Are Implementation Shortfall and the T Standard the same thing?

By: Aran Murphy, Product Strategist SEPTEMBER 2012
Are Implementation Shortfall and the
T Standard the same thing?
Issue: The T Standard is Russell’s industry-recognised set of guidelines for the
consistent and transparent reporting of transition event performance. Yet its
foundation metric uses a version of the implementation shortfall methodology.
So how does the T Standard differ from implementation shortfall?
Response: The implementation shortfall methodology is an important element of
the T Standard. The T Standard, an industry standard performance metric
pioneered by Russell, 1 providing specificity for reporting periods, disclosures and
pricing conventions – is designed to improve transparency and guide managers’
conduct of transition events.
Background
The term “implementation shortfall” was first given prominence by André Perold in his
landmark 1988 paper, “The Implementation Shortfall: Paper vs. Reality.” 2 Since then,
institutional investors have learned to measure investment success not in terms of how
well a strategy works on paper, but in terms of the real-value performance of the
implemented portfolio.
Transaction costs can have significant impact on a portfolio’s performance. The roundtrip
costs of trading an investment idea can materially affect, and in some cases
dominate, realised value. An example is the “Value Line anomaly,” whereby the popular
investment newsletter’s recommended stock picks delivered superior returns over the
market on paper, yet underperformed the market when put into a real portfolio 3 .
For a transition event, implementation shortfall is the arithmetic difference between the
return on the actual portfolio and the return on the target portfolio wherein the target
portfolio is attained at no cost. Commissions, spreads, fees, market impact and
opportunity costs of trading are factors that contribute to implementation shortfall.
1
2
3
The T Standard is proprietary to Russell Investments, yet it may be used by any third party in connection
with such third party's manager performance calculations. Such third party calculations may be designated
as being T Standard only in those cases where the entire T Standard methodology, as made available by
Russell, including without limitation as posted on Russell's website(s), has been followed in producing the
calculation. For more information, see www.russell.com/tstandard.
Journal of Portfolio Management 14, no. 3 (spring 1988): 4–9.
See Leinweber, (2002) Using Information from Trading in Trading and Portfolio Management and for
another example see Anderson, Bianci, and Goldberg (2011) Will My Risk Parity Strategy Outperform?
Russell Investments // Are Implementation Shortfall and the T Standard the same thing?

While the implementation shortfall methodology is a general measure of transaction
costs, the T Standard is a specific measure used for the consistent and transparent
reporting of transition event performance. Although the implementation shortfall
methodology is an important element of the T Standard, the T Standard sets out
stronger guidelines for reporting periods, disclosures and pricing conventions. One can
do an implementation shortfall calculation and not necessarily get the T Standard result
– but one can’t get the
T Standard result without doing an implementation shortfall calculation.
Russell’s motivation for creating the T Standard 4
The reporting clients look for, and which their managers provide during their ongoing
investment assignments, is time-weighted investment performance data derived from
the managers’ accounting systems. The reporting protocol in transition management
assignments should be no different. Reports should provide daily returns, include all
assets and include day-over-day market valuation.
For the above reasons, Robert Collie of Russell Investments built an industry
consensus on the proper standards for transition management performance - from the
client’s perspective. 5 The new standard, called the T Standard, established a rule
whereby transition managers provide daily, accounting-system-based market
valuations of all portfolio assets (including cash, securities, currency, derivatives and
other relevant assets). Reporting must show how the returns tie out to the three key
periods of the transition: pre-implementation, implementation and post-implementation.
Exhibit 1 / The implementation shortfall measure and the T Standard – a comparison
IMPLEMENTATION SHORTFALL
A methodology first articulated by
André Perold
in 1988
Measures the difference between a
trade or portfolio’s return on paper and
the real return realised after trading
Generalised for all transactions
What is measured can vary
immensely, with different managers
providing different arrival prices,
benchmark rules and reporting periods
T STANDARD
A set of reporting practices introduced
by Russell Investments in 2003
Measures the difference between a
transition portfolio’s value on the close
prior to trading and the portfolio value
at conclusion of trading
Specific to transition management
industry
The T Standard is now industry
standard, with consistent pricing and
reporting frameworks
The T Standard follows methodology
used in ongoing asset management
assignments
4
5
The T Standard was first introduced in 2003 by R Collie of Russell Investments. See R Collie, “Calculating
Investment Performance During a Portfolio Transition: The ‘T Standard’”, Russell Research Practice Note,
2007. It was then updated in 2008 to include more examples and clarification on timing, changes to the
target portfolio during the implementation, and allowable prices. For more information click here.
R. Collie, “Performance Standards for Transition Management”, Journal of Performance Measurement 2003.
Russell Investments // Are Implementation Shortfall and the T Standard the same thing? / p 2

