How Do Family Offices Measure Investment Performance?
Short answer. Family offices measure performance with consistent benchmarks and metrics suited to the portfolio and its asset classes. They should agree in advance on how to assess returns and risk, and compare results with policy. The investment team should explain departures from standard measures. This helps the family avoid selective reporting and evaluate outcomes and capital use.
Family offices measure investment performance by using consistent methods to assess returns and compare results with family policy. Measures should fit the assets under review. Direct property, a private company, and a public market portfolio call for different evaluations, so the family should know what each metric captures.
Agree on Measures Before Reviewing Results
The family and its board should agree with the investment team on performance measures in advance. This reduces the chance that a manager selects whichever figure looks strongest in a given period. Keep definitions consistent across reports, and require a clear explanation when the team departs from a standard metric or benchmark.
Benchmarks should reflect an investment's purpose and risk. For some equity investments, a suitable market index can help compare the result with another use of capital. For a private investment, the family may also need to consider expenses and the time and risk involved in managing the asset. The question is whether the investment was worthwhile compared with other uses of family capital.
Measure Risk as Well as Returns
Performance reporting should include the risks taken to produce a return. Consider concentration and liquidity, along with debt and the assumptions behind valuations. A strong reported result can obscure a risk the family did not intend to accept, while weak results may reflect a longer investment horizon or a specific portfolio objective. The team should explain the context without changing measurement rules after the fact.
Set reporting expectations in the investment mandate and connect them to the family's objectives. The mandate can set priorities for preservation and growth, as well as income, liquidity, and risk. See how to write an investment policy statement and how allocation choices affect the portfolio for more on those foundations.
Use the Review to Guide Decisions
Performance review should inform decisions about managers and asset allocation, along with future commitments. It should also help the family understand whether its chosen portfolio model is delivering the outcomes it intended. If the team uses different measures for different asset classes, explain why and keep the approach stable enough for meaningful comparisons.
Good oversight depends on clear roles. A CIO or investment committee can monitor the portfolio, while the family or board confirms that the measures still match its goals. Avoid relying on a single number to judge the entire portfolio. Review returns and risk, along with liquidity and the use of time and resources. For related context, see portfolio models used by family offices and the investment committee's role.
It is important that the family and the board agree with the investment team on the various ways they measure performance because otherwise it can be very easy for an investment professional to favor one metric over another and vary from month to month how he or she measures performance.
Sources: How to Start a Family Office, The Single Family Office. Informational only, not financial, legal or tax advice.