Investment Performance
There are many ways to calculate investment performance. Consumers of financial information should be aware of the numerous variables surrounding this complex subject. We adhere to industry standards when calculating and presenting performance returns, and we encourage potential clients to consider the following issues when evaluating an investment manager:
We are very proud of the investment returns we have generated for our clients, and welcome the opportunity to share our performance information with interested parties. Please contact us to find out more about the results of our investment management decisions.
Composite Structure
We aggregate our clients individual account performance into our Balanced, Income, or Growth composite, based on the stated investment objective of each account. Our composites include only fee-paying accounts managed on a fully discretionary basis.
Method of Calculation
We calculate monthly composite returns by weighting each account's monthly return, based on its beginning market value as a percent of the total composite beginning market value. We calculate quarterly and annual returns by geometrically linking monthly returns. Gross returns do not include deductions for investment advisory fees. Net returns include deductions for investment advisory fees. All composite returns are time-weighted rates of return that include deductions for commissions, transaction costs, and custodial fees.
Benchmarks
For our Equity asset class, we have selected the S&P 500 Index. For our Fixed Income Asset class, we have selected the Merrill Lynch Short Term Corporate/Government Index. We also present our performance relative to the following indexes: DJIA, Russell 3000, Russell 1000 and US T-Bills.
Relevance of Benchmarks
We have selected the above benchmarks because they are: representative of their respective asset classes; investible (e.g. a viable investment alternative); constructed in a disciplined and objective manner; formulated from publicly available information; neutral and consistent with underlying investor status (e.g. regarding tax, time horizon etc.).
Adjusting for Risk
As supplemental information, we present the following risk-adjusted returns to interested parties.
Sharpe Ratio:
The Sharpe ratio measures a portfolio's excess return relative to its volatility. It is calculated by subtracting the risk free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. In other words, the Sharpe ratio is a risk-adjusted measure of return based on total (market and firm-specific) risk. The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment decisions or a result of excess risk.
Treynor Ratio:
Developed by Jack Treynor, the Treynor ratio measures returns earned in excess of that which could have been earned on a riskless investment per each unit of market risk. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the beta of the portfolio. In other words, the Treynor ratio is a risk-adjusted measure of return based only on systematic (market) risk. It is similar to the Sharpe ratio, the difference being that it uses beta as the measurement of volatility.
Jensen's Alpha:
This is a risk-adjusted performance measure that represents the average return on a portfolio over and above that predicted by the CAPM, given the portfolio's beta and the average market return. Jensen's Alpha measure is one of the ways to help determine if a portfolio is earning the proper return for its level of risk. If the value is positive, then the portfolio is earning excess returns.
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