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The Measure of Success

Truths About QAIB
Answering Fiction about Investor Returns with Facts

April 2016

The Quantitative Analysis of Investor Behavior (QAIB) was created to set reasonable investor expectations of investment returns and identify opportunities for investors to improve their returns.

QAIB is not and has never been an academic exercise but is a tool that reflects the way investors view their investments and how they determine the profits or losses they have. To that end, QAIB takes the most often used approach to calculating investor returns… Profits made on funds invested over a specific timeframe. This is also consistent with guidelines from the IRS and the SEC.

The most recently published fiction about QAIB is addressed here with the basic facts.

The Fiction: The 7 Worst Offenders
  1. QAIB blames low returns on dumb investors.
  2. QAIB blames only voluntary investor behavior for low investor returns.
  3. QAIB excludes expenses that make investor underperformance worse.
  4. QAIB returns canNOT be compared to fund returns as asset weighted returns can.
  5. QAIB uses a "quirky formula of its own".
  6. QAIB calculates returns based on "total assets at the end" of a period.
  7. QAIB returns are inaccurate because they are compared to an index rather than to the funds themselves.
Why the Fiction?

The reasons for creating fiction about QAIB fall into three categories:
  • Failing to understand what investor return really is… simply the money earned by investors over some specific period of time.
  • Discounting the disparity to maintain investors’ ignorant bliss… higher investor returns presents a more optimistic picture.
  • Simplistic views that ignore critical investor perceptions… such as the cost or benefit of not being invested during the period being measured.
The Facts

The truths about the 7 worst offending lies are discussed in the following sections. This section will be expanded when further questions arise or if amplification is needed.

1. QAIB blames low returns on dumb investors.
Nothing in the 20 year history assigns any blame to investors. Four factors cause the gap between investor returns and an appropriate index:
  • Availability of capital to investors for the entire period being measured.
  • Need for capital by investors before the end of the period being measured.
  • Expenses and underperformance of the funds.
  • Investors’ irrational behavior, based on generally accepted but misleading opinions.
2. QAIB blames only voluntary investor behavior for low investor returns.
As indicated in #1, there are four factors that cause the low returns. Voluntary investor behavior is one of the causes.

Voluntary investor behavior includes:
  • Delaying an investment decision
  • Withdrawing funds before they are needed or withdrawing from a less than optimal source.
  • Reinvesting after there is evidence of a market recovery.
3. QAIB excludes expenses that make investor underperformance worse.
QAIB measures assets after all costs and expenses are deducted and flows after all sales charges are paid.

While some measures attempt to make adjustments for differing share classes and expense ratios, QAIB makes no such adjustments since only net assets and net flows are used.

4. QAIB returns canNOT be compared to fund returns as asset weighted returns can.
QAIB reports the returns that are most visible to most investors, the investor’s personal return and the most widely used indexes.

The decision to compare the most visible measures of return allows QAIB to reflect the investors' perception and therefore to properly define the problem. Having defined the problem, methods have been developed and are being developed to narrow the gap between these two measures. QAIB presents an "investor's" view of the fund.

Asset weighted returns by definition ignore the time during which the investor is out of the investment and do not provide a measure of the lost opportunity. As such asset weighted returns are a “fund’s” view, reflecting only returns when money is in the fund.

5. QAIB uses a "quirky formula of its own".
The description of the QAIB calculation as being "quirky" or something that is exclusive to QAIB is utterly ridiculous.

The QAIB calculation is consistent with or similar to the formula used by mutual funds, brokerage firms, insurance companies and retirement plan providers who report investor returns to their clients.

The QAIB formula is based on the IRS guidelines for calculating gains and losses. The annualization of returns uses the SEC formula for that calculation.

6. QAIB calculates returns based on "total assets at the end" of a period.
This use of the term "total assets at the end" was an unfortunate paraphrase of the term used in the report, "cost basis".

It is unfortunate that the inventor of the phrase "total assets at the end" and those who repeat it are unaware of the enormous difference in meaning of the two terms.

7. QAIB returns are inaccurate because they are compared to an index rather than to the funds themselves.
Comparing investor returns to fund returns is useful when the goal is to reach no further that what funds can earn.

QAIB takes the approach, that the ultimate goal is to perform better than the market average and thus uses the market average as the benchmark.