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August 19, 2016 10:52AM

Investment Management – Performance Returns

When you are selecting a fully articulated investment management system, there are two essential functions to require of your prospective platform. First, it must be capable of tracking and measuring key performance and economic returns which are indicators of the “health” of your investment(s). Secondly, it must enable you to easily and regularly ensure and report compliance with regulatory requirements.

Just as a doctor checks your basic functions such as pulse, temperature, blood pressure, and respiratory rate, your investment management software should regularly monitor and report the “vital signs” of your investment portfolio. These include:

  1. Total Return—the value an investor earns from an investment over a specific period of time. It has two components expressed mathematically as Current Income + Appreciation.
    1. Current Income – rental income minus all expenses, taxes, etc.. Also, expressed as (Net Operating Income / Property Value)
    2. Appreciation—the change in the value of an asset / investment property at a point in time. It is expressed as a total and as per share ex: Net Asset Value (NAV)) often based on a current appraisal of a property (aka: Fair Market Value).
  1. Cash flow (aka: flow of funds) dollars coming in versus dollars out. Just like with your personal checkbook, the goal is to have positive cash flow, where the money flowing in is greater than the money going out.
  2. Rates of return—the percentage of your original investment that has netted you a profit over a period of time.

Beyond the Basics with Benchmarked Returns

In addition to complying with recognizable accounting principles and laws, real estate investment firms often compare their asset performance against a set of published benchmarks, which enables them to produce meaningful “report card”-like grades, related to performance, risk, and valuation to investor/stakeholders.  Many of the report card’s metrics relate to the aforementioned vital signs.

Several benchmarks are available for comparative performance analysis, such as the National Council of Real Estate Investment Fiduciaries (NCREIF)’s leading Property Index (or NPI). NCREIF collects, processes, validates, and then disseminates investment and operating information reporting on the risk and return behavior of real estate assets owned by institutional investors. NCREIF collects data on the performance of both individual commercial properties and collective investment funds. NCREIF publishes the NCREIF Property Index (NPI) and other statistical measures of performance on a quarterly basis. The reporting standards contain required and recommended elements, detailed calculation instructions related to time-weighted returns, internal rates of return, equity multiples that foster transparent, consistent and complete reporting of financial and operating information. In addition to the property-level NPI, NCREIF also publishes other indices like the NCREIF ODCE FUND INDEX to measure time-weighted returns of Open End Diversified Core Equity funds.

Another leading benchmark is the Global Investment Performance Standards (GIPS) administered by the Charted Financial Analysts Institute.  As evident in its name, GIPS is a global standard that quantifies and measures, not just financial performance, but also compliance with a set of industry-wide ethical principles. This increasingly accepted standard guides investment firms on how to calculate and present their investment results to prospective clients. The GIPS make it possible for investment managers around the world to “transport” their historical investment returns to other countries without having to restate these figures using different calculation and presentation rules. GIPS ensures fair representation and full disclosure of investment performance results.

Several leading commercial real estate and investment management software vendors—including Yardi—incorporate NCREIF and GIPS reporting elements in their platform, including more sophisticated elements that are usually the purview of the upper-tier fund structures (such as assets under management, net asset value, modified Dietz return, etc.). This enables users to easily track the full complement of data points and rate of return calculations right within the system.

In sum, when selecting Investment Management software, make sure that it can track and measure all basic performance, economic and benchmark return “vital signs.”