases still do not - provide these variations in-house calculations became standard, with discussions on the pros and cons of Lux tax or UK tax being held. The performance analyst was expected to contribute fully and clearly on all of these topics.

Anyone who naively thought their education ended the day they started work was in for a shock. Regulatory exams became the norm and analysts were usually to be found studying for their Investment Administration Qualification (IAQ) or Investment Management Certificate (IMC). It was only in latter years the more academic performance analysts would be sitting for their Chartered Financial Analyst (CFA) designation. This would be a useful tool to enable them to move on either to a broader role within performance measurement, or indeed, within the fund management industry as a whole. Choosing to pursue a further career as a risk analyst or even a performance specialist/consultant, someone removed from the day-to-day production, could add immense value to the entire industry by providing knowledge and input into a variety of projects and the latest issues of concern.

Risk figures were increasingly expected to be produced and interpreted, primarily ex post and then very quickly came ex ante. In the early 1990s, most companies recognised the standard performance team did not have the skills - nor the time - for the ex ante work, so they passed this work on to either the fund managers' Quant team, appointed a dedicated person to these tasks or set up a specific risk team. This meant the risk team was much more mathematical and CFA biased. A more ad hoc process started to replace a daily routine, with hot topics defining the priorities and output of the hour.

Although for institutional clients the use of peer group comparison was becoming almost non-existent, for retail and insurance funds it was increasing. Companies like S&P (Micropal) and Lipper were coming to the forefront, providing all of the market comparison required for this group of funds. The performance analyst had to become expert at using the proprietary systems to extract the required data. Fixed income attribution became of paramount interest to the industry. Various job adverts appeared offering inflated salaries to the few people who had this experience. It was certainly a niche part of the marketplace. New companies appeared offering fixed income attribution systems with varying degrees of success. Fixed income fund managers were demanding a similar service to the one their equity colleagues had been receiving for many years.

Approaching the year 2000, Global Investment Performance Standards (GIPS) also became part of the performance team's remit, with most of the larger asset management firms opting to become GIPS compliant. Each asset management firm undertook the huge project of acquiring the regulation certificate. Given that the data exercise could span up to 10 years of history, the amount of work involved was massive. All performance analysts were involved in some way with this historic exercise, and some permanently remain attached to the ongoing annual audits that roll on year after year. Here again the technical prowess shifted in emphasis for the few performance analysts who specialised in GIPS, moving away from the detail of calculation methodology and industry events, to a more accountant style work of checklists and tick boxes - and dealing with the dreaded auditors.

As the time went on, performance analysts, provided they had served their time in the traditional role, had opportunity to carve out one of their choosing within the performance umbrella. Some stayed in the traditional client reporting type role, some chose to specialise in risk, some in fixed income and still others, as mentioned above, to work with GIPS. Though to be fair in smaller companies, often the job encompassed elements of all of these specialities. 

The present

So here in 2007, the exact structure of the performance team does vary from company to company. In fact, some no longer have a traditional performance team having outsourced this role to external third parties. In a few instances, the outsourcing decision was due to the unavailability of the requisite skilled staff, but more often than not, it was purely down to money. Time has since shown that most of these companies have now found the need to set up a small team in-house to handle the ad hoc urgent requests not catered for within the outsourcing service level agreement. But for those companies that have retained the complete performance measurement role in-house, the performance team's remit has expanded and continues to change. Some performance teams are now linked to the middle office or even the front office, which reflects the importance of the work they do and the esteem in which they are held.

These days standard published indices are becoming far rarer, as funds' benchmarks are now carve-outs, amalgamations and varying restructures of indices. Exclusions of specific stocks to meet the funds objective, specifically on socially responsible types of investment (SRI) vehicles, are fairly standard if not common. The majority of fund management companies have some automation in place, so the drudgery of manual input is becoming obsolete, although it has to be said that data checking remains important. The nuts and bolts of client reporting is today probably only about 50 per cent of the team's work, with the remainder of their time being spent involved in projects and ad hoc work for senior management, fund managers and marketing initiatives.

Hedging has become a standard enterprise of nearly every company, although to varying degrees. The performance analysts have evolved to operate with most complex types of financial instruments, and then understand how to measure the performance of these instruments. The analyst must be able to attribute against them and interpret the impact - 'longs', 'shorts' and 'swaps' have become part of everyday language.

Given the turbulence of markets over the last decade, property, an often overlooked investment category in the past, has now become an area of increasing interest. Many fund managers now launch property funds. Analysts now must understand the differences between investing in the commercial property market as opposed to the stock exchange. They must have knowledge of the way properties are managed and refurbished, and treat each transaction appropriately. Property performance systems are rare, but in time another area of specialisation will doubtless be created.

Far more imagination and investigation is demanded of the analyst than it was previously, if they are to deal with questions such as:

"I want to launch a fund in India/Venezuela/China. Who are the competitors? What are their investment styles and benchmarks? What are their historical returns?"

Probably one of the most surprising and challenging developments for the performance analyst is that increasingly they must now be a professional communicator and presenter, dealing with people at all levels. The more senior analyst might be invited to speak at conferences and seminars. They will be called into client and other external meetings to add value and detail. They must be able to communicate to all who ask about the success or otherwise of their investment strategy while littering the conversation with all the measures that prove their point. They must help analyse funds and markets in times of turmoil where deeper analysis is required. They have to deal with senior management on an equal level, adding input into the investment process.

The future

The performance measurement function will always exist, it is an essential part of the investment process. As automation increases there should be less manual work, even ad hoc requests should move towards having some kind of automated or semi-automated solution. The performance measurement team's role will move to become one of communication and explanation rather than just calculation. However, I do also see an increase in terms of the hypothetical questions asked, such as what would my performance and risk profile had been if I had chosen basket A of funds rather than basket B?

So what skill set will take the performance team forward to deal with whatever is going to happen in the future? Without doubt, one of the most important characteristics - essential for all analysts to have - is the ability to adapt to this ever-changing environment. Mathematical ability is essential. Accuracy and attention to detail are both vital. The ability to fact check and question has remained constant throughout the history of the sector. Any interest in continued learning and the market place is already mandatory if you want to progress.

So if anyone knows this paragon of virtue that I describe, please let me know as I have a job for him or her...