The Spaulding Series: Pension Funds: Measuring Investment Performance, by Peter Dietz


In 1966, Peter Dietz raised the bar for all financial market participants by authoring Pension Funds: Measuring Investment Performance.

Foreword 2004 by David Spaulding

I hope Im not accused of using hyperbole when I say that Peter Dietz is the father of investment performance measurement. Such a claim is quite justified. This book, Peters doctoral thesis, was the fundamental reason for the introduction of the Bank Administration Institutes standards, the Investment Counsel Association of Americas standards, as well as the UKs Society of Investment Analysts standards, all calling for the use of time-weighted rates of return. But this book did more than offer sound testimony to the merits of time-weighting over dollar-weighting as a way to measure investment performance. It also pointed out the problem with the practice of failing to monitor the performance of U.S. pension funds.

While today we might look back at this as simply a mistake of the past, the reality is that it wasnt too long ago that firms in Japan, too, didnt re-price pension fund portfolios. And, there are still countries today where such practices are not yet in place. So, while one might look upon this work as having some historical significance and offer the basis for the standards that followed, it also serves as a logical rationale for those today who havent yet adopted the techniques which many think are common place. I regret that I never had the opportunity to work with Peter, let alone meet him. When The Journal of Performance Measurement® decided to establish an annual award for the best article of the year, there was only one name that came to mind for the award: Peter Dietz.

The Spaulding Groups surveys have shown that Peters own rate of return formulas (both the Original Dietz and day-weighted (also known as modified)) continue to be used throughout the industry. While some may not be aware of what the Dietz refers to, those of us who do, recognize Peters contributions to the investment industry. During his life Peter obviously met and touched many people. One of them, Terry Fowler, sent us a note regarding Peter and has granted us permission to include it here:

Dear Sir, I wrote a letter to my 17-year-old high school senior daughter today in an attempt to explain why her mother and I are vocal about our expectations. In particular I was trying to explain that while she will almost certainly get into Boston College, UVA and maybe Princeton because she is smart, goes to a well respected prep school and is a national class swimmer, it is important to do the best you can not just slide by. Part of that letter included a reference to Peter Dietz.

Since I was waiting up for her to return from a Homecoming Dance, just for fun I did a Google on Peters name and found your first annual Peter Dietz Excellence Award website. I hope there was a second annual award and that there will be many more. If you ever want to explain to people what Peter was all about, give them this excerpt from my letter to my daughter:

I know this is getting long but I need to make sure that you understand why I am so difficult about the issue of communicating expectations. About 9pm on a Friday night in early December 1969 I received a call that would change my life. It was the last class day of my first quarter in graduate school. We had all been out having a few beers and I was feeling relieved that I didnt need to take the final in the most difficult class on my schedule - Quantitative Financial Analysis. The Prof, Peter Dietz had told three of us that because we were assured of at least a B we didnt have to take the final if we didnt want to - it was our choice. The three of us spent all of 30 seconds after class to make a decision. The decision was hell no we were not going to take the final. When I picked up the phone that night Dr. Dietz was on the other end. He was mad. I dont remember every detail of the conversation but the content was clear: I expect more of you. You three are the best and brightest of this class. You have an obligation to yourself and to your class. Taking the easy way out is not an option in this class, in this university or in life. The next morning the three of us were up in my office (I was a TA so I had an office) trying to figure out how to study for the test. For some odd reason I started reading the introduction to the book (Frontiers of Investment Analysis - still remember the name after all these years). I can remember just like yesterday saying: guys look at this! Suddenly we began tying together all the concepts we had been studying all quarter. It was fun it was exciting. We all took the final and I think we all received As - at least I know I did. Moreover, it was the basis for my entire educational and business life from that day forward. Peter became my mentor and was to be my Committee Chairman for my doctorate that didnt happen because I took a temporary job in 1970 to start a leasing company (Seafirst Leasing Corp/MetLife Capital/GE Capital) and Peter started spending more time on the consulting job he took in 1969 with a small investment firm in Tacoma (Frank Russell & Company). I know you dont know these companies but I want to tell you they are major factors in the US financial markets. Why did all of this happen? Because Peter Dietz expected a great deal of himself and more of others than they did of themselves. Most importantly he was un-afraid to express his expectations. I want to pass to you his and my passion for excellence and achievement and I dont want to dance around issues or expectations. The letter went on from there but the part about Peter is as fresh today as  it was 34 years ago. Friedman & Savage; Hirshleifer, Fisher & Lorie; Markowitz; Modigliani & Miller - what great fun when you were able to tie them together with Peters view of time, risk, volatility and return. One thing I laughed about - when I looked in the book to make sure I had spelled Modigliani correctly I noticed there was a no next to an article entitled Progress Towards Economic Stability. Peter was ever his own person. The author was his Committee Chairman, Arthur F Burns, the then sitting chairman of the Federal Reserve. Hope you have enjoyed this and will have some use for my reminiscences.

Terry Fowler

Thus, Peters reach (not surprisingly) extended well beyond the field of investment performance. We decided to republish this book because we believe its a part of the fundamental investment performance literature. Perhaps my own interest in history, in general, contributed to this decision. However, we also believe that it helps explain why we do what we do today. We hope you find this book insightful and interesting. I want to take this opportunity to thank Peters widow, Betty for loaning us a copy of the original book, Devon Wille and Sabina Hastings for their work in laying this book out, and Cybill Conklin for her design of the cover.

David Spaulding




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