Historical Perspective

Time-weighted indices were first developed and presented in the 19th century. However, it was not until the 1930s that Cowles introduced the idea of market-weighted indices. His indices were the forerunners of those of Standard & Poor's. Cowles made significant progress in the construction of a performance index for an equity portfolio. In the early 1960s Fisher & Lorie [1964], who founded the Centre for Research in Security Prices ("CRSP") at the University of Chicago, put these concepts of performance evaluation together. Fisher [1965; 1966a; 1966b] created total return indices. which included both dividends and capital gains, over the period 1926-1960. An im-portant aspect of these studies was the treatment of compounding of returns. Fisher & Lorie [1968] discussed how performance should be measured, and provided a set of performance evaluation standards together with a discussion of the fundamental issues in performance evaluation. Their article begins with the following paragraph (Fisher & Lorie [1968, p. 291]:

'One of the vital statistics for measuring the performance of pension funds is the rate-of-return. Rate-of-return has many possible definitions, probably none of which is right for all purposes. It is hoped that at least one is useful for each purpose.'

In the late 1960s, the Ford Foundation [1968] popularised the concept of considering total returns. Its report, emphasised the importance of total returns and that cash could be raised by realising capital gains in addition to dividends.

These three basic concepts:

  • creating a performance index;
  • compounding returns over time; and
  • measuring total return

provide the foundations of performance evaluation as it is now understood.