The importance of a performance track record

And how to create one for yourself!

If you are not a fund manager yet but you would like to become one, how can you work strategically to build a track record?

Turning yourself into a portfolio manager, launching a fund or even creating a new fund management company are all extraordinarily difficult challenges. If you wanted to get a taster of just how difficult it is, there is an article you ought to read. It’s called “Attempting the Impossible“, and it’s become a bit of a classic read among aspiring fund managers. Quite possibly, after reading it, you’ll have zero inclination to return to the rest of our article.

One of the reasons why it is so difficult to start as a fund manager, is that investors will ask you for a performance track record.

If you are not a fund manager yet but you would like to become one, how can you work strategically to build a track record?

If you already have a track record of some kind, how can you best present it in such a way that investors will want to back you?

During our work with aspiring fund managers (some of whom we will launch funds with over the coming months and years), we found that there are few comprehensive resources on the Internet that explain the subject of performance track records from a practical perspective.

With today’s article, we are aiming to provide colleagues in our industry (current and prospective) with some useful background information.

The Drop-Dead Requirements For A Launch

Before you even consider turning yourself into a fund manager, you should ask yourself how many of the following key criteria you fulfil.

  • Track record: Do you have one, and how good is it?

  • Funds under management: Many investors only feel comfortable investing once you have reached 20, 50 or 100 million of assets under management.

  • ‘Skin in the game’: Are you willing (and able) to put your money where your mouth is and invest either a significant absolute sum or a significant percentage of your total net worth into your own fund?

You can probably get away with launching a new fund if you only fulfil two of the three criteria.

For example, you may not reach the threshold for assets under management, but you make up for it by putting a million of your own money into the fund. A significant personal investment on the part of the manager is a major vote of confidence.

What, you don’t have a million to invest? What is your investment track record then? Why haven’t you made yourself modestly rich yet? Investors will often look for a five-year track record of investment performance from a manager, and there are already a lot of funds out there with great track records over five, ten or even twenty years.

You get the idea…

There is a multitude of factors at work, and this article will focus on one of them. Of these three criteria, an established track record is often the most important factor, and yet it can also be the most difficult for a new manager to produce.

We are going to spell out some options for new fund managers when it comes to presenting their performance record to prospective investors. This article will also help you to strategically plan your career, which may require a few years’ lead time.

Establishing A Performance Track Record

There are three primary options for creating a track record ahead of you launching a fund:

  • manage a personal portfolio with real money

  • manage a model portfolio, i.e. on paper only

  • back-test an investment strategy using historical data

Call us biased, but we call the first option the gold standard. Quite possibly, it’s the only acceptable and effective way to establish a track record ahead of launching a fund.

With a model portfolio that you run on paper only, there’ll always be issues with evidencing that the data wasn’t manipulated. You can produce time-stamped evidence for your portfolio, but everyone will ask why you didn’t simply set up a brokerage portfolio with USD 5,000 in it. Spare yourself the resulting pain and simply set up a brokerage account with real money – and if you don’t, brace yourself for the inevitable sceptical questions.

As to back-testing an investment strategy, don’t even get us started… (Though we admit that for some sectors of the fund industry, back-testing may have relevance.)

Once you have created an investment track record using real money in a real brokerage account, you’ll have bank statements, trading statements, annual portfolio and account summaries and other documents to use as evidence that you really achieved this performance.

Nowadays, this kind of performance data might be easily downloaded from the brokerage platform you have been using – for example, Interactive Brokers provides a comprehensive suite of performance analysis tools for its clients.

In the absence of institutional fund management experience, anyone who wants to move over to portfolio management at some point in their career – especially sell-side analysts who would otherwise find it hard to establish a track record – is well advised to set up their own portfolio in order to cultivate a track record that can be utilised in future.

The absolute key aspect in all this – and this is an area where few have expertise – is to get this performance audited. You need to have independent verification of your portfolio’s performance to make it useful for raising money from investors.

Audited Track Records – What Are The Options?

You can certainly get the ball rolling with prospective investors by simply putting together your performance presentation based on your own records and portfolio trading data. To have initial conversations and test potential market demand or get verbal commitments from potential anchor investors, this will do. However, some kind of performance audit will ultimately be necessary in order to get serious about fundraising. You may also need it for convincing a regulator to give you a permission to operate, or for service providers to accept onboarding you as a client (the really good service providers tend to be busy and nowadays can often be very picky about new clients).

