Do you ever get asked about investment performance when comparing your portfolios for clients, other advisors or your DFM?

I think you might. It makes interesting reading at times and I’ll come back to that.

I like to summarise the key learning points from any complex subject using a picture. I want to share with you two graphs which help explain the key elements of the most important part of the whole AF4 exam study plan: portfolio performance.

You’ll know I spend a lot of time in the world of pensions, but I love my investment theory. You’ll know that once you take the FLUMP, it’s what you do with it and how you manage it that’s key.

If you are in pensions, you are in investments; they come as a package. You know that. I spend a lot of time with the pension (tax) wrappers, but as important (if not more..) for the client, is the investment management within (or without) the pension wrapper, irrespective if you are a Dimensional guru or Woodford fan.

That is reflected in the AF4 exam. It’s a key part of the journey to chartered status and the exam is asking you to assess the investment structure that you advise clients on. The most important module in the whole AF4 exam syllabus is the Portfolio Performance measurement. Your clients will regularly ask about performance.

What performance?

Last week I had a quick look at a financial advisers site. It had a lot on performance. It had nothing (yes, nothing) about risk-adjusted performance or any alpha that had (or hadn’t) been added. That’s not good enough now.

As a chartered financial planner and as part of educating your customers you need to know how to assess your own portfolio, your clients portfolio and your DFM’s performance – relative to the risk they are taking, the time invested and the money invested.

The AF4 exam helps develop your skills in these all these aspects. The AF4 exam tests your ability to analyse and apply your knowledge into case studies, just like your clients.

It doesn’t get any more important that Portfolio Performance.

It brings everything together and completes the full investment story from module 1 (AF4: Algebra and calculations) to module 8 (Portfolio Performance) and back to module 1; it tells the whole story of the AF4 exam and it’s the most important module in the whole course.

You know how I like my pictures when we’re learning; a picture paints a thousand words.

I like to summarise the key learning points using a diagram, or a picture or a graph and I want to share with you two graphs which help explain the key elements of the most important module in the whole AF4 exam study plan.  I want to share with you the SML graph and why it is so important.

I want you to look at an APCIMS benchmarking analysis, risk adjusted formulae and performance in a different light. I hope it’ll be easier to understand the full story, how they are connected and what you’ll be asked to look at in the exam.

Module 7 was the theory of portfolio construction.

Module 8 is about analysing to evaluate performance and measure return (with or without risk-adjustment) and it’s the module at the core of the exam, because it’s the most which is most applicable as you compare and are asked about performance.

You’ll see that there is more than one way of calculating returns from an investment. But, risk is critically important in assessing risk adjusted measures of performance. MOST importantly for the AF4 exam we’ll have a look at comparing benchmark performance with portfolio performance; the APCIMS benchmarking and performance comparison question in AF4 has been a BIG question. It is a must know subject. It came up again in October 2014 and is worth knowing inside out.

But, before all that, you need to know your SML…

Take a look at the video: