PERFORMANCE REPORTING GUIDE

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1 For adviser use only PERFORMANCE REPORTING GUIDE and provide you with a range of performance reporting resources. This guide provides you with a summary of these resources, examples of how performance is calculated and some frequently asked questions. Performance report/resource Source Performance calculation methodology Report level Performance data Performance Summary (Portfolio - PPS) n-link Investor reports Modified Dietz Client account level. Total portfolio return (%) over chosen time periods for each of your clients accounts. Investment Performance Summary (IPS) n-link Investor reports Modified Dietz Client account level. Client security level. Total portfolio return for each of your clients accounts. Individual security returns over chosen time periods by: income ($), Income (%), Growth (%) and Total Return (%). Investments, CGT, and Portfolio Summary n-link Adviser reports Modified Dietz Adviser account level Total portfolio return, portfolio value, and CGT position for every, and badged IDPS account listed under your adviser code on one.xls worksheet. Fund level investment performance n-link Research menu > Investment Products FSC Standard no Fund level Historical performance, fund commentary, 6 and GIPS 1 management cost, unit price, distribution and benchmark comparison data for each security. and MLC Navigator Fund Profile tool MLC Wealth site (via n-link Research menu) FSC Standard no 6 and GIPS Fund level Historical performance over different time periods, by: income (%) and growth (%) for each security held in and. and MLC Navigator monthly performance and asset allocation worksheet MLC Wealth site (via n-link Research menu > Fund Profile Tool) FSC Standard no 6 and GIPS Fund level comparison Compare historical performance and asset allocations of the different investments on and over different time periods by income (%) and by growth (%). Listed security performance Morningstar and Thomsen Reuters (via n-link Research menu) N/A Fund level Access the Stock Centre information including: share price performance history, Morningstar share recommendations and the ability to set alerts for shares including volume spikes, ASX announcements or the attainment of specific price points. 1 Global Investment Performance Standards. Performance Reporting Guide 1

2 How is performance calculated? Performance reports available on n-link use the Modified Dietz methodology. This includes reports that measure performance at the account (or Total Portfolio ) level and also at the security level. The Modified Dietz method is used to calculate the effective rate of return, over the specified time period, by taking into account the timing of capital flows and hence the amount of investments exposed in the generation of the investment returns over the specified period. Using the following key: Symbol Definition Summary OMV NCF CMV Opening Market Value for the selected report period Net Capital Flows for the selected report period Closing Market Value for the selected report period. Time weighted investment exposure for the selected report period. The unit/share price used to calculate opening market value of each investment in the portfolio will be the SELL price as at close of business on the day prior to the specified report start date. (Note, for non-daily priced securities, it is the last available SELL price). For external securities transferred into and (i.e. in-specie transfers in) or where an assignment transfer occurs, the inception dates used to determine the security performance will be the date the securities were transferred in. Net capital flows capital inflows less capital outflows Capital flows apply the closing SELL price of the day in which they occurred. The unit/share price used to calculate closing market value of each investment in the portfolio will be the SELL price as at close of business on the specified report end date which, for non-daily priced securities, is the last available SELL price. Multiply each cash flow (including opening balance, inflows and outflow) by the proportion of the time that the cash flow was invested relative to total report period and then sum the results of each time weighted cash flow. The Modified Dietz formula for calculating performance over a specified time is: Investment earnings ($) / What is a net capital flow? Money that is transferred into or out of the client s account/investment (gross of initial advice fees). Assets that are in-specie transferred into or out of the account. Some tax related transactions impacting the cash account (relevant for superannuation and pension accounts, such as contributions tax) which are more of a capital type item. Income tax, tax rebates or other credits of this nature are not considered to be cash flow items but are items that offset or enhance investment returns. Insurance premiums impacting the cash account. Any capital flows mentioned above that are specific to the cash account will only be applicable when calculating account level return and not security level return. The portfolio includes the contribution of the cash account, whereas the security level does not include the contribution of the cash account (other than earnings such as dividends) that is paid directly into the cash account. Net Capital Flows do not include: Applications and redemptions that relate to transactions on the client s portfolio (for example purchases or sales of shares or managed funds etc.) Any income received on assets within the client s portfolio. Fees (inclusive of ongoing adviser fees and commissions) and charges on the portfolio. Performance Reporting Guide 2

