By David D. Spaulding, DPS, CIPM, founder and CEO, The Spaulding Group which conducts GIPS® verifications; publishes The Journal of Performance Measurement®; and hosts the Performance Measurement Forum, the Asset Owners’ Round Table, and the Annual PMAR™ Conferences.
I did a LinkedIn survey, with a simple question: “To what level of precision do you typically report performance (rates of return)? We got 120 votes, including my own; here are the responses:
It might be obvious how I voted, as the checkmark gives it away.
Most people, probably not surprisingly, report to two decimal places. Now, my thoughts:
Zero decimal places
This choice received the fewest votes (only two people out of the 120 checked it off). Is there anything wrong with this level of precision? Perhaps.
Consider the following returns: 7.51%, 7.63%, 7.74%, 7.82%, 7.89%, 8.01%, 8.14%, 8.19%, 8.26%, 8.36%, and 8.49 percent. They would all be shown as 8 percent. But wouldn’t we agree there are differences that are not shown by a simple 8 percent? The extremes in this series, 7.51% and 8.49%, do seem pretty different, right? They’re separated by 98 basis points, but both round to 8 percent. I would therefore suggest that such a level of precision isn’t quite enough.
Three or more decimal places
I do not find such a level of precision warranted.
To see, for example, 7.510%, 7.511%, 7.512%, 7.513%, 7.514%, rather than simply 7.51% adds nothing, in my view. And to go to even more precision (e.g., 7.5113%) is quite a bit overboard.
When I see clients report to three or more decimal places, I always suggest they reduce to at least two, if not one.
What is gained by going to three or more decimal places? Does anyone care to see it to this level? Perhaps a few folks, but for most people, it serves no purpose.
Plus, with such precision, the likelihood of errors increases, I believe, necessitating corrections which are non-material.
Two decimal places
Perhaps it’s not surprising to discover that most of the participants chose this response; it’s the one I most often come across when doing verifications. And I think it’s what most investment professionals are comfortable with and would recommend to others.
You cannot go wrong with two decimal places.
But it’s not my preferred level of precision ...
One decimal place
I think one is sufficient. Interestingly, perhaps, it lagged behind those who selected three or more, coming in third place, just ahead of the no decimal places option.
I prefer it because I think such precision is adequate in conveying returns.
Plus, it has the added advantage that errors are less prone. E.g., if you reported 13.12% only to discover it was really 13.14, your 13.1 won’t change.
In the end (or, if you prefer, at the end of the day)...
You’re safest with one or two decimal places. And, as one person commented, you “Need higher precision behind the scenes.” That is, how you store your returns. Returns should be stored to a minimum of four decimal places; and, I think ideally to six. Only show one or two, but store to more, to avoid rounding issues that might arise.
Performance Perspectives Newsletter | The Spaulding Group (spauldinggrp.com)
About the Author:
David D. Spaulding, DPS, CIPM has been a thought leader in our industry for more than 30 years and has an in-depth experience with every major asset class and just about any circumstance.
He is arguably the #1 authority on performance measurement. Dave has over 40 years’ experience in management and technology, including over 30 years in the financial sector. He has conducted training classes for our clients, the CFA Institute, as well as local societies for 20 years. He has written four books and been co-author and/or editor of five more. He has also written numerous articles for various industry publications. Dave has served on a variety of industry committees and working groups. He earned a BA in Mathematics from Temple University, an MS in Systems Management from the University of Southern California, an MBA in Finance from the University of Baltimore, and a doctorate in Finance and International Economics from Pace University.
The Spaulding Group, Inc. is the fastest-growing verification firm, serving clients around the globe, with assets ranging from less than $100 million to more than $1 trillion. They provide an array of performance measurement services and products, including consulting.
