PERFORMANCE MEASUREMENT

Transcription

1 PERFORMANCE MEASUREMENT THE JOURNAL OF THE PERFORMANCE MEASUREMENT RESOURCE INSIDE THIS ISSUE - SUMMER 2018 GEOMETRIC ATTRIBUTION AND THE INTERACTION EFFECT VOLUME VOLUME :: NUMBER NUMBER 44 THE JOURNAL INTERVIEW - KEN GROSSFIELD & NICOLE WELLMANN KRAUS BEST PRACTICES FOR GIPS POLICIES & PROCEDURES POLICIES & PROCEDURES CONTEST WINNERS: APPLETON PARTNERS FIERA CAPITAL, INC. JOHN HSU CAPITAL GROUP A PUBLICATION OF THE SPAULDING GROUP, INC.

2 The Joural Iterview Ke Grossfield, CFA is Chief Admiistrative Officer ad Geeral Cousel of Strategic Ivestmet Group, ad is a member of Strategic s Board of Maagers. Ke maages the firm s legal affairs, oversees the firm s risk maagemet efforts, which iclude operatioal due diligece ad ivestmet risk maagemet, ad leads the Relatioship Maagemet team, focusig o fosterig firmwide egagemet ad stadardizig best practices for existig cliets. Ke has worked at Strategic for more tha twety years. Prior to joiig Strategic, he was a Associate at the law firm of Shearma & Sterlig i New York. He has bee admitted to the legal bars of New York ad the District of Columbia. Ke holds a J.D. from New York Uiversity School of Law ad a B.A. i Political Sciece from the Uiversity of Michiga. Ke is a member of the CFA Society of Washigto, D.C. Nicole Wellma Kraus, CFA is the Maagig Director, Global Head of Cliet Developmet of Strategic Ivestmet Group. She oversees the developmet of cliet relatioships ad drives the firm s marketig strategy. She also serves as a member of Strategic s Board of Maagers. She has more tha two decades of experiece i the OCIO idustry, icludig early a decade at Hirtle, Callagha & Co. where she worked with the firm s largest cliets ad ultimately led the istitutioal practice, ad early twelve years at SEI Ivestmets workig with edowmets, pesio fuds, healthcare orgaizatios, ad foudatios. She has extesive experiece advisig ivestmet committees, to whom she is ofte asked to provide isights o best practices ad goverace. She has also actively collaborated with the Natioal Associatio of College ad Uiversity Busiess Officers (NACUBO) for early a decade, icludig servig as a speaker at multiple NACUBO evets. Nikki is the co-author of Edowmet Maagemet for Higher Educatio, a publicatio released by the Associatio of Goverig Boards of Uiversities ad Colleges (AGB) i Jue She has published various articles i the areas of ivestmet committee goverace ad ivestmet maagemet. Additioally, Nikki is a frequet guest speaker ad skillful moderator of ivestor paels at idustry cofereces. Nikki holds a B.A. i Eglish ad Computer Applicatios from the Uiversity of Notre Dame. She is a member of the CFA Society of Philadelphia. Ashley Reeves: Please provide us with some backgroud about yourselves. Ke Grossfield: I am Chief Admiistrative Officer ad Geeral Cousel at Strategic Ivestmet Group, where I have worked for almost 21 years. A core part of my job is overseeig our risk maagemet, legal ad compliace fuctios, so I have bee ivolved i settig ad reviewig our performace presetatio ad disclosure policies for my etire teure at the firm. Durig the early years, prospective cliet meetigs cetered aroud the ature of our Outsourced Chief Ivestmet Officer or OCIO model relative to the other models that domiated istitutioal asset maagemet at the time the cosultig model ad the bak model. As the OCIO idustry has matured, our coversatios ow focus o how we are differetiated from other OCIOs. This ievitably leads to a greater focus o performace, which is why we feel that achievig uiformity of calculatio methodology ad presetatio stadards is critical to a asset ower s OCIO vettig process. Nikki Kraus: I am Global Head of Cliet Developmet at Strategic, ad have bee i the OCIO space for over 24 years. I have met with as may as 50 ivestmet committees a year for may years, so I believe I am very familiar with the issues ad cocers of fiace executives ad committees as well as their reactio to the cocept of a OCIO arragemet, ad the cocers they have about it. I have worked i two categories of OCIOs: the multi-product/maager-of-maagers OCIOs, like SEI, ad the dedicated OCIOs, like Strategic. AR: Please describe what a OCIO is. The term OCIO has become like the term hedge fud, meaig that there are may differet categories of providers, so oe perso s cocept of what the term The Joural of Performace Measuremet -20-

