AGENDA. Investment Performance Council Conference Call

Transcription

1 AGENDA Investment Performance Council Conference Call 7:30 am to 9:00am (EST) Tuesday, 24 June 2003 Welcome 1. Approval of the Minutes (6 March 2003 Meeting) Action Requested J. Hollis 2 min 2. Fees Subcommittee Update Action Requested H. von Euw 15 min - Addition of Fees Provisions to GIPS - Adopting Release 3. Real Estate Subcommittee Update Discussion Item P. Saint-Pierre 10 min - Application of Provisions to Indirect Real Estate Investments 4. Country Standards SubCommittee Information Only G. Solomon 3 min - Update on the Submission of the Polish Translation of GIPS 5. Interpretations Subcommittee Update Information Only C. Bacon 5 min 6. Verification Subcommittee Update Information Only K. Vincent 5 min 7. Future Meetings 25 September 2003, In-Person Meeting in Sydney 9 December 2003, Conference Call Meeting, 7:30 9:00am (ET) 4 March 2004, In-Person Meeting in Europe (location to be determined) 8. Any Other Business Information Only J. Hollis 5 min - Update on Evolution of Gold GIPS Standards and Explanation of Executive Session 9. Questions from Observers 5 min ***** EXECUTIVE SESSION ***** Closed to Observers 10. Country Standards SubCommittee Discussion Item G. Solomon 40 min - Initial Review of Gold GIPS Standards

2 Association for Investment Management and Research MINUTES OF THE INVESTMENT PERFORMANCE COUNCIL In-person Meeting Thursday, 6 March :00am to 4:00pm Fairmont Hotel Vancouver Primary Members Present: Jamie Hollis, Chair Carl Bacon Louis Boulanger Lynn Clark Alain Ernewein Bernd Fischer Brian Henderson Stefan Illmer Yoh Kuwabara Terence Pavlic Glenn Solomon Ad van den Ouweland Karyn Vincent Hans-Jorg von Euw Affiliate Members Present: Yoshiaki Akeda AIMR Staff Present: Observers Present: Nicola Donohue Alecia Licata Patricia Walters Joe D Alessandro Tobin Cochran David Gould Barry Hitchens Robert Mitchell Materials Distributed Prior to Meeting: IPC Meeting Booklets Mr. Hollis called the meeting to order. He welcomed all IPC members, AIMR staff, and observers to the meeting and read a quote to remind the members that the purpose of the IPC is to promote the adoption and implementation of a single investment performance presentation standard throughout the world as the common method for calculating and presenting investment performance. Page 1 of 7

3 1. Approval of the Minutes of the 10 December 2002 Conference Call Ms. Clark motioned to approve the minutes. The motion was seconded and approved with no further comments. 2. IPC Administrative Issues IPC Nominations and Rotation Update Ms. Licata informed the IPC that the annual confirmation of IPC members had been completed and that Mr. van den Ouweland would no longer be staying on as either a primary member of the IPC or Chair of the Venture Capital Subcommittee due to time constraints. Mr. van den Ouweland thanked the group for their support and said he would remain on the Venture Capital Subcommittee as a regular member. Ms. Licata informed the IPC that the nomination guidelines call for an affiliate member to be chosen by the Nominations Committee to fill Mr. van den Ouweland s primary membership seat until the next rotation of the seat. ACTION: Nominations Committee Also, the IPC nominations rotation schedule indicated that the Japan seat, the Performance Measurement seat, and the Pension Funds (2) seat were scheduled for rotation in 2003 for the term. These seats were open for nominations until 31 March Other seats open for nomination due to natural attrition (not required to be filled) were: Consulting seat (1 affiliate) Insurance seat (1 affiliate) Mutual Fund seat (1 affiliate) Pension Funds (1) seat (1 affiliate) Private Equity/Real Estate seat (1 affiliate) Ms. Licata encouraged IPC members to tell interested colleagues know about these openings. ACTION: All 3. Global After-Tax Initiative Ms. Licata summarized the Global After-Tax initiative. First presented in 1994, the After-Tax provisions of the AIMR-PPS standards were developed to address the calculation and presentation of after-tax investment performance results in a standard format. Since their initial release, the AIMR-PPS Implementation Committee (the country sponsor for the US and Canadian version of GIPS) has received several questions and concerns relating to the After-Tax provisions. In an attempt to clarify the issues, the Committee proposed several modifications to the requirements and recommendations of Page 2 of 7

