40 years too long to wait

Most money managers are confident of their ability to add value and believe they can identifying performance problems that their products may experience. Both plan sponsors and money managers can rapidly detect underperformance in one of 2 ways: 1. Settle for a lower t-statistic. 2. Extract as much...

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Bibliographic Details
Published in:Pensions & investments (1990) 1997-10, Vol.25 (21), p.54
Main Author: Philips, Thomas K
Format: Article
Language:English
Subjects:
Benchmarks
Investment advisors
Investment policy
Pension plan funding
Portfolio performance
Process controls
Online Access:Get full text
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Summary:Most money managers are confident of their ability to add value and believe they can identifying performance problems that their products may experience. Both plan sponsors and money managers can rapidly detect underperformance in one of 2 ways: 1. Settle for a lower t-statistic. 2. Extract as much information as possible from the manager's returns. Both methods work. The second method is rooted in the observation that changes in the mean of a random process can be detected rapidly using a statistical process control technique known as the Cusum procedure. In essence, the Cusum procedure formalizes an advisor's visual ability to detect changes in slope into a statistical test that rapidly discriminates acceptable from unacceptable performance. Plan sponsors can use Cusum to monitor their money managers. By rapidly identifying week performers, it allows plan sponsors to revisit their initial due diligence process at an opportune time to determine whether the underperformance is merely accidental or the unhappy result of a fundamentally flawed process.
ISSN:1050-4974
1944-7671