3 Account level return The account level return (also known as Total Portfolio Return) provides a consolidated return for each member s account/s. This is available in the Performance Summary Portfolio (PPS) or the Investment Performance Summary (IPS) report on n-link. Example of a client s return at account level: Variable Value Summary Reporting period 6 months Reporting period specified by adviser OMV $1,000 OMV of Security A plus OMV of Security B, each valued at $500 each NCF $200 A $500 deposit into the account (end month 3), less a $300 withdrawal (end month 5) CMV* $1,310 Includes security A CMV of $400 plus security B CMV of $810 plus dividends received of $100 from security B (situated in the cash account) $1,200 $1,000 opening balance x 100% (6/6 month exposure) plus $500 deposit x 50% (3/6 month exposure) less $300 withdrawal x 16.7% (1/6 month exposure) $1,200 * In the Portfolio Performance Summary, the closing market value of the account incorporates pending and received income in the period. Total account Investment earnings ($) ($1,310 $1,000 $200) $1, % Performance Reporting Guide 3

4 Security level return The security return provides a discrete income and capital growth return for each security within a member s account. This is available in the Investment Performance Summary (IPS) report on n-link. Example of calculation of return for each security in a client s account: Variable Value Summary Reporting period 6 months Reporting period specified by adviser OMV # $500 OMV of Security B $500 NCF $100 A $250 BUY into Security B (end month 3), minus a $150 SELL out of Security B (end month 5) $100 CMV # $810 CMV of Security B $810 (excluding dividends paid into the cash account) $600 $500 opening balance x 100% (6/6 month exposure) + $250 BUY x 50% (3/6 month exposure) less $150 SELL x 16.7% (1/6 month exposure) $600 Income # $100 Dividend income of $100 received from security B (paid into the cash account) # the closing market value of each security in the Individual Performance Summary report does not include income received or pending income in the period. The reason for this is that income is provisioned for in the cash account rather than against the security. As a result, when calculating security returns, income will be factored into the calculation separately as detailed below (rather than accounting for income in the CMV): Capital growth return calculation Investment earnings ($): Capital growth only ($810 $500 $100) $600 35% Income return calculation Investment earnings ($): Income only Income $100 $ % Combined security level return for period Income returns plus capital growth returns 35% plus 16.67% 51.67% Note: Should a listed investment or managed investment be impacted by certain corporate actions or other significant events, we may not be able to calculate security performance returns for the chosen period of the report. Performance Reporting Guide 4

5 Frequently Asked Questions 1. When is an appropriate time to run my clients performance reports? The timing of when you run the performance report would depend on your preference of having fees incorporated in your returns. Fees are not included as capital items but as offsets to investment returns. For instance, monthly fees are charged at the beginning of the month. So if you didn t want the upcoming fee run to impact returns, you would need to run the report at month end prior to the beginning of the monthly fee run. For more information about the key monthly fee dates, please refer to the Important Updates MLC Key Dates flyer available on wealth.mlc.com.au in the MLC updates section. 2. How are Income accruals accounted for when we calculate performance on a client s accounts? The date the report is run and the report end date can impact the performance calculation, especially where accrued income is generated. The type of income will dictate how the accrued income is treated in the account and the security performance. The table below provides some guidance about how income accruals are treated for different security types on the platform: Security type Income summary Treatment Account return Treatment Security return Term deposit Accumulated interest (paid at maturity). Will be incorporated into performance calculation if we have received details of the accrued interest and provisioned for it in the cash account. Will be incorporated into security calculation if we have received details of this entitlement. Listed security Pending dividends/distribution allocated to cash account once notification received. Will be incorporated into performance calculation if we have received details of this entitlement and provisioned for it in the cash account. Won t be incorporated into the income return until paid. Wrap cash account Managed fund Interest calculated daily and paid quarterly no accruals. Distributions only allocated on payment date no accruals. Cash account interest will be included in the opening or closing market value only once paid. Managed fund distribution will be included in the opening or closing market value only once paid. 3. Why does my client s performance differ from that of the fund manager? Your client s performance may differ for a number of reasons, including the assumptions we use with our methodology (such as time weighting), as well as the time frames and cash flows in the specified reporting period. The wrap performance takes into account the individual holding and any actual cash flow. Performance Reporting Guide 5

6 4. In what situation could the security return for each asset in the account be positive but the overall account return is negative? This situation can happen from time to time, but it is very rare. The calculation for determining the account return (Total portfolio return) is impacted by transactions in the cash account. Such transactions could include: Fees; Commissions; Ongoing Adviser Service fees; Taxes etc. In contrast, such transactions relating to the cash account, do not necessarily impact the security returns if the cash account has sufficient balance to cover such outgoings. Example If we had 4 securities each opening at $1,000 and closing at $1,035 (including $15 of dividends each), the return on each is 3.5%, which is 3.5% for the overall portfolio, excluding cash. In the cash account, however, the ongoing fees + commission + ongoing adviser service fees + tax is say 5% (of total initial FUM), and the cash account had a sufficient balance to cover such costs without selling down other assets. As a result the asset level (total portfolio return) will be -1.5% (comprising 3.5% minus 5.0%) The individual securities do not carry any of the above expenses (as they are paid from the cash account), so the security level return of each of the 4 securities above will show as a positive while the portfolio will show a negative result. Performance Reporting Guide 6