4 this country-specific section and developed a great deal of interpretive guidance to accompany the restated after-tax provisions. Two actions were requested: The IPC was asked to weigh the implications of the continued proliferation of local after-tax performance standards versus the development of global after-tax standards. The IPC was asked to determine the steps necessary to launch a global after-tax initiative with the goal of developing after- tax provisions and/or guidance for the GIPS Standards. Several members of the group noted that they thought it would be valuable to include some basic and fundamental global tax principles in GIPS. Others noted the difficulty in finding fundamental, universal principles within global taxation. Mr. Solomon made a motion to have the IPC create a subcommittee to do some investigative work on after-tax provisions for the GIPS standard; the motion was seconded. A vote was taken on whether to create a new subcommittee and with all in favor and no abstentions, the motion was approved. Ms. Walters reminded the IPC that resources at AIMR were limited and while she did not want that to affect whether a new subcommittee on taxation was formed; she did want it noted so that expectations could be adjusted accordingly. 4. Country Standards Subcommittee Update Re-Endorsement of AIMR-PPS Standards As a Result of After-Tax Modifications Ms. Vincent briefed the IPC on the modifications. The intention of the rewrite was to make the provisions more workable and acceptable to the industry. The effective date of these proposed standards was 1 January 2005 and would not be retroactive. Mr. Solomon informed the IPC that the CSSC had evaluated the modifications and recommended accepting them and re-endorsing the standards. Therefore, Mr. von Euw proposed re-endorsing the AIMR-PPS Standards and Mr. Ernewein seconded the motion; the motion passed with all in favour and no abstentions. Re-Endorsement of Swiss PPS Standards as a Result of Minor Modification to Provisions Mr. Solomon stated that the revisions to the Swiss PPS Standards clearly represented a convergence towards GIPS. The motion to re-endorse the Swiss PPS was made and seconded by Mr. Boulanger. The motion was passed with all in favour and no abstentions. Endorsement of the Polish Translation of GIPS as TG Page 3 of 7

5 While the final version of the Polish TG was not available, Mr. Solomon felt confident that the country sponsor would make the final version available shortly. Upon receiving it, the AIMR staff planned to distribute it to members of the IPC for an vote. ACTION: AIMR Staff, All Update of Gold GIPS Evolution and Implementation Plan Mr. Solomon stated that there were 19 countries that have adopted either GIPS in English, a TG, or a CVG. He went on to summarize the 5 March 2003 in-person meeting of the CSSC. 5. Discussion of GIPS Requirements IRR vs. TWRR Mr. van den Ouweland on behalf of the Venture Capital and Private Equity Subcommittee, Mr. D Alessandro on behalf of the Real Estate Subcommittee, and Mr. Bacon on behalf of the Interpretation Subcommittee, each expressed their views on the issue of IRR vs. TWRR. After much discussion, Mr. Bacon felt he had enough guidance to go back to the Interpretations Subcommittee with. Mr. Hollis felt that a position paper was necessary and asked for a group of IPC members to collaborate on it. ACTION: All 6. Interpretations Subcommittee Update Mr. Bacon presented an update on the work of the Interpretations Subcommittee. The Subcommittee was making progress on the Calculation Methodology and Treatment of Carve-Outs guidance statements and was soon to be dealing with Supplemental Information. Mr. Bacon also provided an update on the helpdesks; as of 12 February 2003, the helpdesk had answered 1,768 questions over the previous twelve months. The average response time was between three and five business days. Mr. Bacon commended the AIMR staff for their efforts. Mr. Bacon informed the IPC that the Interpretations Subcommittee had reached a conclusion on the French Valuation Issue: the first recommendation was that, as of 31 December 2003, composites must have consistent beginning and ending annual valuation dates. The second recommendation was for France to value portfolios as of the calendar month end or as of the last business day of the month. Because this second recommendation should be considered for Gold GIPS, Mr. Bacon stated he would be handing it over to the CSSC to determine the appropriate effective date and to consider the practical difficulties it might cause within the French market. After some discussion about potential problems with different regions having different end-of-period valuation dates, the motion to accept the first recommended solution and move the second recommendation to the CSSC was put to the IPC. The motion was seconded and approved with all in favor and no abstentions. ACTION: CSSC Page 4 of 7

