INVESTMENT PERFORMANCE AND THE GIPS STANDARDS

Transcription

1 INVESTMENT PERFORMANCE AND THE GIPS STANDARDS Jonathan A. Boersma, CFA Head, Professional Standards Executive Director, Global Investment Performance Standards 14 March 2017

2 TABLE OF CONTENTS 1 Introduction to Performance 2 Performance and the Portfolio Management Process 3 Returns: Total Returns, Time-Weighted vs. Money-Weighted 4 The Need for Performance Standards 5 Overview of the Global Investment Performance Standards 6 Questions & Answers 2

3 INTRODUCTION TO PERFORMANCE

4 WHY MEASURE PERFORMANCE? Performance is what investment managers sell and how they compete Performance is what investors buy Performance is what is used to evaluate and compare investment managers Performance is what investment managers use to evaluate themselves Performance is what investors use to evaluate themselves Performance determines how much (or little) capital an investor has 4

5 INVESTORS CHASE PERFORMANCE

6 PERFORMANCE AND PORTFOLIO MANAGEMENT PROCESS

7 PORTFOLIO MANAGEMENT PROCESS 1. Set investment objectives/investment policy statement a. Risk tolerance b. Return objective c. Liquidity constraints d. Time horizon 2. Establish Capital Market Expectations 3. Determine Asset Allocation 4. Security Selection 5. Performance Measurement, Attribution, and Evaluation 7

8 PORTFOLIO MANAGEMENT PROCESS Performance and Attribution allow us to: - Evaluate/adjust capital market assumptions - Evaluate/adjust asset allocation - Test portfolio against Investment Policy Statement - Evaluate alpha hypothesis 8

9 MEASURING RETURNS

10 TOTAL RETURNS ROI = Capital Return + Income Example: Price (t=0) Price (t=1) Income Return - Stock % - Stock % - Which stock would you buy? Total return represents what the investor earned on the investment Benchmark must also include income for a fair comparison 10

11 TIME-WEIGHTED RETURN (TWR) REMOVES THE IMPACT OF CASH FLOWS AND ALLOWS RETURNS TO ACCRUE UNEVENLY 1 Jan 1 May 1 Sep 31 Dec * Market Value after deposit or withdrawal Market Value* $1,000,000 $1,100,000 $1,300,000 Cash Flow $200,000 Calculate Sub-Period Returns $1,100, 000 $200, 000 $1, 000, 000 rjan $1,000, % r Feb, Mar $1,300,000 0 $1,100, % $1,100, 000 Chain-Link Sub-Period Returns (1 + r Jan )(1 + r Feb,Mar ) 1 = (1 0.10)( ) 1 = 6.36% 11

12 TIME-WEIGHTED RETURNS VS. MONEY-WEIGHTED RETURNS Portfolio 1 Initial Investment = 1,000 Month 1 return = 100% Ending portfolio value = 2,000 Portfolio 2 Initial Investment = 1,000 Month 1 return = 100% Ending portfolio value = 2,000 Client cash flow = +1,000 Month 2 return = -50% Ending portfolio value = 1, Time-weighted return = 0% Internal rate of return = -18% Client cash flow = -1,000 Month 2 return = -50% Ending portfolio value = Time-weighted return = 0% Internal rate of return = 37% IRR is dependent on the timing of the cash flows client specific! IRR is not comparable unless cash flows are identical. 12

13 NEED FOR PERFORMANCE STANDARDS

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16 EVALUATING PERFORMANCE Asset Manager (Total) Benchmark (Price)

17 EVALUATING PERFORMANCE 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Asset Manager Benchmark

18 EVALUATING PERFORMANCE 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -5.00% Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Manager A Benchmark Composite

19 CELEBRATING 30 YEARS! 19

20 CURRENT STATE OF COMPLIANCE Key Highlights of Firm Notification Data as of 31 December 2015: 1608 firms submitted their claim of compliance. 86% of the firms have indicated that they have been independently verified. A comparison with the Cerulli database revealed that 24 of the Top 25 Global Asset Management Firms claimed compliance with the GIPS standards for some or all of their business as of 31 December, Source: Cerulli Associates

21 THE GLOBAL INVESTMENT PERFORMANCE STANDARDS

22 LOOK FOR GIPS COMPLIANCE What are the Global Investment Performance Standards (GIPS)? - Voluntary standards governing the calculation and presentation of investment performance based on the ethical principles of fair representation and full disclosure. Purpose of the GIPS Standards - Ensure accurate and consistent data - Obtain worldwide acceptance of standards for calculating and presenting performance - Promote fair, global competition among investment firms - Promote industry self-regulation on a global basis

23 WHAT DO GIPS COVER? Select Components of GIPS - Return Calculations - Composite Construction - Disclosure Requirements - Presentation/Advertising - Asset Class Variations - Private equity - Real Estate

24 STEPS TO COMPLIANCE Definition of the firm Definition of discretion Create composites Calculate returns Presentation and disclosure Must maintain records and policies and procedures covering all aspects of performance and compliance. 24

25 WHAT IS A GIPS REPORT? Year Composite Gross Return (%) Composite Net Return (%) Sample 1 Investment Firm Balanced Growth Composite 1 January 2002 through 31 December 2011 Custom Benchmark Return (%) Composite 3-Yr St Dev (%) Benchmark 3-Yr St Dev (%) Number of Portfolios Internal Dispersion (%) Composite Assets ($ M) Firm Assets ($ M) , , ,236 Sample 1 Investment Firm claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Sample 1 Investment Firm has been independently verified for the periods 1 January 2000 through 31 December The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firmwide 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.

26 GIPS REPORT (CONT)

27 GIPS 20/20 Project to update standards to make them more applicable to all types of asset managers, strategies, and investment vehicles Addressing pooled funds where a composite it not appropriate Needed to achieve GIPS mission 27

28 GIPS HANDBOOK, 3 RD EDITION Released December 2012 Most comprehensive review and revisions to date pages - Free download - PDF and ebook - Purchase hardcopy 28

29 RESOURCES The gipsstandards.org website: - Complete list of Guidance Statements - New Q&A database - Brochures and webcasts - Newsletter archive The GIPS Handbook Helpdesk (gips@cfainstitute.org) Certificate in Investment Performance Measurement (CIPM) 29

30 QUESTIONS

31 Jonathan A. Boersma, CFA Head, Professional Standards and Executive Director, Global Investment Performance Standards CFA Institute