Auditing portfolio performance

[TTTI]

Sharing this with you since you mentioned about career doors. (and also since you asked nicely!)

My 2 cents worth: skip the audit. Even if it costs only $2k.
I've had 2 unsolicited job offers from the fund management (well 1 of them is not exactly, but related) in the past 14months.
I haven't had any audit done.
Just saying you don't need it.

Think they read your blogs and can see how good your analytical skills and reasoning are, besides drs usually have good analytical and reasoning skills

"....besides drs usually have good analytical and reasoning skills"

Well...
I have colleagues with money locked up in wild land in weird remote corners of UK and US for many years, waiting for it to be developed. (Perhaps won't be developed in this life time)
I have colleagues who have vested large 6 figure sums in a "treasure hunting" private company. The hunter has been travelling the seas fully funded by these colleagues for several years, with not a single coin to show for.
These colleagues are very highly educated, top guys, doing very well in their professions.
So..... in relation to the professional duties, yeah for sure. Analytical and reasoning skills are used everyday.

In relation to finance...... you'd be surprised.

[d.o.g.]

Whether you intend to invest only for yourself or for others as well, it is a good idea to know how you are doing. At the minimum you need the information to assess whether you should outsource if you are doing very poorly, or turn professional if you are doing very well.

One well-known case of poor investment return accounting was the Beardstown Ladies, who thought they were investment geniuses (23.4% p.a. for 1984-1993) and published a bestselling book. When they were finally audited by PWC, their actual return was only 9.1% p.a., far below the 14.9% p.a. returned by the S&P 500 during the same period. They had forgotten to account for money they had added to the investment pool.

That said, an audit is not absolutely necessary. What matters is that you can show how your conclusion was arrived at i.e. show the source documents and the calculations. This way, when you are challenged, you have the data to back you up.

XIRR and NAV as previously discussed are two very good ways to compute returns. The final answers are easily understood - you put in $1 and it became $X, and the average annual return was Y%.

If you do not understand how to use XIRR or NAV then one very crude way is to just look at how much capital was put in, and how much the portfolio is worth now. If most of the money was added early on, the correct return will not be too far off from the lump-sum method.

Alternatively, if money was added at fairly regular intervals in similar sums each time, this approximates a mortgage and you can use the RATE function in Excel to compute the effective interest rate by using the original investment as the loan quantum (PV) and the average monthly additions as the loan payments (PMT), with the final portfolio value as the future value (FV). Use negative signs for PV and PMT, and a positive sign for FV. Otherwise it won't work properly. Also, the rate you get is a monthly rate of return, so you need to compound it by 12 to get the annual rate of return.

If all of this still sounds like too much work, you should probably talk to a fund accounting professional - and pay for an accurate assessment of how well you are doing. Call up any of the fund administrators and explain that you have a one-off assignment. They will be happy to assign someone to help - for a fee, of course. You can shop around a little to make sure you are not getting ripped off, 3 quotes should suffice.

As usual, YMMV.

[TTTI]

Whether you intend to invest only for yourself or for others as well, it is a good idea to know how you are doing. At the minimum you need the information to assess whether you should outsource if you are doing very poorly, or turn professional if you are doing very well.

One well-known case of poor investment return accounting was the Beardstown Ladies, who thought they were investment geniuses (23.4% p.a. for 1984-1993) and published a bestselling book. When they were finally audited by PWC, their actual return was only 9.1% p.a., far below the 14.9% p.a. returned by the S&P 500 during the same period. They had forgotten to account for money they had added to the investment pool.

That said, an audit is not absolutely necessary. What matters is that you can show how your conclusion was arrived at i.e. show the source documents and the calculations. This way, when you are challenged, you have the data to back you up.

XIRR and NAV as previously discussed are two very good ways to compute returns. The final answers are easily understood - you put in $1 and it became $X, and the average annual return was Y%.

If you do not understand how to use XIRR or NAV then one very crude way is to just look at how much capital was put in, and how much the portfolio is worth now. If most of the money was added early on, the correct return will not be too far off from the lump-sum method.

Alternatively, if money was added at fairly regular intervals in similar sums each time, this approximates a mortgage and you can use the RATE function in Excel to compute the effective interest rate by using the original investment as the loan quantum (PV) and the average monthly additions as the loan payments (PMT), with the final portfolio value as the future value (FV). Use negative signs for PV and PMT, and a positive sign for FV. Otherwise it won't work properly. Also, the rate you get is a monthly rate of return, so you need to compound it by 12 to get the annual rate of return.

If all of this still sounds like too much work, you should probably talk to a fund accounting professional - and pay for an accurate assessment of how well you are doing. Call up any of the fund administrators and explain that you have a one-off assignment. They will be happy to assign someone to help - for a fee, of course. You can shop around a little to make sure you are not getting ripped off, 3 quotes should suffice.