6 7. Verification Subcommittee Update Ms. Vincent presented an update on the activities of the Verification Subcommittee. Evolution of GIPS Mandating Verification: The Subcommittee had been charged by the Country Standards Sub Committee (CSSC) to investigate the possibility of upgrading the current recommendation to have the firm s claim of compliance verified to a requirement. The Subcommittee planned to seek input from each of the country sponsors and regional subcommittees as to how each group perceived the need for verification, as well as the quality of available verification services. A draft of the survey questions was presented to the IPC and following much discussion, Ms. Vincent planned to take the IPC comments back to the Verification Subcommittee for incorporation into the document. Suggested Questions To Ask Prospective Verification Firms: The Subcommittee was working on a document that stemmed from the European Investment Performance Council s (EIPC) Verification Working Group. Once completed, the Subcommittee recommended it be placed on the AIMR Web site as guidance to prospective users of verification services. Members of the IPC were in favor of this. Frequently Asked Verification Questions: Ms. Vincent explained that this was the development of guidance for the current users of verification services. The Subcommittee was working to develop a list of frequently asked questions and answers. Once completed, the Subcommittee will present this document to the IPC and recommend it be placed on the AIMR Web site. Verifier Independence: The Guidance Statement on Verification is not clear regarding the line that must be drawn between pre-verification consultancy and the verification exercise. The Verification Subcommittee was looking at the issue of independence in light of some recent industry feedback on the issue in order to determine whether any action is necessary. 8. Update from European Investment Performance Committee Mr. Illmer presented an update on the EIPC. The committee is still awaiting submissions from Belgium, Sweden, and Germany. A Polish submission for a TG of GIPS had been received, the endorsement of which was deferred earlier in the meeting. A TG from Spain is expected in In summation, in Europe there were four CVGs, seven TGs, two English versions of GIPS, and four countries working to develop a Standard. Mr. Illmer presented five objectives in order to continue to promote GIPS in Europe: 1) Push Finland, Czech Republic, Slovakia, Croatia, Ukraine, and Greece to accept GIPS. 2) Assist Sweden, Germany, Belgium, and Spain with their submissions. Page 5 of 7

