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# 3 Ways to Measure Investment Performance

Fund managers are in a seemingly never-ending competition to attract more capital in order to grow their funds’ assets under management (AUM). The most common and effective way to attract more AUM would be superior investment performance, as this represents the hallmark of an investment expert. The typical method for measuring performance is to look at the manager’s percentage returns (after fees) on a multiyear basis.

However, when it comes to investors managing their personal funds, they need not always rely on these usual performance metrics since each investor has his or her own personal goals and objectives. Here are three ways investors can assess their performances.

## 1. Absolute return basis

More growth-oriented investors may wish to measure their performance using absolute returns — either on an overall portfolio basis or for specific positions. This is computed as the total returns for each position, or for the portfolio, in dollar terms.

For example, assume an investor had invested \$10,000 into Company A. Over a period of three years, the share price of Company A has risen, and the market value of his position in Company A is now \$12,000. During that time, he also received total dividends of \$600. He would then record a positive performance for Company A of \$2,600, which is the difference between the current market value versus his cost, along with dividends added (\$12,000 – \$10,000 + \$600).

## 2. Percentage return basis

The problem with measurements using absolute return is that they may not account for the total value of the portfolio. Thus, if an investor has a \$1 million portfolio but makes a dollar gain of \$2,600 (as in the above example), it constitutes only a very tiny return in the overall scheme of things.

A preferred way of measuring performance makes use of percentage returns instead. Using the same example, a capital gain of \$2,000 on an original cost base of \$10,000 would represent a 20% return (\$2,000 / \$10,000). The dividends make up 6% return (\$600 / \$10,000). Therefore, the total percentage return would be 20% + 6% = 26%.