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StatPro presentation about GIPS (Global Investment Performance Standards) and why investment management professionals should comply.
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GIPS – Why Comply? GIPS – Why Comply? A Timely ReminderA Timely Reminder
Carl Bacon, CIPM
Chairman, StatPro Group Wednesday, March 16, 2011
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Agenda
• StatPro Introduction
• Carl Bacon Background
• GIPS :• Standards – why are they needed?• Benefits to asset managers & clients• Leveraging the standards• 2010 Changes• Implications of compliance• Verification
• Questions & Answers
• Michael Walsh’s Email Address: [email protected]
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StatPro IntroductionStatPro Introduction
1994 Company
founded. First Product,
Composites
2002 Fixed Income
Attribution
2005 Advanced Reporting
2009 CAP and
Index service
2000 Performance
and Attribution
2003 Risk
Management
2006 Global Market Data business
2010 Seven:
Performance, Attribution, Risk,
Composites, Reporting
2011 Revolution
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Carl Bacon Biography
• Joined StatPro as Chairman in 2000
• Work Experience• Director of Risk Control and Performance at Foreign & Colonial Management Ltd • Vice President, Head of Performance for JP Morgan Investment Management (Europe) • Head of Performance for Royal Insurance Asset Management
• Education• B.Sc. Hons. In Mathematics, Manchester University
• Membership / Associations• member of the Advisory Board of the Journal of Performance Measurement• a founder member of both the Investment Performance Council and GIPS® • chair of the GIPS Executive Committee• chair of the Verification Sub-Committee • member of the UK Investment Performance Committee
• Industry Publications • author of “Practical Portfolio Performance Measurement & Attribution”, numerous articles and papers
and editor of “Advanced Portfolio Attribution Analysis”
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GIPS – Why Comply?GIPS – Why Comply?
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Why are Standards needed?Why are Standards needed?
• “All” asset managers above average• “Cherry picking” accounts• “Cherry picking” time periods• Self-selection
• Methodology• Treatment of errors• Model results & carve-outs
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GIPS GIPS (Why should asset managers do it?)(Why should asset managers do it?)
• Global Passport• Marketing advantage• Client driven (Level –playing field)• Self-Regulation• Internal Control (Good practice)
• More efficient• Better data/ information• Risk control
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GIPS GIPS ( Why clients should demand it?)( Why clients should demand it?)
• Differentiate between “good” and “bad” asset managers
• Basic hygiene factor
If not compliant, is the asset manager?:• Not committed to ethical standards• Controls so weak they cannot achieve
compliance• Not prepared to make the appropriate
investment
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GIPS are Ethical StandardsGIPS are Ethical Standards
“GIPS are ethical standards for investment performance
presentation to ensure fair representation and full
disclosure of an investment firm’s performance history”
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Benefits of the GIPS StandardsBenefits of the GIPS Standards
• Enhanced ability to compare performance between firms and strategies
• Consistency in calculation and presentation of performance results• frequency of valuation, treatment of large cash flows and handling of
accruals
• Full disclosure of important details on performance data presented• such as fees, composite construction criteria, dispersion of returns
• Firms recognized for adherence to industry best practice
• Strengthened internal processes and controls; improved risk management
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Who are Standards aimed at?Who are Standards aimed at?
• All “users” of Investment Performance Information• Institutional• Private Clients• Retail, if not covered by existing regulations
• All asset/product types• Equity/ Fixed Income/ Multi-currency• Real Estate/ Property• Venture Capital/Private Equity• Derivatives/Overlay/Leverage• Hedge Funds/ Alternative Investments/ Absolute Return
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Endorsed Country SponsorsEndorsed Country Sponsors
Australia Austria Belgium Canada Denmark* France Germany Hong Kong* Hungary Ireland Italy
Japan* Kazakhstan Korea Liechtenstein Luxembourg Micronesia Netherlands New Zealand Norway Poland
Portugal Singapore South Africa Spain Sri Lanka Sweden* Switzerland UK Ukraine U.S.* Greece
32 countries as of 1/1/2010* Greater than 70% of firms claim compliance1
1. CFA Institute Market Research Group, GIPS Standards Research: Compliance Verification and 2010 Review. September 2007
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Leveraging the StandardsLeveraging the Standards
• GIPS:• Ensures comparability for the investor• Promotes credibility for and builds trust within
the investment management industry• Allows global competition
• According to eVestment Analytics2 73.4% of firms in database comply to GIPS:• Total # of firms in the global database = 1546• Firms responding "Yes" to GIPS compliance = 1146 • Firms responding "No" to claims compliance with the
GIPS standards = 403
Bernard Madoff2. https://www.evestment.com/global/Home.aspx
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Leveraging the standardsLeveraging the standards
• Initially required by clients & “good” managers• Differentiate
• Emphasize the difference• Take a competitive advantage• Explain that non-compliant presentations are
meaningless
• Use the data to manage the business• Clarity of investment strategy• Drive for consistency• Subsidiaries and overseas offices • Increase acquisition value
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Standards: the CoreStandards: the Core
• Fundamentals of Compliance• Definition of firm• Discretionary (effective, not legal)
• Input Data• Record keeping & consistency• Valuation (Fair value hierarchy)
• Return Methodology• Portfolio returns• Composite returns
• Composite construction• Disclosure• Presentation & Reporting
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2010 Review2010 Review
• Standards scheduled to be rewritten every 5 years
• “Straw Man” issued for public comment• Replies required by July 1st 2009• Over 150 comments received
• Revised standards approved 01/29/2010• Evolutionary not revolutionary• Effective 01/01/2011• Main Changes
• Risk• Claim of compliance
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RiskRisk
• Risk belongs in the standards
Performance = Return + Risk
• 3 year ex-post standard deviation required
• Risk is not new to GIPS• Risk measures were previously
recommended • Internal dispersion
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Internal DispersionInternal Dispersion
• Must disclose a measure of “internal” dispersion for each year
• Only those portfolios that are included in the composite for the entire year are included in the calculation
• Measure not required for 5 or less accounts• High and low returns• Difference between maximum and minimum return• Inter-quartile range• Equal weighted standard deviation• Asset weighted standard deviation
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Why Standard Deviation?Why Standard Deviation?