7 5. Why is the performance on one of the securities different for two of my clients who initially invested at exactly the same time? It may be the case that these two clients placed their initial investment at the same time, but completed transactions at different times throughout the specified report period. Depending on when the transactions occurred, this would result in timing differences and impact the time weighted return. This can be especially prominent in a volatile market. For example: 3 Unit Price of XYZ XYZ Unit price: $5.00 Return to end of period (3): 20% Period invested: 3 month 1 2 XYZ unit price at end of period (6 months): $6.00 XYZ Unit price: $5.00 Return to end of period (3): 20% Period invested: 6 months Report period (6 months) Summary 1. Husband and wife both buy 1,000 units in XYZ at a unit price of $5.00. Each of these units generates a return of 20% over the 6 month period invested. 2. Wife then buys 300 more units in XYZ at a unit price of $5.00 at end of month 3. This unit generates a return of 20% over the three month period that it is invested. 3. As a result, the following security returns will be displayed on the Investment Performance Summary (no dividend income): Husband Investment earnings ($): Capital growth only ($6.00 x 1000 units) ($5.00 x 1000 units) ($0 no cash flows) $5,000 x (6/6) 20% Wife Investment earnings ($): Capital growth only ($6.00 x 1300 units) ($5.00 x 1000 units) ($5.00 x 300 units) $5,000 x (6/6) + $1,500 x (3/6) 23% Performance Reporting Guide 7

8 6. Why might my client s performance calculation look unusual? If an account has experienced a significant gain in a short period of time and some or all of that gain is withdrawn soon after that gain occurs the performance result will not be valid and will mostly likely show a negative return. This is especially the case if the performance is run over a short period e.g. 1 month. Example: 1. $1,000 of shares are bought 2. A significant event (such as corporate action) occurs 3 days later which has led to a market value of $1, Investor withdraws $1, Closing balance at end of month is $800 Variable Value Summary Reporting period 1 month Reporting period specified by adviser OMV $1,000 OMV of shares NCF $1,400 A $1,400 withdrawal (end month 1) CMV $800 CMV of shares -$260 $1,000 opening balance x 100% (1/1 month exposure) less $1,400 withdrawal x 90% (.9/1 month exposure) $260 Total account investment earnings ($) ($800 $1,000 $14,000) $ % As you can see, this is not valid as the investor is actually $1,200 ahead and has not returned 1500%. Also, in very limited circumstances, there may be a period where a transaction has occurred but not yet been incorporated into the return calculation as a capital flow, due to processing delays. For example, a large withdrawal has occurred and while the closing balance may be correct, the withdrawal has not been added back to the investment return (as a capital flow). We recommend allowing for sufficient time, after completing a large transaction, to run a performance report. 7. How are fees and taxes treated in the performance calculation? The performance figures are gross of any income tax payable directly by the investor, fees (excluding initial adviser service fees), charges and any applicable portfolio taxes which will be accounted for in the closing market value. Initial advice fees are treated as a capital flow for the purpose of calculating performance. As fees and taxes will often only impact the cash account (and not any of the securities in the account), they may only impact the account level performance calculation. Performance Reporting Guide 8

9 8. How are insurance premiums treated in the performance calculation? Insurance premiums are treated as a capital flow for the purpose of calculating performance. As insurance premiums will only impact the cash account and not any of the securities in the account, they will only be applicable to the account level performance calculation. 9. Where do we get our security prices from in order to determine performance? In some cases, the price data used to generate the specified performance report may have been sourced from an external research provider. In these instances, as unit and share price information is being supplied by third parties, the price used may relate to an earlier date than the date of the report. More information If you have any questions on and Performance reporting, or for assistance with n-link, please call Adviser Services on Important information NULIS Nominees (Australia) Limited ABN AFSL and Navigator Australia Limited ABN , AFSL are ultimately owned by the National Australia Bank group ( NAB ). The above information is believed to be correct as at date of publication, is for advisers only and cannot be distributed to any other person including clients of financial advisers. While every attempt has been made to ensure the accuracy and reliability of the information, it is not guaranteed in any way. Issue date: July 2018 A Performance Reporting Guide 9