3 a fud with a sigle asset mix ad uderlyig maager lieup, some have asset class-specific fuds ad ca therefore customize the asset mix but ot the maager lieup, ad some customize both the asset mix ad the maager lieup. Strategic offers all three implemetatio optios, with the optimal choice for each cliet joitly selected based o cliet-specific cosideratios such as portfolio size, liquidity eeds, risk tolerace, retur objective, legacy ivestmets, ad desired goverace process. meas may be very differet from aother s. The term obscures the diverse rage of service offerigs that it is used to describe. There are a few broad categories of OCIOs, which vary based o the level of discretio, the level of coflicts imbedded i the busiess model, ad the level of customizatio available to cliets. Dedicated OCIOs, such as Strategic, typically focus solely o OCIO ad related services, ted to have a smaller cliet base, ad use a truly ope architecture approach, meaig that they do ot use proprietary ivestmet strategies. We refer to this as a coflict-free busiess model, because there are o acillary busiess lies, ad o opportuity for the firm to ear additioal fees as a result of its allocatio decisios. Therefore, we believe this model best aligs the provider s iterests with the iterests of its cliets. Dedicated OCIOs vary as to the level of customizatio they offer. Some have Other categories of OCIOs iclude cosultats, baks, multi-product/maagers-of-maagers, ad mutual fud complexes. Cosultats typically offer three geeral levels of discretio: advisory, i which they make recommedatios regardig asset allocatio ad maager selectio, but leave the ultimate ivestmet decisios to the asset ower; implemeted cosultig, which mixes advisory services ad trade executio, ofte icludig some level of discretio withi prescribed parameters; ad true OCIO services, i which the portfolio is maaged o a discretioary basis. Cosultats charge much lower fees for advisory services tha OCIO services, with implemeted cosultig fallig i betwee. As a result, there are imbedded coflicts, icludig those relatig to the allocatio of limited capacity maagers across these three busiess lies. The ivestmet process teds to be decetralized, meaig that each cliet s performace will be a fuctio of the specific perso overseeig its accout. These coflicts ad issues should be carefully vetted by a asset ower ad/or its OCIO search cosultat. Baks have umerous busiess lies ad typically offer a rage of ivestmet products, icludig proprietary strategies for which they collect additioal fees. A bak s access to sought-after ivestmet maagers may be limited, because maagers ofte compete with certai of the bak s busiess lies, ad therefore may ot accept OCIO allocatios from them. Agai, the potetial for coflicts must be reviewed closely. The OCIO category also icludes multi-product/maagers-of-maagers, ad eve some mutual fud complexes. Evaluatig these models ivolves some of the same cosideratios as the cosultats ad baks. All four of the firm types described above ted to be sigificatly larger tha dedicated OCIOs, both i terms of umber of cliets ad assets uder advisemet/maage The Joural of Performace Measuremet

4 met. There is also a commo belief that they ted to be more focused o asset gatherig tha deliverig superior ivestmet results ad service to their cliets. Whe a asset ower decides to parter with a OCIO, it is typically because the istitutio does ot have sufficiet resources or expertise to maage ivestmets directly, especially give the ever icreasig complexity of global markets. The job of maagig the ivestmet portfolio geerally falls either to a ivestmet committee, which typically meets less tha te hours per year, or iteral fiace persoel, who are also charged with overseeig the operatig fiaces of the orgaizatio. I each case, the structure does ot typically allow for the focused attetio ecessary to maage a complex istitutioal portfolio prudetly ad efficietly. O the other had, committees ad CFOs are uderstadably reluctat to completely cede cotrol of the maagemet of their asset pools to a third party. A commo misperceptio, ad oe reaso we do ot like the term OCIO, is that the ivestmet committee s or CFO s role i overseeig the assets is elimiated whe a OCIO is hired. A sigificat part of the OCIO evaluatio process ivolves gettig committee members ad executives comfortable that after they hire a OCIO, the committee will cotiue to map the strategic directio of the ivestmet program, provide critical oversight, ad esure that the istitutio s log-term iterests are served. The committee ca ever fully outsource its fiduciary resposibility, so we work collaboratively with the cliet to focus o the decisios that will have the greatest impact o returs. Most committees would admit that they ejoy pickig maagers ad sped most of their time i committee meetigs iterviewig ad researchig maagers, but the research is compellig that this structure cosistetly leads to value detractig selectio ad timig decisios. It is also ot a efficiet use of the very limited time that committee members sped together. A sigle maager search, which may result i a 3% positio i the portfolio, may take up a etire quarterly meetig. This does ot leave sufficiet time for broader discussios that will have a much greater effect o the overall portfolio. based o the orgaizatio s retur objective ad ability to take o risk. Ultimately, the asset allocatio of the ivestmet policy is the committee s. The committee also agrees to the allowable asset classes ad rages for each asset class, ad sets the liquidity parameters of the portfolio. We work withi that framework to seek the best maagers ad take advatage of top dow valuatio aomalies. The work of our 40+ member ivestmet team is supplemeted by the efforts of a host of risk maagemet, operatioal due diligece, legal ad admiistrative professioals, which our cliets say provide great comfort to them. Our cliets also tell us that they could ot bear the expese of buildig a team this comprehesive, with this level of experiece ad expertise, or could they support the level of techology ad systems ifrastructure that we have developed. Whe we work with cliets, the committee is extremely AR: Why did you choose to brig your firm ito comegaged i determiig the optimal asset allocatio pliace with the GIPS stadards? The Joural of Performace Measuremet -22-