As usual, YMMV.

"One well-known case of poor investment return accounting was the Beardstown Ladies, who thought they were investment geniuses (23.4% p.a. for 1984-1993) and published a bestselling book"

Got this from Wikipedia:
"Founded in 1983, the group achieved fame for their stock market acumen, claiming investment returns of more than 23.4% per year from their inception through 1994. They received considerable attention in national media outlets, and authored a best-selling book, The Beardstown Ladies' Common-Sense Investment Guide, following it up with four more books"


5 published books with a best selling one.
They ARE geniuses. 
Seriously.

[karlmarx]

Hi d.o.g.

Thank you for your generous sharing. I managed to calculate my performance using XIRR. It was easier than I thought, and perhaps easier than the NAV method as well. I didn't take too long as my turnover/transactions was very low. I totaled the cashflow for each year, and assumed I had sold all my holdings using the last traded prices for the final cash in-flow. I hope I didn't do it wrongly.

Do you know auditors who are willing to do such a small scale work?

[karlmarx]

@TTTI 

fake it till you make it.  

[specuvestor]

PIMHO NAV per share keeps track of inflows, outflows, corporate actions, etc effectively. And makes it easy to calculate return over any period where you have calculated the NAV per share

Sharing this with you since you mentioned about career doors. (and also since you asked nicely!)

My 2 cents worth: skip the audit. Even if it costs only $2k.
I've had 2 unsolicited job offers from the fund management (well 1 of them is not exactly, but related) in the past 14months.
I haven't had any audit done.
Just saying you don't need it.

Think they read your blogs and can see how good your analytical skills and reasoning are, besides drs usually have good analytical and reasoning skills

"....besides drs usually have good analytical and reasoning skills"

Well...
I have colleagues with money locked up in wild land in weird remote corners of UK and US for many years, waiting for it to be developed. (Perhaps won't be developed in this life time)
I have colleagues who have vested large 6 figure sums in a "treasure hunting" private company. The hunter has been travelling the seas fully funded by these colleagues for several years, with not a single coin to show for.
These colleagues are very highly educated, top guys, doing very well in their professions.
So..... in relation to the professional duties, yeah for sure. Analytical and reasoning skills are used everyday.

In relation to finance...... you'd be surprised.

Quote: The adage "once bitten twice shy" does not hold true for some retail investors. One medical doctor admitted to me that he had lost his money twice to schemes that turned out to be run in a Ponzi-like manner.

https://www.valuebuddies.com/thread-8129...#pid139445

[weijian]

Hi d.o.g.

Thank you for your generous sharing. I managed to calculate my performance using XIRR. It was easier than I thought, and perhaps easier than the NAV method as well. I didn't take too long as my turnover/transactions was very low. I totaled the cashflow for each year, and assumed I had sold all my holdings using the last traded prices for the final cash in-flow. I hope I didn't do it wrongly.

Do you know auditors who are willing to do such a small scale work?

Personally, i have only tried using the XIRR method, although i do understand how both XIRR and NAV works. I thought NAV (never tried it before) is harder to setup for calculations because I will need to "create new units" every time there is a cash in/out fusion while XIRR just requires either a "negative or positive" figure to it. That said, NAV, as the end result, is intuitively easier to understand for outsiders than XIRR, since one can easily benchmark it to 1.00 as the starting point.

I don't think you will need to engage an auditor to do your work. You could simply play around with a few hypothetical numbers that run parallel to your actual numbers using the same calculations. The hypothetical numbers can range from small to large and then you see the variations in the outputs and then you will know whether you are "approximately right" or "accurately wrong".

[d.o.g.]

Hi d.o.g.

Thank you for your generous sharing. I managed to calculate my performance using XIRR. It was easier than I thought, and perhaps easier than the NAV method as well. I didn't take too long as my turnover/transactions was very low. I totaled the cashflow for each year, and assumed I had sold all my holdings using the last traded prices for the final cash in-flow. I hope I didn't do it wrongly.

Do you know auditors who are willing to do such a small scale work?

Any auditor with a fund audit team will have people able to do the audit, but the question is whether they are willing to sign off professionally. Even the easiest job carries reputational liability which bumps up the minimum fee. Any of the "Big Four" can do it, and I believe "the next 4" also have fund audit practices that can do it, probably for somewhat less money. I think BDO, RSM and Crowe Horwath all have fund audit practices. For the very small auditors they may be willing but they may not be able, as they may not have a fund audit team.

[karlmarx]

@specuvestor & @weijian 

Thanks for your input. I'm interested to try NAV calculation but I'll have to spend more time understanding first. I read the past threads but still do not grasp fully. I suppose there are no excel templates for such purposes? Fellow VBs, please share if you have one! 

@d.o.g. 

Thanks for your sharing. I shall search and ask around for quotes.