GIPS Standards Workshop

Transcription

1 GIPS Standards Workshop Iain McAra, Director GIPS, EMEA 25 th October 2017, Kyiv, Ukraine 1

2 WHAT ARE THE GLOBAL INVESTMENT PERFORMANCE STANDARDS? Voluntary standards governing the calculation and presentation of investment performance based on the ethical principles of fair representation and full disclosure. The mission of the GIPS standards is promote ethics and integrity and instill trust through the use of the GIPS standards by achieving universal demand for compliance by asset owners, adoption by asset managers and support from regulators for the ultimate benefit of the global investment community. 2

3 WHY GIPS? Lack of Reporting Consistency: Back testing Performance record portability Model Portfolios Survivorship bias Representative Portfolio with no policy Lack of Industry-wide comparability Lack of Regulatory Guidance Self-regulation of the industry 3

4 GIPS OBJECTIVES Ensure accurate and consistent data Obtain worldwide acceptance of a single standard for calculating and presenting performance Promote fair, global competition among investment firms Promote industry self-regulation on a global basis Promote investor interests and instill investor confidence 4

5 HISTORY OF PERFORMANCE STANDARDS Performance Standards existed in many countries - U.S (Financial Analysts Federation then AIMR) - U.K (National Association of Pension Funds) - Japan 1998 (The Security Analysts Association of Japan) - Switzerland 1997 (Swiss Bankers Association) - Germany 1999 (DVFA-PPS) and others Feb 1999: GIPS and country versions of GIPS released. 2001: 25 countries had adopted or established local standard 2005 edition of GIPS: 25 countries adopted the single, global standard June 2017: 41 Country Sponsors, 2017 celebrating 30 years 5

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7 As of March

8 ROLE & RESPONSIBILITIES OF GIPS EXECUTIVE & CFA INSTITUTE GIPS Executive committee is standing committee of CFA Institute, reports to CFA Institute Board of Governors Responsibility of CFA Institute to: Provide financial resources to support the GIPS standards & infrastructure Dedicate staff resources to manage & support the GIPS standards Build awareness of the GIPS standards by incorporation into programs / events Develop educational tools to support the GIPS standards 8

9 ROLE & RESPONSIBILITIES OF GIPS COUNTRY SPONSOR Promote and maintain integrity of the GIPS standards Provide local market support: Identify and support a representative for regional meetings Encourage local asset managers to comply Enhance public awareness Seek investor support to endorse compliance Determine local educational needs Technical areas (e.g., fees, derivatives) Nominate qualified candidates for regional and Executive / Technical committees Promote provision of high-quality verification services 9

10 COUNTRY SPONSOR AND REGULATOR RELATIONSHIP Support of local regulators is important for the success of the GIPS standards Country Sponsors are encouraged to engage regulators to: Embrace the benefit of voluntary compliance with standards that represent global best practices Endorse or encourage adoption of GIPS by firms Where possible develop regulations that support GIPS standards Take enforcement action when firms falsely claim compliance Encourage the use of independent verification 10

11 FIRM NOTIFICATION OF COMPLIANCE Key statistics: - Firms domiciled in 40 countries notify their claim of compliance - 82% of the firms claiming GIPS compliance chose to be listed on the GIPS standards website - 86% of firms claiming GIPS compliance are verified - Over 86% of the firms claiming GIPS compliance provided their AUM ranges - 1 or more entities from 85 of the top 100 global asset management firms (by AUM) claim GIPS compliance (Cerulli Associates) Those firms represent at least 60% (more than $46 trillion) of the world s assets of $80 trillion (Cerulli Associates) 11

12 PERFORMANCE OF WHAT? Performance of the FIRM The FIRM adheres to best practice for calculating and presenting performance. The FIRM is what is compliant with GIPS; nothing else. The FIRM claims compliance with GIPS GIPS does NOT restrict the FIRM from presenting Additional and Supplemental information or Performance related information requested by the client. GIPS requires specific performance related information to be presented to all qualified prospective clients as the first or one of the first presentations. 12

