Investment Performance and Manager Compensation

Posted by Sean Murray, Director of Product Strategy, BISAM on Jul 12, 2016 1:05:57 PM
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When speaking with Performance Managers in the BISAM community about challenges in manager performance reporting, we are often told the same story. It goes something like this...

It’s the middle of January, and the phone rings.  George, a performance analyst at XYZ Funds answers, and it’s John Portfolio Manager.  John asks, “George, can you do me a favor?  The benchmark I had assigned to me last year was wrong. It should have been the Russell 2000 Growth not the Russell 2000.  Can you make the quick change for me?” 

What George then has to take into consideration is that making the switch could drastically impact the manager’s year-end compensation.  After all, the Russell 2000 Growth has a negative YTD return vs the Russell 200 positive YTD return. It puts him in the awkward position of having to question the PM’s motives before making the change.

Through conversations like this, we’ve realized a couple of things:

  1. Performance Analysts are often called upon to be the gatekeepers of these agreements – the managers’ performance objectives, if you will - and can be viewed as the “bad guys” by Fund Managers who rely on accurate performance results to define their year-end compensation.

  2. Managers often have to defend their results because of negative performance factors that had nothing to do with their decisions.

  3. Very sophisticated global fund managers have spent millions of dollars on custom systems, Excel spreadsheets, ACCESS databases, and rubber bands (kidding) to solve this problem.


At BISAM, we have been asking ourselves the question - why are so many of our current (and prospective) customers using a variety of systems to do this, when everything you need to measure a Fund Manager’s performance, attribution, and risk is already in your PMAR solution?  Why recreate the wheel, when you can just use what you already have?

The overlap in Investment Performance and Manager Compensation is striking.  They both share a need to track (and associate) managers, analysts, and groups to a fund or portfolio. They both require a long list of metrics and statistics (alpha, beta, turnover, correlation, tracking error, attribution). They both require aggregating many funds to form a consolidated view. They both need a dynamic view of funds by Manager, by portfolio characteristic, by security characteristic, or all of the above.

If this is true, why then do fund managers create redundant platforms?

Imagine the conversation between George and John, had XYZ Funds used a PMAR solution to track manager compensation. A solution that has a full audit trail of all changes to a Fund, that can calculate any and all metrics needed, compare a manager against a benchmark or peer group, can enforce data quality standards, can automate the production of the results - all while being an integrated part of a larger fund management solution. That would be quite a productive conversation!

Well BISAM's B-One solution can do just that. We have solved this problem for several customers, and I invite our readers with similar challenges to learn how best to leverage B-One to address manager reporting requirements. 

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Erika_ALter-443083-edited.jpegNote from the BISAM Insights Editor:  Join Sean here each week as he continues to explore the correlations between investment performance and manager compensation, the tensions of that dynamic, and the related efficiencies that firms can realize from their Performance Measurement and Attribution systems. 

Topics: Reporting, Performance & Attribution

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