Measuring Success Is Hard

Measuring success is hard. Case in point this week was something we call the "up-market capture ratio" in my association's investment policy.

Investopedia defines the up-market capture ratio as "the statistical measure of an investment manager's overall performance in up-markets. The up-market capture ratio is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen. The ratio is calculated by dividing the manager's returns by the returns of the index during the up-market and multiplying that factor by 100."

Maybe that's more than you need to know. Point is, our policy says the up-market capture ratio is supposed to be X, and when we finally got around to measuring it this week, we discovered that it has been below X for as long as our current investment manager has been managing our portfolio.

Time for a new investment manager? You might think so, but let's slow down and take a closer look.

Truth is, the amount of return that an investment portfolio can earn -- in either up markets or down -- is tightly correlated with its overall investment strategy and its mix of assets. And guess what, the amount of risk that our investment manager can expose our portfolio to, and the amount of any particular asset class (measured as a percentage of the overall portfolio) that can held are also tightly regulated by our investment policy. In other words, our investment manager, in making his decisions about where to invest our money, has to abide by rules we've put in place to protect the association's assets from what we would consider to be undue risk and shady investment vehicles.

Are you still with me? Because with all of these rules in place, it is entirely possible that we have baked into our investment policy a measure of success that the other requirements of the same policy make impossible to achieve. It's a little like expecting the test pilot to break the sound barrier, and then giving him a Piper Cub to do it in.

We're having a call with our Investment Committee to help sort it all out next week (and maybe I'll have egg on may face then, because the members of that committee understand investments far better than I do), but for the purposes of this blog post we can actually forget about all of these investment details. I'm only using them as an example for an absolute truism when it comes to measuring the success of any initiative.

Make sure the metric is achievable.

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This post first appeared on Eric Lanke's blog, an association executive and author. You can follow him on Twitter @ericlanke or contact him at eric.lanke@gmail.com.

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