13 WHAT TYPE OF PERFORMANCE? Performance that will be presented to PROSPECTIVE CLIENTS Actual Performance, performance that was generated by the FIRM managing actual assets Ex-post performance, NOT ex-ante, theoretical, hypothetical, projected, model Full and Fair requires all the portfolios managed to the same mandate or strategy to be combined together to produce the track record of each strategy; The Composites. 13

14 PROVISIONS OF GIPS STANDARDS 0. Fundamentals of Compliance 1. Input Data 2. Calculation Methodology 3. Composite Construction 4. Disclosure 5. Presentation and Reporting 6. Real Estate 7. Private Equity 8. Wrap Fee/Separately Managed Accounts (SMA) Portfolios The GIPS standards only applied to a FIRM. 14

15 FACTORS DRIVING CLAIM OF COMPLIANCE Developed Markets: - Marketing DISadvantage if not - Asked for on RFPs, of interest to Asset Owners - Indicates voluntary commitment to higher standard than regulation differentiation - Demonstrable governance through Policies & Procedures - Rebuild Trust Developing Markets: - Why reinvent the wheel? - Adopt the Globally recognized standard for the calculation and presentation of performance. - Software, Consultants, Verifiers able to help firms obtain and maintain compliance. - Develop Trust 15

16 BEYOND GIPS COMPLIANCE ADDITIONAL VALUE Within the FIRM supporting the claim of compliance: - Documented policies & procedures (P&P) - Existing client data - Business continuity / recovery - Risk Management - Internal Audit - Due Diligence - Internal evaluation of controls - Internal training: Firm memory - Compensation input 16

17 VERIFICATION RECOMMENDED The review of an investment management firm s performance measurement policies and procedures by an independent third party, testing: - that the firm complies with all the composite construction requirements of the GIPS standards on a firm-wide basis - that the firm s policies and procedures are designed to calculate and present performance results in compliance with the GIPS standards Applies to entire firm not specific composites Firms report that verification not only provides a marketing advantage, but improves the firm s internal policies and procedures 17

18 GIPS ADVERTISING GUIDELINES Options for advertising performance when mentioning the firm s claim of compliance. The GIPS Advertising Guidelines do not replace the GIPS standards, nor do they absolve firms from presenting a compliant presentation as required by the GIPS standards. Guidelines only apply to firms that already satisfy all the requirements of the GIPS standards on a firm-wide basis and claim compliance with the GIPS standards in an advertisement. Firms that choose to claim compliance in an advertisement must follow the GIPS Advertising Guidelines or include a compliant presentation in the advertisement. 18

19 WHAT IS IN A COMPLIANT PRESENTATION? 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 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. continued 19

20 WHAT IS IN A COMPLIANT PRESENTATION (CONTINUED) Notes: Sample 1 Investment Firm is a balanced portfolio investment manager that invests solely in U.S.- based securities. Sample 1 Investment Firm is defined as an independent investment management firm that is not affiliated with any parent organization. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. The Balanced Growth Composite includes all institutional balanced portfolios that invest in large-cap U.S. equities and investment-grade bonds with the goal of providing long-term capital growth and steady income from a well-diversified strategy. Although the strategy allows for equity exposure ranging between 50 70%, the typical allocation is between 55 65%. The account minimum for the composite is $5 million. The custom benchmark is 60% YYY U.S. Equity Index and 40% ZZZ U.S. Aggregate Bond Index. The benchmark is rebalanced monthly. continued 20

21 POLICIES AND PROCEDURES P&P Essential to implementing adequate business controls at all stages of the investment performance process A firm must document all policies and procedures followed for meeting the REQUIREMENTS as well as for any recommendations it as chosen to adopt. P&P must be - consistently applied - reviewed regularly - NOT changed frequently or retrospectively 21

22 BENEFITS OF P&P Risk management Internal and external audit Client due diligence Business recovery / firm memory Template for consistency / continuity Eliminate grey areas, eliminate indecision Reduce contradiction, errors Initially resource intensive, but indicates a level of rigour and commitment in the firm. Transparency of process provides improved view of track record. 22

23 IF NOT, THEN WHAT? All tasks being done if running a controlled firm While functions MAY take longer, reduction in errors, restatement, reconciliation, client / prospect / management / investor enquiries significantly reduced providing time for value added functions NO ADDITIONAL COST Reputational risk reduced Commitment to a business model that values selfregulation, ethical best-practice, achieving a higher standard; globally recognised. Why need to justify proprietary approach given GIPS? No other GIPS. Supported by CFA Institute since