7 3) Contact the European Commission and other European organizations. 4) Integrate other European industry groups into the EIPC. 5) Push EIPC members to introduce GIPS to the local regulators to further spread GIPS in their individual countries. 9. Technical Subcommittee Updates Real Estate Subcommittee Mr. D Alessandro presented, noting that the Real Estate Subcommittee was making good progress and planned to have the standards finalized by May The two biggest issues dealt with were valuation issues and TWRR vs. IRR. Venture Capital and Private Equity Mr. van den Ouweland presented; public comments were still being sent to AIMR since the comment period for the proposed Venture Capital and Private Equity Provisions had not yet closed. Advertising Subcommittee Ms. Licata gave an update on the Advertising Subcommittee; the public comment period for the proposed Advertising Guidelines closed in December The Subcommittee hoped to have the Advertising Guidelines ready to present to the IPC at the September meeting. Fees Subcommittee Mr. von Euw presented an update on the Fees Subcommittee. The Subcommittee had reviewed the public comments received on the proposed Fees provisions and made two changes to the original provisions. The first was that gross-of-fee would not be required, but would remain a recommendation (since the mutual fund industry typically reports net-of-fee performance). The second change was that provision 5.B.1 would remain a recommendation rather than becoming a requirement. The Subcommittee planned to have the guidance finalized for the June meeting of the IPC. Leverage & Derivatives Subcommittee Bernd Fischer reported that the Leverage and Derivatives Subcommittee amended its proposal following the Berlin meeting of the IPC and that the proposal was currently out for public comment. 10. Future Meetings 24 June 2003, Conference Call Meeting, 7:30 9:00am (EST) 25 September 2003, In-Person Meeting in Sydney (to be confirmed) 9 December 2003, Conference Call Meeting, 7:30 9:00am (EST) Page 6 of 7

8 11. Any Other Business 12. Questions and Comments from Observers Mr. Hitchens, Founder and Chairman of Comstat Capital Sciences in Vancouver, submitted the suggestion that in future years fund management entities have their performance verified and audited for the safety of beneficiaries. He thanked the IPC for allowing him to observe the meeting. Mr. Gould, secretary of the UK Investment Performance Committee, noted that they will be responding to the Venture Capital and Private Equity Provisions and the Leverage and Derivatives Provisions. He thanked the IPC for allowing him to observe the meeting. Page 7 of 7

9 Proposed Adoption Date:??-??-?? Proposed Effective Date: 1 January 2005 Retroactive Application: No INVESTMENT PERFORMANCE COUNCIL (IPC) Fees Provisions for the GIPS Standards Note: Highlighted portions represent new provisions being added to the GIPS standards. All other (non-highlighted) provisions represent modifications to existing GIPS provisions. Capitalized terms are defined in the Glossary (page 8). Calculation Methodology Requirements 2.A.6. All returns must be calculated after the deduction of the actual direct trading expenses incurred during the period. Estimated trading expenses are not permitted. 2.A.9. If the actual direct Trading Expenses cannot be identified and segregated from a Bundled Fee: when calculating Gross-Of-Fees returns, returns must be reduced by the entire Bundled Fee, or the portion of the Bundled Fee that includes the direct Trading Expenses. Estimated Trading Expenses are not permitted. when calculating Net-Of-Fees returns, returns must be reduced by the entire Bundled Fee, or the portion of the Bundled Fee that includes the direct Trading Expenses and the Investment Management Fee. Estimated Trading Expenses and Investment Management Fees are not permitted. 2.A.10. If a composite contains both portfolios where the actual direct Trading Expenses cannot be identified and segregated from a Bundled Fee and portfolios where the direct Trading Expenses can be identified, GIPS Calculation Methodology Requirement 2.A.9 (above) must be met for those portfolios where the direct Trading Expenses cannot be identified and segregated from a Bundled Fee when calculating the composite Gross-Of-Fees or Net-Of-Fees return. Disclosure Requirements 4.A.8. Firms must clearly label returns as Gross-Of-Fees or Net-Of-Fees. 4.A.12. If a composite contains any non-fee-paying portfolios, then the firm must disclose that the composite contains non-fee-paying portfolios and must disclose, as of the end of each period, the percentage of the composite assets represented by the non-fee-paying portfolios. 4.A.16. Firms must disclose the Fee Schedule appropriate to the composite