5 Cliets, potetial cliets ad their OCIO search cosultats have expressed tremedous frustratio with the games they see ad suspect are beig played with performace results. They poit to a host of abuses, icludig cherry-picked results, the after the fact elimiatio of accouts that performed poorly, gamed bechmarks, ad simulated, model, or backtested track records. Some of these practices are buried ad obscured, while some are more braze. For example, i 2009, we saw a retur history for a OCIO firm that showed, durig the fiacial crisis, a 40% allocatio to a defesive strategy desiged to offer sigificat dowside protectio. The problem was, the defesive strategy did ot actually exist i , ad the performace of the strategy was the result of a simulated backtest that was geerated with the beefit of hidsight. We have also see a firm with a seve-year operatig history show a te-year performace record. (While GIPS allows for portability of prior track records i certai istaces, it has strict requiremets for doig so, which were ot met i this istace.) I geeral, the more product lies a firm has, ad the more decetralized its ivestmet process is, the more flexibility it will have to pick ad choose the products ad cliet accouts that have performed well to iclude i its performace presetatios. Without some uiversally accepted groud rules, asset owers ad their advisors begi to distrust all performace data, ad, by extesio, become skeptical of the etire OCIO idustry. We have cotiually sought to take steps that would icrease the trasparecy of our processes ad performace, ad the comfort level of our cliets ad prospects. As a example, for may years we have completed a SOC 1 report o our iteral cotrols. This report, which is ot required of OCIOs, helps our cliets uderstad our ifrastructure ad facilitates their audit processes. GIPS is a atural extesio of this philosophy. We have a track record that we are proud of, we believe i trasparecy, ad wat to get full credit for the results our team has delivered for cliets through may market eviromets. AR: What challeges did you ecouter alog the way? The process of becomig GIPS compliat is paistakig, exactig, cosumes a sigificat amout of time of may professioals throughout the orgaizatio, ad is somewhat expesive. There are a umber of issues that are more complicated for a OCIO seekig GIPS compliace tha for a direct asset maager. These iclude how to defie discretio, how to group cliets ito composites i a way that is as iclusive as possible, ad how to treat illiquid legacy assets. While these issues eed to be carefully cosidered, they ca be addressed i a way that is trasparet ad workable. After we completed the GIPS compliace process (which took us approximately two years), we received positive feedback from our existig cliets, who were ecouraged by the fact that it oly required us to make very small revisios to our global composite performace results. This validated our belief ad our cliets cofidece that we were computig these results i a maer cosistet with GIPS, eve if we had ot bee claimig compliace with the stadards. AR: Have you foud compliace to be beeficial? Yes. There is a growig umber of prospective cliets ad OCIO search cosultats who uderstad ad appreciate the value of GIPS compliace ad verificatio of total portfolio results. We actually wo a ew relatioship because the ivestmet committee kew they could trust the quality of our track record. However, we have bee surprised ad disappoited by how few people kow about GIPS compliace. We are tryig to get the word out, ad very happy that we have foud likemided OCIO search cosultats who are also workig hard to ecourage ad perhaps demad GIPS compliace of all cadidates i OCIO searches that they ru. Ufortuately, may OCIO firms take advatage of the fact that few prospects kow what GIPS compliace is ad they take liberties i presetig their performace histories. Nikki was o a pael years ago ad a woma said that OCIO returs are more reflective of the compliace departmet s flexibility rather tha ivestmet skill, meaig that the stregth of the returs is based o how much the compliace team allows the sales team to get away with. This ca still be true. AR: Why do you thik that so few OCIO firms have moved to GIPS compliace? We will be direct. Properly measurig ad reportig performace results would likely damage the marketig prospects of a umber of OCIOs. Very few firms have delivered strog, actual returs across their cliet base The Joural of Performace Measuremet