24 BENEFIT TO INVESTORS Enhanced ability to compare performance between firms and strategies Consistency in calculation and presentation of performance results, such as 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, etc. 24

25 BENEFIT TO INVESTMENT MANAGERS Firms recognized for adherence to industry best practice Strengthened internal processes and controls; improved risk management Introduces transparency to the performance presentation and generates an improved view of the track record Market has determined that it wishes to embrace the GIPS standards 25

26 BENEFIT TO ASSET OWNERS The GIPS standards can benefit Asset Owners in two ways: Asset owners can raise the practices of the industry used in calculation and presentation of performance information by inquiring and additionally requiring that investment management firms claim compliance with the GIPS standards. Asset Owners can claim compliance with the GIPS standards 26

27 BENEFIT TO ASSET OWNERS REQUIRING COMPLIANCE Enhanced ability to compare performance between investment managers and strategies Increased transparency of the performance presentation Consistency in calculation and presentation of performance results, such as frequency of valuation, treatment of flows and handling of accruals Full disclosure of important details on performance data presented including fees, composite construction criteria, dispersion, risks, material changes, benchmark. Strengthened internal processes and controls in managers Get passed the data into people, process, policy Drive development towards the ethical best practice standard 27

28 BENEFITS TO A REGULATOR Self-regulation is a tool in the regulation tool-box that is recognized as beneficial by Regulators Self-regulation usually responds faster to Industry Change Self-regulation can use Industry expertise effectively Generates standards that can be quickly accepted and adopted by the Industry Where reliable and independent groups are involved, removes the need for the Regulator to drive, observe 28

29 BASICS OF COMPLIANCE STEP BY STEP PROCESS 1. LEARN ABOUT THE GIPS STANDARDS 2. ANALYZE YOUR FIRM S ABILITY TO COMPLY 3. BUILD THE INFRASTRUCTURE TO COMPLY 4. IMPLEMENT THE REQUIREMENTS 5. MAINTAIN / STAY UP-TO-DATE 29

30 1. LEARN ABOUT THE GIPS STANDARDS Text, Audio, Audio-visual Hardcopy, web-based (on-screen, downloadable, printable), e-format Interactive: Conferences, forums, workshops, webinars. Third party providers: Verifiers, Consultants, Country Sponsors, CFA Societies 2010 edition of Global Investment Performance Standards: 70 pages Global Investment Performance Standards Handbook 3 rd edition pages 30

31 2. ANALYZE FIRM S ABILITY TO COMPLY Management Support Firmwide claim, firmwide benefits Requires commitment from senior management Include in system and budget discussions Involves many business functions: - Pricing, Valuation, Portfolio Accounting, Account management, Client Service, Performance, Client Reporting, Risk Management, Internal Audit, Business Risk, Business Continuity, RFP team, Legal/Compliance, Manager Evaluation, Due Diligence, Product Management Ask all to identify synergies; break down silos through GIPS committee 31

32 2. ANALYZE FIRM S ABILITY TO COMPLY What is the definition of the FIRM: Remember - Recommend broadest, meaningful; distinct business entity, organizationally and functionally segregated; retains discretion over the assets it manages, autonomy over investment process - Holds itself out as? - Look at all the portfolios / assets included in the definition. Do they make sense? Is something missing? Anything unexpected? - Definition of discretion 32

33 2. ANALYZE FIRM S ABILITY TO COMPLY Roll back definition five years or to Inception - Write a timeline for strategies as well as components of the definition; consider Portability Five years or Since Inception: TRACK RECORD - DATA, Supporting records, processes supporting GIPS Sources: Custodians, Brokers, Fund Administrators, Asset Owners Reprocessing costs; partial roll-back + going forward - Resource availability; existing staff, consultants 33

34 2. ANALYZE FIRM S ABILITY TO COMPLY INPUT and CALCULATION METHODOLOGY - Valuation: Fair Value; GIPS Valuation Principles - Calendar month end or last business day; at time of Large Cash Flows. - Trade date accounting, accrual accounting for fixed income securities - At least monthly Time Weighted portfolio Returns (modified Dietz) - Total returns (Capital and Income) - Returns after deduction of trading expenses / transaction costs 34