10 4.A.17. If a composite contains portfolios with Bundled Fees, the firm must disclose for each annual period shown that Bundled Fee portfolios are included in the composite. 4.A.18. If a composite contains portfolios with Bundled Fees, the firm must disclose the various types of fees that are included in the Bundled Fee. 4.A.19. When presenting Gross-Of-Fees returns, firms must disclose if any other fees are included in addition to the direct Trading Expenses. 4.A.20. When presenting Net-Of-Fees returns, firms must disclose if any other fees are included in addition to the Investment Management Fee and direct Trading Expenses. Input Data Recommendation 1.B.2. Firms should accrue fees and expenses. Presentation & Reporting Recommendations 5.B.1. The following items should be presented: (a) composite performance gross of investment management fees and custody fees and before taxes (except for non-reclaimable withholding taxes), - 2 -

11 INTERPRETIVE GUIDANCE FOR FEES PROVISIONS The purpose of the GIPS standards is to create performance presentations that allow for greater comparability of returns and increase the transparency of information provided to investors. While it is impossible to develop standards that cover every situation, GIPS provide a general framework that can be applied to many different circumstances. It is important to remember the underlying principles of the GIPS standards: fair representation and full disclosure. In the global investment industry, fees are charged in many different ways and a variety of terms are used. In order to promote comparability, it is important that firms around the world treat fees consistently and in a comparable manner. The terms that are used can confuse the matter considerably. In some parts of the world the Net-Of-Fees return is the starting point and investment management fees are added back to arrive at the Gross-Of-Fees return. In other places the opposite is true and fees are deducted from the Gross-Of-Fees return to arrive at the Net-Of-Fees return. In some regions the terms fee, duty, cost, charge, and expense have different meanings, while in other regions these terms are interchangeable. This highlights the need for common definitions, which are included in the attached Glossary. There is a range of different types of costs and/or fees that a client incurs when maintaining an investment portfolio. In general, there are three main types of fees and/or costs: Investment Management Fees, brokerage commissions, and Administrative Fees. Administrative Fees include Custody Fees and may also include accounting fees, consulting fees, legal fees, performance measurement fees, and other applicable fees. The investment firm should only be held responsible for those fees that it can control. In some situations, the only fees that the firm controls are the Investment Management Fee and the direct Trading Expenses (i.e., the direct cost of buying or selling the assets). Therefore, only the Investment Management Fee and the direct Trading Expenses should impact the firm s returns. Even though Custody Fees are a necessary additional cost of owning a portfolio, many investment managers are not involved in the selection of the custodian or in the negotiation of the Custody Fees. Accordingly, in order to promote comparability, Custody Fees should not be reflected in (i.e., reduce) the firm s returns. Firms should present the returns that are most appropriate for a particular composite. In cases such as a mutual fund where the Gross-of-Fees return is not achievable by any investors (i.e., fees are not negotiable), then it is most appropriate to present the Net-Of-Fees returns. Further, in the case of mutual funds, it is most appropriate to present the return net of all fees (e.g., including Administrative fees) since all investors must pay these fees. In the case of portfolios that invest in mutual funds, it is not appropriate to gross up the mutual fund returns within the portfolio since those returns are not achievable. In effect, the fees of the mutual funds within the portfolio are the costs of owning that position and should be considered when evaluating investment alternatives (e.g., when the portfolio manager selects the particular mutual fund). The GIPS standards are primarily based on the concept of presenting composite performance to a prospective client rather than presenting individual portfolio returns to an existing client. Firms should, however, consider if existing clients will benefit from the presentation of their individual portfolio returns after the reduction of all fees associated with owning an investment portfolio (i.e., including Administrative Fees). This Client Return (the Net-Of-Fees return reduced by all - 3 -

