The Problem with Monthly Returns

I recently wrote about three “red flags” that I look for when evaluating portfolio manager returns. The third item – a firm dropping a specific time frame from its performance reports – is particularly relevant, because we’ve decided to make our own change to the time horizon for our performance numbers. Beginning next month, Pinnacle will no longer publish monthly portfolio returns.

Let me explain the context for this decision…

For many years the shortest reporting period we offered clients was quarterly. In fact I wrote our Quarterly Market Review for eight years focusing on quarterly investment and market news and including quarterly portfolio performance. Over the past two years, as our institutional investment business grew, we began to offer institutional investors monthly performance. This was purely a response to the institutional market place where monthly reporting is important for money managers implementing short-term market timing strategies. While our investment process has little to do with short-term timing strategies. we wanted to offer institutional investors competitive information in a competitive market. After some consideration, we thought we were discriminating against our private wealth management clients by not offering them the same data and (after vigorous debate among the partners at Pinnacle) we agreed to provide monthly performance to those who asked. Eventually this practice morphed into including monthly return data in our Pinnacle Monthly .

In retrospect we think we should have reached a different conclusion. First, Pinnacle’s investment process has little to do with monthly time horizons. Our process attempts to find values based on longer-term criteria, including fundamental macro-economic data, traditional measures of value, and market psychology measured over intermediate and long-term time horizons.

Second, monthly returns offer no clue as to whether we are successfully implementing our tactical investment strategy. In fact, at this year’s Inside the Investment Committee meeting, I showed attendees the chart to the right, displaying our monthly portfolio returns from inception. As you can see, the returns appear random and are too ‘noisy’ to reach any conclusions about investment trends or the success of our strategy.

Third, Pinnacle clients themselves do not see the value of monthly reporting. When asked which time horizon they feel is the best for evaluating portfolio returns, only 15.5% answered monthly. (Admittedly, only 3.9% answered “a complete market cycle,” which in my view is the correct answer.)

We further suspect that number is inflated since many clients interpreted the question to be “How often do you look at your portfolio returns?” which is a very different question from “What is the correct time horizon in which to evaluate an investment strategy?” Regardless of how the question was understood, there doesn’t appear to be much demand for monthly numbers from our clients.

Finally, perhaps the most important reason to stop reporting monthly numbers is that it invites unwise short-term decision making. By reporting monthly returns we are implying that such short term results are useful or representative to our readers. In contrast, we believe that a too-brief performance time horizon leads one to overreact to short term shifts in the market… which can result in serious financial planning or investment strategy errors.

Next month, we’re going to add quarterly performance as the shortest time horizon for Pinnacle portfolio reporting. We believe any period shorter than that is simply too brief to be relevant to our investment process. We will continue to write about the financial markets on a monthly basis in the Pinnacle Monthly and clients will still be provided with a virtual blizzard of performance data accumulated over more than ten years as a GIPS compliant money manager. Monthly data will of course still be available for any clients who specifically ask for it.

Our performance data is meant to inform and guide our clients in their decision-making. Hopefully, with this change, we’re making it easier for our clients – and anyone considering our money management – to evaluate our investment service.