As fund managers or financial advisers, evaluating the performance of an investment portfolio and accessing pertinent information are crucial. Professors Georges Hübner (photo) from the University of Liège and Pascal François from the University of Montreal, Canada, address these queries comprehensively in their extensive work, The Complete Guide to Portfolio Performance, spanning over 1,000 pages. This book, endorsed by Nobel laureate William Sharpe, an authority in risk-return analysis, aims to become the definitive text in its field.
Hübner, a stalwart in the Belgian financial sector with 27 years of academic and practical experience, co-founded fintech companies Gambit and Sopiad. He served on the Dexia commission post-financial crisis and holds ongoing roles as an independent director at Belfius and Belfius Asset Management and as chairman of Belfius’s audit committee.
According to Hübner and François, while there are many excellent reference books available, they felt the need for a guide that covers all relevant aspects of portfolio performance. “The literature on the subject has recently exploded, necessitating an up-to-date synthesis,” said Hübner.
Hence the authors’ commitment to a complete guide. ‘I had wanted to read this book when I was a student,’ said Hübner. ‘We wanted to write what could become the reference on portfolio performance. A kind of bible with which investment professionals, and to a lesser extent educators, students and the general public, can find answers to any question on the subject. The aim is to raise the competence level of professionals, while keeping the subject matter accessible.’
The topics in The Complete Guide to Portfolio Performance are brought together under the headings Appraise, Analyse, Act, which is also the subtitle of the book. According to the author, they denote “a logical next step each time”: looking back at historical returns and appreciating them, analysing the present and looking ahead to the future and acting on it. The book gives concrete examples of these steps.
With the book’s insights, can I, as a portfolio manager, compare different funds objectively?
Hübner: “Yes. But not only active funds, but also ETFs. Because some ETFs are more expensive than others. Sometimes the cost is a few basis points, but for some more specific ETFs the cost can even exceed 50 basis points. On the other hand, there is tracking error: the deviation of the ETF from its benchmark. Here you also need to have objective criteria to make your choice.”
So you have to compare apples to apples. Doesn’t the benchmark then help put returns in context?
Hübner: “Often the benchmark is made in such a way that the picture will generally be positive. Active fund managers try to create an environment where the alpha is positive, almost by definition. The benchmark is not a good gauge of value if it does not fit well with the investment policy, or does not reinvest dividends or perhaps has a slightly lower risk level. Thus, the funds in question take risk on factors other than simply the market factor.”
“The different performance indicators are also used interchangeably: Alpha, Information ratio and Sharpe ratio. Which one do you choose? You can have a very good Sharpe ratio and a bad Alpha or vice versa. So if there is someone who is going to defend a particular fund, he will always find a way to say: yes, but from this point of view I worked well or from this point of view I worked well. The book aims to give the keys to read returns correctly.”
What does your book add to existing literature on the subject?
Hübner: “The book is mainly aimed at a professional audience from fund managers to financial advisers. There is a huge need for education in the field. Many issues are hidden to create the illusion of good performance.
“The central question is: what is a good ratio to measure return versus risk? There is no recent book that really gives a complete answer to that. I found that strange. We devote more than 60 pages to problems related to estimating performance. How long is the period to be analysed? What is the risk-free interest rate to use as a benchmark for that period? Because it obviously doesn’t stay the same over a long period.”
“We have performance indicators that do not take into account a point-in-time estimate, but an estimated cycle flow of, say, the volatility of the market’s average return. You have to analyse over the long term, which gives a very well-diversified portfolio, considered best-in-class buy-and-hold. To make it a bit more technical: what is a good Sharpe ratio? I know many - former - fund managers. The consensus is between 0.3 and 0.4, while many sites favour a ratio of one. So that’s the kind of thing we answer to.”
The endorsement by economist and Nobel laureate William Sharpe, who praised the chapter on performance indicators that includes the eponymous Sharpe Ratio, is a significant accolade for the authors. “Receiving his commendation was an honour; those are emails I’ll never delete,” said Hübner.
This article was originally published in Dutch on InvestmentOfficer.be.