12 Administrative Fees) may be useful to prospective and existing clients to fully understand the actual return that has been earned and the total amount of fees incurred. These Administrative Fees, however, are typically outside the control of the investment management firm and, as such, should not reduce the firm s Gross-Of-Fees or Net-Of-Fees returns. The Gross-Of-Fees return is defined to be the return on assets reduced by any direct Trading Expenses and non-reclaimable withholding taxes incurred during the period. Because the Gross- Of-Fees return includes only the return on assets and the associated cost of buying and selling those assets, it is the best measure of the firm s investment management ability and can be thought of as the investment return. In addition, because fees are sometimes negotiable, presenting Gross-Of-Fees returns shows the firm s expertise in managing assets without the impact of the firm s or client s negotiating skills. Accordingly, firms are recommended to present Gross-Of-Fees returns. A prospective client, however, must also consider the effect of fees on performance. As a prospective client evaluates and compares investment firms, the most universal point of comparison is the Gross-Of-Fees return less the Investment Management Fee that the prospective client expects to pay. Consequently, firms are required to disclose in each composite presentation the fee schedule that is appropriate to the particular prospective client and composite. The Fee Schedule should be current and relevant to the composite being presented. While a current Fee Schedule may not assist a prospective client interpret historical performance, it is the most relevant. Firms should also disclose additional information related to the firm s fees (e.g., if performance-based fees are available). Firms may present a Fee Schedule that is specific to a prospective client as Supplemental Information in addition to the Fee Schedule that is required. The Net-Of-Fees return is defined to be the Gross-Of-Fees return reduced by the Investment Management Fees incurred. It is important to recognize that the Net-Of-Fees return consists of two distinct components: the Gross-Of-Fees return and the impact of the Investment Management Fee (see Fees Example Scenario A). Firms are also encouraged to present Net-Of- Fees returns. In order to reflect the most accurate Net-Of-Fees return, fees and expenses should be accrued, when possible. The GIPS standards require that returns must be calculated after the deduction of actual direct Trading Expenses. Trading Expenses can be: Direct: as in the case of brokerage commissions and any other regulatory fee, duty, and/or tax (e.g., stamp duty, SEC fee, etc.) associated with an individual transaction, or Indirect: such as a bid/ask spread. For purposes of the GIPS standards, firms must include (i.e., reduce) both Gross-Of-Fees and Net-Of-Fees returns by the direct Trading Expenses incurred in the purchase or sale of securities. These costs must be included because they must be incurred in order to implement the investment strategy. Estimated Trading Expenses are not permitted. In some cases (particularly when initially compiling a compliant track record), the actual fees charged to each discretionary portfolio under management are not available. In these situations, - 4 -

13 firms that wish to show Net-Of-Fees performance results are permitted to use the highest investment management fee incurred by portfolios in the composite to reduce Gross-Of-Fees performance. Firms are permitted to use the highest investment management fee in cases where firms chose to show Net-Of-Fees results, and the actual fees charged to one or more portfolios within the composite are not available. However, it is not permissible to use the highest investment management fee to add to the Net- Of-Fees return in order to obtain a Gross-Of-Fees return. Adding back the highest fee would result in overstating the Gross-Of-Fees returns. When adjusting from Net-Of-Fees to Gross-Of- Fees performance, firms must use either the actual fees or the weighted-average fee for the composite. Many custodial banks charge part of the Custody Fee based on the number and type of transactions. These fees, even though they are charged on a per transaction basis, are still part of the Custody Fee and should not be included in the direct transaction costs. Bundled Fees In some cases, firms combine several fees together to create a Bundled Fee. A Bundled Fee can include any combination of fees including Trading Expenses, Investment Management Fees, Custody Fees, or any other related fees. A Bundled Fee can be specific to a client, as is the case with all-in fees, or can be specific to a particular product, as is the case with wrap fees. Some Bundled Fees can be segregated into the various underlying components (e.g., the firm can un-bundle the fee and identify each segment that comprises the Bundled Fee see Fees Example Scenario C). In other cases, only portions of the Bundled Fee can be segregated (e.g., Investment Management Fee segment can be identified and separated, but the Custody and Trading Expenses cannot see Fees Example Scenario D). If a firm includes a portfolio with a Bundled Fee in a composite, it must disclose that the composite contains portfolios with Bundled Fees. Firms are required to disclose the various types of fees that are included in the Bundled Fee. In cases where the direct Trading Expenses cannot be identified and segregated from a Bundled Fee, either the entire Bundled Fee, or the portion of the Bundled Fee containing the direct Trading Expenses, must be included in (i.e., reduce) the Gross-Of-Fees and Net-Of-Fees returns (see Fees Examples Scenarios B and D). In these cases, Custody and other Administrative Fees might be included in the Gross-Of-Fees and Net-Of-Fees returns. Firms may also find that the Gross-Of-Fees return is equal to the Net-Of-Fees return. In order to assist prospective clients better understand the fees charged in these situations, GIPS requires when presenting Gross-Of- Fees returns, firms to disclose if other fees are included in the Bundled Fee in addition to the direct Trading Expenses. When presenting Net-Of-Fees returns, firms must disclose if other fees are included in addition to the Investment Management Fee and direct Trading Expenses. Some investment product returns are typically calculated net of other fees (e.g., Custody and other Administrative Fees). In order for these portfolios to be treated consistently with regards to the definitions of Gross-Of-Fees and Net-Of-Fees in the Standards, firms are allowed to add back all fees and expenses (e.g., investment management, Custody, transfer agent, share registration, marketing, and regulatory fees) except for direct Trading Expenses. When calculating Net-Of