• Factual measure of variability
• Standard Deviation• Simple• Widely used• Easily understood• Comparable
• Descriptive Statistic• Mean is the first moment• Variance is the second moment• Distribution of returns is useful information
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Risk MeasureRisk Measure
• Managers can state standard deviation is not appropriate
• Present an additional measure• In fact are required to do so if they believe
standard deviation is not appropriate
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Risk Risk PresentationPresentation
• Recommended to show history of standard deviation
• Recommended to show annualised risk alongside annualized return
• Required to show standard deviation for each year going forward
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Risk – should we go further?Risk – should we go further?
• Yes of course (but perhaps when the market is ready)
• Additional descriptive statistics• Skewness - 3rd moment• Kurtosis - 4th moment
• Relative risk• Information ratio• Correlation
• Partial moments• Downside risk• Extreme risk
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Claim of Compliance – Verified firmsClaim of Compliance – Verified firms
• ABC Firm claims compliance with the with the Global Investment Performance Standards (GIPS®) has prepared and presented this report in compliance with the GIPS standards. ABC Firm has been independently verified for the period from January 1,2004 to December 31, 2009.The verification report(s) is/are available upon request
• Verification assesses whether 1) the firm has complied with all of the composite construction requirements of the GIPS standards on a firm-wide basis, and 2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation
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Claim of Compliance – Not VerifiedClaim of Compliance – Not Verified
• ABC Firm claims compliance with the with the Global Investment Performance Standards (GIPS®) has prepared and presented this report in compliance with the GIPS standards. ABC Firm has not been independently verified.
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Why be Verified?Why be Verified?
• Verifiers add real value • Compliance without verification is high risk• The performance measurement process will be
improved• Verification ensures global consistency
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Implications of Claiming ComplianceImplications of Claiming Compliance
• A firm must make every reasonable effort to provide a GIPS-compliant presentation to all prospective clients • A firm cannot choose to whom they want to present
compliant performance• As long as a prospective client has received a compliant
presentation within the previous 12 months, the firm has met this requirement
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ImplicationsImplications of Claiming Compliance of Claiming Compliance
• The firm must document, in writing, policies and procedures in establishing and maintaining compliance with the requirements of the Standards
• The firm must comply with all requirements of the
Standards, including:• Updates• Reports• Guidance Statements• Interpretations, or clarifications published by CFA
Institute and the Executive Committee (EC) of GIPS
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Implications of Claiming ComplianceImplications of Claiming Compliance
• The firm must provide a list and description of composites to any prospective clients that makes such a request• Discontinued composites must be on the list for at least 5 years
after discontinuation
• The firm must provide a compliant presentation for any composite on the list and description of composites upon request
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Implications of Claiming ComplianceImplications of Claiming Compliance
• Regulatory Risk• CFA Institute does not “test” a firm’s claim of compliance• No CFA Institute enforcement • Potential CFA Institute member sanction - CFA charter at risk• SEC, FSA
• Client risk• Misrepresentation• Client may sue if decision to hire was based on an erroneous claim
of compliance
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Concluding RemarksConcluding Remarks
• GIPS is essential• Clients• Good asset managers
• In most cases the investment in GIPS has not been leveraged• Externally• Internally• Increased professionalism in the performance team
• Costs are easy to identify• Benefits less easy but nevertheless significant
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ResourcesResources
GIPS Website: www.gipsstandards.orgCFA Institute Website: www.cfainstitute.orgGIPS Helpdesk: [email protected] alert list: [email protected] Composites: www.statpro.com
GIPS Handbook:
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Thank you!Thank you!
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