Key Takeaways
- Tracks compounded growth of a $1,000 initial investment.
- Assumes full reinvestment of gains and distributions.
- Visualizes total return excluding cash flow distortions.
- Useful for comparing fund or portfolio performance.
What is Value Added Monthly Index (VAMI)?
The Value Added Monthly Index (VAMI) is a performance metric that tracks the compounded growth of a hypothetical initial investment, usually starting at 1,000 units, by applying net monthly returns including reinvested gains and distributions. It provides a clear, standardized way to visualize and compare total returns of portfolios or funds over time without distortion from external cash flows.
By isolating pure trading performance, VAMI helps you assess how your investments grow cumulatively, making it easier to benchmark against other funds or indices.
Key Characteristics
VAMI’s main features simplify performance tracking and comparison for investors and managers:
- Compounded Growth Tracking: Reflects the reinvestment of dividends and gains monthly for a total return view.
- Standardized Base Value: Typically starts at 1,000, allowing consistent comparison across investments.
- Net Returns: Uses returns net of management fees, providing a realistic performance measure.
- Cash Flow Neutral: Ignores deposits or withdrawals, focusing solely on investment returns.
- Visual Performance Insight: Enables charting growth trends and drawdowns to complement metrics like R-squared.
How It Works
VAMI calculates monthly growth by multiplying the previous period’s value by one plus the net monthly return, compounding gains over time. This formula captures the cumulative effect of reinvested profits, making it straightforward to track long-term performance.
For example, if your portfolio returns 5% in one month, VAMI multiplies the prior month’s value by 1.05, updating the index value to reflect that gain. This approach highlights trends and recovery speeds, helping you evaluate tactical asset allocation decisions within your portfolio.
Examples and Use Cases
VAMI is widely used to evaluate fund managers, portfolios, and investment strategies across industries and asset classes:
- Airlines: Investors tracking Delta can use VAMI to measure compounded returns over periods of market volatility.
- Equity Funds: Comparing VAMI curves of different funds helps identify those with superior compounded growth, complementing analyses found in low-cost index funds.
- Portfolio Strategy: Assessing monthly returns through VAMI aids in refining tactical asset allocation to optimize growth and risk balance.
Important Considerations
While VAMI provides a valuable snapshot of cumulative performance, it does not directly measure volatility or risk, so pairing it with metrics like standard deviation is essential. Also, VAMI assumes no taxes or financing costs, which might affect actual investor returns.
To deepen your understanding of growth metrics, consider exploring compound annual growth rate (CAGR), which complements VAMI by standardizing returns on an annual basis. Using VAMI alongside such measures and data analytics can enhance your investment evaluation process.
Final Words
VAMI offers a clear view of compounded investment growth, isolating performance from cash flow distortions. Use VAMI charts to compare funds or strategies over time and identify trends before making allocation decisions.
Frequently Asked Questions
VAMI is a performance metric that tracks the compounded growth of a hypothetical initial investment, typically $1,000, by applying monthly net returns with full reinvestment of gains, dividends, and distributions. It provides a standardized way to measure and compare investment performance over time.
VAMI starts with a base value, usually 1,000, and updates monthly by multiplying the previous VAMI by one plus the net monthly return. This reflects the compounding effect of returns, showing total growth as if all profits were reinvested.
VAMI helps investors visually track and compare the compounded growth of portfolios or funds over time, highlighting trends, drawdowns, and recovery periods. It standardizes performance evaluation without distortion from external cash flows like deposits or withdrawals.
Yes, VAMI returns are typically net of management and performance fees, and they include reinvested dividends and distributions. This ensures the performance metric reflects the true growth of the investment after costs.
While VAMI visually displays drawdowns and growth trends, it does not directly measure risk or volatility. For a complete risk assessment, it should be used alongside other metrics like standard deviation or the Sharpe ratio.
VAMI is commonly used for evaluating fund managers, benchmarking investment strategies, back-testing portfolios, and tracking performance over different time frames such as monthly, quarterly, or yearly.
VAMI ignores interim cash flows such as deposits and withdrawals to isolate pure trading performance. This allows for a clean comparison of investment growth without the distortion of external cash movements.
Yes, for non-USD assets, VAMI calculations incorporate foreign exchange rates to accurately reflect returns. This makes it a versatile tool for international portfolio performance tracking.