You can address your potential clients’ need to receive an audited performance track record in several ways. The easiest, cheapest and most straight-forward way to do this is to prepare a summary of your historical performance and have it verified by an independent accountant.

An audit of this kind will include the independent accountant’s report, the performance track record summarised in tabular format and supporting notes to provide a description of the return calculation methodology and other information pertaining to the investment manager or account owner that may be relevant to the potential investors.

Depending on which jurisdiction your fund will be based in, who you target as investors, and how ambitious you are, such an audit by an independent accountant may suffice, or it may not.

However, if you have the ambition to (one day) play in the big league, you will have no other choice but to prepare a so-called Global Investment Performance Standards (GIPS) report. GIPS are a “set of standardized, industry wide ethical principles that guide investment firms on how to calculate and report their investment results to prospective clients.”

GIPS: The Gold Standard

A GIPS report typically consists of:

  • a statement that the report has been prepared in compliance with GIPS standards

  • a summary of your returns for at least five years (or since inception, if shorter)

  • a description of the period(s) for which the returns have been calculated

  • a description of the applicable valuation and accounting policies

  • a summary of fees (if applicable yet)

  • a summary of the benchmarks

The main benefit to complying with the GIPS standards is that you can present your results to potential investors (or fund management companies) around the world. You’ll be able to present your historical returns anywhere and to anyone, without having to restate performance using different calculation and presentation methods.

There is one important aspect to using a GIPS standard performance report, which may or may not apply to you.

If you already have a firm (rather than to act as an individual), you’ll need to adopt GIPS standards on a firm-wide basis. Compliance with these standards MUST be met on a FIRM-wide basis and cannot be met on a composite, pooled fund, or portfolio basis. Having your firm comply to these standards signals that you have designed and implemented policies and procedures to fully disclose and fairly present past performance. Compliance requires firms to establish robust investment performance policies and procedures, and allows you to demonstrate to current and prospective clients as well as the general public that you have made a voluntary commitment to follow ethical standards.

Are you an individual investor who wants to get the performance of his personal portfolio audited? In that case, you can still go ahead and get the performance audited to GIPS standards. In fact, we have worked with one portfolio manager who did just that – and it put him onto a totally different path for launching his own fund!

You can find a detailed explanation of the provisions of the GIPS standards here:

Here is an example of a an investment report that has been independently verified to be GIPS compliant:

What Does A GIPS Report Cost?

The GIPS verification cost can range from approximately US$10,000 to as high as six figures.

The cost of GIPS verification is dependent upon a few key factors:

  • the number of years to be verified

  • the number of transactions in the portfolio

  • the size of the firm (e.g., number of accounts, and number of composites)

  • the complexity of the firm

Service providers that can conduct a GIPS report including most of the larger accounting firms, such as KPMGand PwC, and compliance and risk organisations such as ACA Global. You’ll also find smaller outfits offering them – check the Internet for providers in your country.

Is It Worth It?

The regulatory requirements for fund managers are only ever increasing, and with it increases the critical mass of assets you need to pay for such an operation.

In our view, if you are undertaking such a venture, getting your track record audited to GIPS standard is both a necessity and an excellent investment. The hard truth is, if you cannot afford a few ten thousand dollars to have a proper audit of your performance carried out, why are you even attempting to convince investors to back you with millions?

While a GIPS report is likely to prove more costly in most instances than the other options, new fund managers will find that they face less questions over the verifiability of their performance track records if they can produce a GIPS audit.

Given how many other questions you will inevitably face, you’ll be glad you did it!

YOUR VIEWS AND EXPERIENCES: We are eager to turn our website into a resource that is useful for aspiring fund managers, and we’d love to hear about your experiences and views. There’ll be follow-up articles of this kind, and we are also happy to discuss the content of this article in person through Zoom calls or meetings (in London and Guernsey).

Disclaimer: This blog is intended for informational purposes only. This blog is not intended to invite, induce or encourage any persons to engage in any investment activities and is not a solicitation or an offer to buy or sell any stock, investment product or other financial instruments. If in doubt, please seek financial advice from an independent financial adviser. Sarnia Asset Management is licensed by the Guernsey Financial Services Commission (GFSC). Past performance is not an indication of future returns. Investments carry risk, including the risk that you will not recover the sum that you invested.

By James Faulkner

Outdated Browser Warning

Oops! You are using an outdated browser!

Click here to upgrade your browser in order to view this page.