What it Means to be faar-better℠ informed
FAAR℠ recognizes that investment managers work best when they are best informed. A vital part in making this happen is for financial analyses, statements, and reports to provide these managers with meaningful information…information that greatly increases their understanding of the happenings and performance of the funds that they manage. Doing so almost always results in better investing and operating decisions, stronger accounting controls, and, most notably, more satisfactory investor communications.
To be meaningful, FAAR℠ believes that information should simply be insightful, accurate and easy-to-understand. As a provider of analyses and reports, FAAR℠ seeks to ensure that the information in its work products is endowed with these three attributes. FAAR℠ leaves prospective analyses used in making specific trading decisions to the investment managers. Instead, FAAR℠'s work products are based on the accounting data contained in the official, audited "books and records". FAAR℠'s backward-looking mission is to explain what has already transpired. The sections and paragraphs that follow explain why the FAAR℠ approach (the "FAAR-Better℠ Way") to historical analysis and reporting is better…meaningfully better.
A faar-better℠ way...
Generally Accepted Accounting Principles (GAAP), referred to by this or some other nomenclature, is almost always the foundation for determining and reporting an investment fund’s financial condition and financial performance. Although a fund manager’s proprietary systems may more than adequately analyze the fund’s condition and performance, the GAAP-formatted statements that are audited and reported back to investors (and, hence, about which and to which the fund manager must speak) do an exceptionally poor job in explaining both a fund’s happenings and the drivers of that fund’s financial performance. Reconciling an understanding and narrative to those GAAP-formatted statements distributed to investors usually becomes a significant challenge. This challenge can be overcome by utilizing FAAR-Better℠ analyses as reporting supplements.
FAAR-Better℠ analyses and reports are compiled following an approach which recognizes what investment funds are all about – which is simply that investment funds:
1) Invest to generate returns via capital appreciation, income, or both
2) Seek to meet their objectives by buying, holding, and selling investments
3) Most times, they are managed on a fair-value basis and transact with their investors on a Net Asset Value ("NAV") basis.
Managing an investment portfolio on a fair-value basis and undertaking capital transactions on a NAV basis means that the financial performance of an investment fund – or its rate-of-return (ROR), is almost always driven simply by i) the income earned or revaluation recognized from buying and holding an investment and ii) the value received from selling, or otherwise disposing, of an investment position. As almost all are aware, the measures of how the buying, holding, and selling activities of a fund contributed to financial performance (aka “Results of Operations”) are reported as income, gains, and losses. However, as a GAAP-formatted Statement of Operations determines and reports such income, gains and losses by comparing values received and revaluations recorded against the cost bases of a fund’s investments, such GAAP-reporting tells a distorted and, most often, inaccurate story of events and their impacts on ROR.
While reconciling back to the same GAAP-based Bottom-Line and ROR, a supplemental FAAR℠ Statement of Operations (unlike its GAAP-formatted counter-part) determines and reports such income, gains and losses by comparing values received and revaluations recognized against the fair values previously recorded for a fund’s investments. In so doing, this simple change permits the accurate measurement and valid association of income, gains and losses to the fund’s buying, holding, and selling activities. This significant improvement in identification and association, in turn, brings about an ease in attributing, understanding, and explaining transactions and events and their roles as drivers of fund performance. This reporting change, as simple as it is in concept and as impactful as it is in its consequence, can be quite difficult in its execution. For this reason, analytics and financial reporting services commonly offered by fund administrators do not make mention of such an offering.