35 2. ANALYZE FIRM S ABILITY TO COMPLY COMPOSITE CONSTRUCTION - Sufficient details to assign each portfolio to the strategy the IMA says it is being managed to - Necessary detail to allow for significant flows - Track any changes to composite membership to opening, closing or client directed requirements. 35

36 3. BUILD THE INFRASTRUCTURE TO COMPLY Management Support: GIPS Team Communicate requirements to functions impacted by GIPS: - Operations - Client Service / Portfolio Management - Legal, Compliance, Risk Management - Marketing - Systems / IT - Performance 36

37 3. BUILD THE INFRASTRUCTURE TO COMPLY IT - Spreadsheet / Build vs. Buy integrated / best of breed - Functionality - Level of automation versus cost of manual resources POLICIES AND PROCEDURES (P&P) - Follow structure and numbering of the provisions - Use GIPS Team to retrieve P&P from the internal functions - External as well as internal (3 rd party providers) - Include controls and checks (reduce errors) - Request from prospective client who qualifies 37

38 3. BUILD THE INFRASTRUCTURE TO COMPLY Historical data / Track record - Since Inception or MINIMUM 5 years of firm - Determine quality of existing historical data - Closed accounts, terminated strategies, merged funds - Continuity of strategies or managers - Star or team approach; significant events - Ported data - Prior systems - GAPS: Reprocess, alternative sources, insufficient records? - Combine historical with on-going to reach minimum 38

39 4. IMPLEMENT THE REQUIREMENTS Maintain Compliance Inputs received on time Corrections incorporated correctly New, closing, changed mandates reflected Cash flows detected and correctly processed Review outliers; assignment or processing errors? Effective Production timetable Policies and Procedures consistent & maintained Review when errors detected, periodic update / sign off Controls and checks in place. 39

40 4. IMPLEMENT THE REQUIREMENTS Composite details Benchmark, definition, description, risk, minimum, strategy. Compliant Presentations Review outliers; assignment or processing errors? System / processing Processing, review, composite assignment & construction, validation, output in required timeframe including restatements. GIPS included in existing and new staff training 40

41 5. STAY UP TO DATE! RECEIVE: - GIPS Newsletter - Communications from Country Sponsor & CFA Society - Updates from Verifiers, Consultants, Conference Organisers VISIT: - GIPS Website regularly, review Q & A database - Webinars, live and recorded, podcasts - Blogs, Twitter, LinkedIn Groups - Conferences, Workshops, Forums - Volunteer Locally or Globally 41

42 GLOBAL INVESTMENT PERFORMANCE STANDARDS MISSION STATEMENT: GIPS 20/20 Promote ethics and integrity and instill trust through the use of the GIPS standards by achieving: universal demand for compliance by asset owners, adoption by asset managers and support from regulators for the ultimate benefit of the global investment community. 42

43 GIPS 20/20 REIMAGINING THE STANDARDS Why change the Standards? - Composites are the foundation of the Standards, but composites are not appropriate for all investment products. - Pooled funds, in particular, do not fit neatly into the current compositeoriented framework. - Cannot achieve our mission with the Standards as currently structured. - Will allow for greater adoption of the Standards by product-oriented firms, as well as firms in jurisdictions dominated by pooled funds. - Allows us to address IRR vs. TWR differences. Challenge is to recast the Standards while maintaining their integrity and cohesiveness. 43

44 GIPS 20/20 Total Firm Assets Strategy Product Proprietary Separate Accounts Customized Client Specific Client Input Pooled Funds, Structure Products Standardized WYSIWYG Client Agnostic No Client Input Financial Stmts? Regulated/Unre gulated Asset Owner Proprietary Assets No Clients 44

45 RESOURCES The GIPS standards website: - Complete list of Guidance Statements - Q&A Database - Free webcasts - Disclosure Guide Matrix - Assistance to firms considering compliance paper The GIPS standards Handbook Helpdesk: gips@cfainstitute.org Firm Registration Questions: gipscompliance@cfainstitute.org Alert List: standards@cfainstitute.org Twitter: gipsstandards 45