Asset reporting: what can it do?

Every large asset should be regularly monitored with regard to the performance of its individual segments. Only through continuous monitoring can undesirable developments be identified in good time. Consolidated asset reporting enables effective control.

From Prof. Dr. Maximilian A. WerkmüllerProfessor of Finance and Family Office Management at the Allensbach University

Every large asset should be regularly monitored with regard to the performance of its individual segments. Only through continuous monitoring can undesirable developments be identified in good time and effective control be possible at all. Once the status quo of the total assets has been recorded, the installation of consolidated asset reporting immediately follows.

The particular added value of reporting lies in the fact that it makes the reporting systems of the commissioned asset managers "identically named" and thus enables the services to be compared in the first place. Take, for example, the area of banks that manage liquid assets. Even if they all have the same requirements due to identical investment guidelines, their in-house reports look very different.

Time- and money-weighted performance calculation

Some calculate performance on a time-weighted basis, others on a money-weighted basis. This alone is a significant difference that will lead to different results, because in the money-weighted performance calculation, the manager's performance is calculated in relation to the capital made available to him in the reporting period. Withdrawals and deposits therefore sometimes have a significant impact on the result. This distinction must first be eliminated in order to be able to compare two companies. The following example should serve as an illustration:

Market value of securities account January 1, morning EUR 4,000,000.00
Market value depot April 1 morning         EUR 4,200,000.00
Asset growth EUR 200,000.00 +5.00 %

Withdrawal on April 1 EUR 2,000,000.00
Market value of securities account April 1, evening EUR 2,200,000.00
Market value Depot June 30, evening         EUR 2,024,000.00
Decrease in assets EUR -176,000.00 -8.00 %

Total result EUR + 24,000.00

divided by average
capital EUR 3,100,000.00

money-weighted performance = +0.77 %
Time-weighted performance = -3.40 %

(Note: Example taken from Eigelshoven in: Werkmüller (ed.), Family Office Management, "Vermögensreporting", 4th edition, Heidelberg 2019)

In the money-weighted performance, the result is calculated in relation to the average capital invested. Investment results achieved with a lower capital investment have less of an impact with this method. The money-weighted performance thus gives the return at investor level, which is attributable both to the performance of the asset manager and to the skill of the investor or his family office in terms of the provision and recovery of his capital. For a long-term comparison of asset managers, however, the time-weighted method is recommended.

Standardization of the portfolio key figures

In addition, some companies report performance before tax, others after tax, others before costs, others after costs. This diffuse picture does not allow for comparability. The risk measure used by the individual companies also varies: some calculate on the basis of a "value at risk" approach (= highest probability of loss), others calculate using volatility (= fluctuation range around the mean value of an investment), while others calculate on the basis of the so-called "Sharpe ratio" (= volatility reduced by the risk-free interest rate). These portfolio ratios must therefore be standardized in order to be able to compare the risks that the individual companies are taking into account. This is what asset reporting does.

Asset reporting: standardized risk measurement

It also enables the family office to identify the asset classes in which outperformance was achieved, i.e. where the market performance was outperformed by the asset manager. However, this per se good news deserves a second look at the risk with which this was achieved. An asset manager who outperforms the market several times in a row but takes risks that far exceed the family's requirements has not necessarily done a good job and therefore does not deserve unqualified praise. The family office should certainly intervene here. However, if the risk shown in the reporting meets the requirements, the reporting answers the question about the origin of the outperformance.

Was it the strategic asset allocation or was it the investment approach or were "timing", "stock-picking" or a "long-short" strategy the key to success?

All these answers allow a judgment to be made as to whether the asset manager has done a good job or not. The reporting and the insights gained from its evaluation form the basis for the critical reviews with the commissioned asset managers, which take place at regular intervals.

1. Monitoring the investment guidelines

Powerful reporting also provides information on whether or not the investment guidelines negotiated with the respective asset manager have been adhered to. This also applies, for example, to the correctness of the settlement of transactions. It is precisely in this area that clearing houses typically make settlement errors that would remain undetected if reporting did not exist. The so-called transaction control report is created for these purposes.

2. Preparatory work for the tax return

Last but not least, reporting should also provide the data for the tax return. The so-called "tax report" should cover special forms of investment and refund claims with regard to foreign withholding tax in equal measure.

3. Scenario calculations and special evaluations

Depending on the amount and level of detail of the data provided, reporting is also able to deliver special evaluations on individual topics. For example, the alternatives segment, i.e. the non-liquid asset classes, can also be run against one of the known market indices. This results in a uniform risk across the total assets. The same applies to works of art and art collections. They can also be included in the overall asset analysis and management in the form of an index (see last blog).

4. Individual reporting

As a rule, the asset owner can determine the structure of the reporting himself. Typically, the principal wants to obtain a concise overview of the state of his total assets in as little time as possible. A short report that shows the key success factors, portfolio key figures and developments is therefore more suitable for them than a comprehensive report for the family office or family advisor.

Some families and family offices already work with wealth reporting service providers or have their own reporting tool. Other families still work with an Excel spreadsheet that is kept by the company's group accounting department. It is important to note that the "Excel solution" only provides a snapshot of the total assets, but does not show any developments and therefore does not show which investments are performing well and which are not. As a result, it cannot replace high-performance reporting. Good reporting certainly has its price. As a result, the costs are usually calculated in basis points, based on the monitored assets. But this money is well invested.

In our Family Office Management elective as part of our Master's program in Finance you can study the basic functions of effective wealth reporting. This is the "navigation tool" of every family officer. It is therefore not only worth a first look, but certainly also a second one.