Although not common, I still occasionally run into situations like the following: a period is selected to report performance that extends beyond (at the start, end, or both) the actual period a portfolio or asset was being managed or held, and yet a return is produced, with no indication of the true period for which the return is being measured.
For example, a portfolio’s inception date is October 20, 2013, and you’re reporting the fourth quarter 2013 returns for all portfolios. This portfolio, along with every other one in the composite, has a return, with no flagging or footnote indicating that its true period is shorter. To me, this is a big problem.
We occasionally see this when we conduct GIPS(R) verifications, where a composite began after the start of the year (or ended before the end, or had a break within the year). We require our clients to have a footnote or some other indicator as to what the true reporting period is.
It occurred to me that in cases like this, we’re reporting a return that occurred during the period, but it’s definitely not for the period.
Imagine a prospective employee who shows you their resume that reflects a continuous employment history, with no breaks. You later find that they had been terminated from one job and that it took them six months to get a new one. To avoid the unseemly break, they decided to extend the termination date from the one job, and move the start date from the second job up a bit. And so, they’re reporting on jobs that were held during the alleged period, but clearly not for the period. We would not look favorably upon such reporting, would we? Folks have been terminated for less.
Well, shouldn’t performance reports be held to the same level of scrutiny? My belief is that if a portfolio, security, etc. doesn’t exist for the full period, you either (a) report “n/a,” or (b) report a return with an indicator that it’s for a shorter period, and identify what that period is. To do otherwise would, in my view, provide invalid and misleading information.