14 Fees returns, firms are allowed to add back all fees and expenses except for direct Trading Expenses and the Investment Management Fee, provided that the firm can identify all these fees. Estimated fees are not permitted. Sub-Advisor or Fund-of-Funds In some situations, firms may utilize a sub-advisor or create a fund-of-funds structure whereby additional fees are charged by the underlying fund or paid to the sub-advisor. If these fees can be identified, then they can be added back when presenting Gross-Of-Fees returns, but the firm must separately disclose these fees or fee schedule in their composite presentations. Since Net- Of-Fees performance must be net of Investment Management Fees (and these are essentially Investment Management Fees), these fees must not be added back to calculate Net-Of-Fees performance. In all cases, the firm must disclose in each composite presentation the current Fee Schedule appropriate to the particular composite

15 Fees Examples For the purpose of these examples, the Trading Expenses are stated as a percentage of the beginning market value. In practice, Trading Expenses are typically accounted for in the book value of securities and are, therefore, reflected in the return on assets. These examples are presented to illustrate the concepts presented in the fee provisions and assume deduction at the beginning of the period. Actual return calculations may differ based on when the fee is deducted from the portfolio and the value used as a basis for the calculation (e.g., beginning period assets, ending period assets, weighted average period assets, etc.). Scenario A: Description: Return on Assets 8.00% Scenario A represents a typical Direct Trading Expenses 0.20% fee structure where each fee can be Investment Management Fee 1.00% clearly identified. Administrative Fees (including Custody) 0.50% Scenario B: Bundled Fee 1 Description: Return on Assets 8.00% Scenario B illustrates a Bundled Fee Bundled Fee: Direct Trading, Investment Management, 1.70% structure where the Bundled Fee and Administrative Fees (including Custody). cannot be separated. Scenario C: Bundled Fee 2 Description: Return on Assets 8.00% Scenario C illustrates a Bundled Fee Bundled Fee: Trading, Investment Management, and 1.70% structure where the Bundled Fee Administrative Fees can be separated. included and can be separated as follows: Direct Trading Expenses 0.20% Investment Management Fee 1.00% Administrative Fee 0.50% Scenario D: Bundled Fee 3 Description: Return on Assets 8.00% Scenario D illustrates a Bundled Fee Bundled Fee: Trading, Investment Management, 1.70% structure where only the Investment and Administrative Fees (including Custody) Management Fee can be separated included and can be separated as follows: from the Bundled Fee. Investment Management Fee 1.00% Direct Trading Expenses and Administrative Fee 0.70% Scenario E: Bundled Fee 4 Description: Return on Assets 8.00% Scenario E illustrates a Bundled Fee Bundled Fee: Trading, Investment Management, 1.70% structure where only the direct and Administrative Fees (including Custody) Trading Expenses can be separated included and can be separated as follows: from the Bundled Fee. Direct Trading Expenses 0.20% Investment Management and Administrative Fee 1.50% - 7 -

