A Money Manager May Try to Skew His Track Record

A money manager tells you that he has earned 20% a year for his clients in the stock market over the past 15 years.

Sounds great. But how do you know it’s true?

Strange as it seems, there is no standard formula that money managers must follow in calculating their investment track records. The variations are endless--and naturally, most managers will adopt a formula that makes their performance look best.

Say, for example, a manager has 25 individual accounts. When you ask how he performed over the last five years, does he show you his best account? The average return of the 25? The median return? Also, are the results before or after fees charged?

Does the manager remove from his calculations the accounts that he lost during the period? Obviously, if they left because the manager performed poorly, the results of his remaining (and probably happy) clients don’t tell the whole story.

The only protection for investors is to ask a lot of questions about a manager’s performance figures.

The Assn. for Investment Management and Research, a Charlottesville, Va.-based group whose members include many of the biggest money managers in the country, doesn’t require its members to calculate performance statistics uniformly. But last December, the group issued a long-awaited report that attempts to set standards for how performance is presented to clients and potential clients.

Some guidelines:

* Reported results must be time-weighted--that is, they must be calculated so as to minimize short-term fluctuations that occur as a manager takes in new accounts and loses others over time. Otherwise, a great performance on a small sum of money early in a manager’s career could skew long-term results.

* Any “typical account” figure presented for a specific time period must include all accounts managed during that period--even those the manager subsequently lost.

* No “selective” reporting--that is, a manager should show performance for as long as he has been managing money, not just since a specific date. Otherwise, a manager who performed terribly in the early 1980s might be tempted to show results only since, say, 1985.