6 Very few firms have a track record as log as the oe they are showig potetial cliets, ad may worry about how their hads will be tied goig forward. You will cotiue to hear, We are workig o it, or We are thikig about it. We thik this is ofte code for, We do t wat to do it. I the direct active maager space, firms eed to have a GIPS compliat track record to be cosidered by idustry leadig cosultats ad OCIOs. We believe this should be the same for OCIOs ad, agai, are happy to say that may OCIO search cosultats support this goal. AR: Do you feel that GIPS should have ay special rules for OCIO firms, or are the rules, as writte, sufficiet? We have also heard some firms say that they thik the GIPS stadards eed to be looseed or modified for OCIOs. We disagree. We thik the guidelies ad the verificatio of total firm results are exactly what prospective cliets are seekig. Oe challege that we ofte hear metioed is that OCIO services are so customized that it is meaigless to aggregate cliet portfolios ito composites because you would be mixig a rage of differet asset allocatios. While this is true for absolute performace, it is ot true for relative performace. Absolute performace is a fuctio of may thigs a cliet s retur objective, risk tolerace, liquidity eeds, comfort level with various asset classes that are urelated to the OCIO s ivestmet skill. Relative performace, that is, how a actual cliet portfolio performs agaist a appropriate bechmark selected o a ex-ate basis, is a pure measure of ivestmet skill. Therefore, the performace of a composite of actual cliet returs, compared to the returs of each cliet s bechmark, weighted i accordace with the size of each cliet portfolio, is a meaigful, ad we believe the oly, way to appropriately gauge the ivestmet success of a OCIO. While GIPS compliace occurs at the overall firm level, a OCIO has the optio to produce either idividual asset class-level or total portfolio-level composites. The multi-product/maager-of-maagers who have claimed GIPS compliace have typically opted to produce asset class-level composites. Whe presetig performace to prospects, they the aggregate these asset class composites ito hypothetical global portfolios, with the allocatios to each asset class selected with the beefit of hidsight. This method does ot accurately capture the actual performace that cliets experieced, because it igores the impact of the OCIO s actual asset allocatio decisios. Prospective cliets should be lookig for verificatio at the total portfolio level to develop cofidece i the OCIO s skill i doig the exact thig the prospect is lookig to the OCIO to do: maage the total portfolio. AR: What other thoughts do you have? As we oted at the begiig, each of us has had the pleasure of workig i the OCIO idustry for more tha two decades. However, the idustry as a whole is still i a relatively early stage. The state of OCIO GIPS compliace remids us of where the direct asset maagemet idustry was whe we started. May traditioal maagers iitially resisted GIPS, but, drive by ivestor ad cosultat demad, GIPS became idustry stadard. We are optimistic that the same will happe i the OCIO idustry, with isightful asset owers ad OCIO search cosultats leadig the charge. AR: We greatly appreciate Ke ad Nikki sharig their thoughts with us. For those who are woderig, here is the firm s claim of compliace, firm defiitio, ad iformatio o obtaiig their list of composite presetatios. Strategic Ivestmet Group ( Strategic ) claims compliace with the Global Ivestmet Performace Stadards (GIPS ). Strategic, a pioeer i dedicated Outsourced CIO (OCIO) solutios sice 1987, offers a comprehesive service platform for maagig customized portfolios for istitutioal ivestors. Our proprietary process combies active portfolio maagemet, rigorous risk maagemet, ad ope-architecture maager selectio. To receive a compliat presetatio ad/or the firm s list of composite descriptios, please cotact Nikki Kraus at kraus@strategicgroup.com. Reprited with permissio of The Joural of Performace Measuremet. Fall All rights reserved. The Joural of Performace Measuremet -24-