T Standard performance summary – an example
The image below is an attribution report that breaks down the performance of a
transition event. Implementation shortfall, as defined in this case by the T Standard, is
but one dimension by which the success of the event is gauged.
T Standard
performance summary
Pre-implementation
period
Implementation
period
Post-implementation
period
Time-w eighted
return
05-Dec - 07-Dec 08-Dec - 13-Dec 14-Dec - 14-Dec 05-Dec - 14-Dec
Legacy portfolio -0.82% -3.84% -2.03% -6.56%
Transition portfolio -0.82% -2.76% -1.28% -4.78%
Target portfolio -0.04% -2.41% -1.27% -3.69%
RUSSELL MIDCAP INDEX -0.45% -3.69% -1.35% -5.42%
Implementation shortfall -0.34%
Actual transaction costs -0.35%
Opportunity gain 0.01%
Legacy portfolio Transition portfolio Target portfolio RUSSELL MIDCAP INDEX
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
-7.00%
Pre-implementation
period
Implementation
period
Post-implementation
period
Time-weighted
return
For illustrative purposes only.
Includes commissions, taxes & fees, bid/ask spread, market impact and opportunity costs.
Data is historical and not a guarantee of future results. Indexes are unmanaged and cannot be invested in directly.
The T Standard evolved as a means of better evaluating and managing large portfolio
changes, such as an institutional investor’s funding, hiring or firing of an investment
manager. Unmanaged transitions were known to be costly, and yet until the T
Standard, there was little consensus on how best to measure investment performance
during a transition. True daily investment performance measurement, key to
management throughout a transition event, was relatively unknown. Now, with the T
Standard, institutional investors have a transparent and consistent means of assessing
the impact of changing a portfolio’s structure.
Russell Investments // Are Implementation Shortfall and the T Standard the same thing? / p 3

A detailed daily view into your portfolios
For illustrative purposes only.
Data is historical and not a guarantee of future results. Indexes are unmanaged and cannot be invested in directly.
RELATED READING
For more information about the T Standard and transition management, please visit
Russell Investments’ website, at www.russell.com/tm, www.russell.com/tstandard, and
www.russell.com/institutional/investment_solutions/transition_best_practices.asp
Important Information: This document is issued by Russell Investment Management Ltd ABN53 068 338 974, AFS License 247185 (RIM). It provides
general information for wholesale investors only and has not prepared having regard to your objectives, financial situation or needs. Before making an
investment decision, you need to consider whether this information is appropriate to your objectives, financial situation or needs. This information has been
compiled from sources considered to be reliable, but is not guaranteed. Past performance is not a reliable indicator of future performance. Nothing
contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any
investment, nor a solicitation of any type. Copyright © 2012 Russell Investments. All rights reserved. This material is proprietary and may not be
reproduced, transferred, or distributed in any form without prior written permission from RIM or Russell Investments. First published July 2012. Revised
September 2012. R_RPT_RES_ShortfallTStandard_V1F_1209 MKT/4910/0912
Russell Investments // Are Implementation Shortfall and the T Standard the same thing? / p 4