16 Scenarios A B C D E Return on Assets 8.00% 8.00% 8.00% 8.00% 8.00% - Direct Trading Expenses 0.20% 1.70% 0.20% 0.70% 0.20% Gross-Of-Fees Return 7.80% 6.30% 7.80% 7.30% 7.80% - Investment Management Fee 1.00% n/a 1.00% 1.00% 1.50% Net-Of-Fees Return 6.80% 6.30% 6.80% 6.30% 6.30% - Administrative Fee 0.50% n/a 0.50% n/a n/a Client Return* 6.30% 6.30% 6.30% 6.30% 6.30% * The Client Return is not required by the GIPS standards and is presented here as additional information that may be helpful for existing clients

17 FEES GLOSSARY Administrative Fee all fees other than the Trading Expenses and the Investment Management Fee. Administrative Fees include Custody Fees, accounting fees, consulting fees, legal fees, performance measurement fees, or other related fees. These Administrative Fees are typically outside of the control of the investment management firm and are not included in either the Gross-Of-Fees return or the Net-Of-Fees return. However, there are some markets and investment vehicles where Administrative Fees are controlled by the firm (see Bundled Fee). Bundled Fee a fee that combines multiple fees into one bundled fee. Bundled Fees can include any combination of management, transaction, Custody, and other Administrative Fees. Two specific examples of Bundled Fees are the wrap fee and the all-in fee. All-in Fee Due to the universal banking system in some countries, asset management, brokerage, and Custody are often part of the same company. This allows banks to offer a variety of choices to customers regarding how the fee will be charged. Customers are offered numerous different fee models in which fees may be bundled together or charged separately. All-in fees can include any combination of Investment Management, Trading Expenses, Custody, and other Administrative Fees. Wrap Fee Wrap fees are specific to a particular investment product. The U.S. Securities and Exchange Commission (SEC) defines a wrap fee account (more commonly known as a Separately Managed Account) as any advisory program under which a specified fee or fees not based upon transactions in a client s account is charged for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and execution of client transactions". A typical separately managed account has a contract or contracts (and fee) involving a sponsor (usually a broker or independent provider) acting as the investment advisor, an investment management firm typically as the sub-advisor, other services (custody, - 9 -

18 consulting, reporting, performance, manager selection, monitoring, and execution of trades), distributor, and the client (brokerage customer). Wrap fees can be allinclusive, asset-based fees (which may include any combination of management, transaction, custody, and other administrative fees). Client Return Custody Fees Fee Schedule the Net-Of-Fees return reduced by any Administrative Fees related to a particular portfolio. The Client Return is not required by the GIPS standards, but may be useful for existing clients to see in order to understand the impact of all fees related to their portfolio. the fees payable to the custodian for the safekeeping of the portfolio s assets. Custody Fees typically contain an asset-based portion and a transaction-based portion of the fee. The total Custody Fee may also include charges for additional services including accounting, securities lending, or performance measurement. Custody Fees that are charged per transaction should be included in the Custody Fee and not included as part of the Trading Expenses. a list of the firm s current Investment Management Fees or Bundled Fees for a particular composite. This schedule is typically listed by asset level ranges and should be appropriate to the particular prospective client. Example: Up to 25 million 0.65% per annum Next 15 million 0.40% per annum Over 40 million 0.30% per annum Gross-Of-Fees Return the return on assets reduced by any Trading Expenses incurred and non-reclaimable withholding taxes incurred during the period. Investment Management Fee Net-Of-Fees Return Trading Expenses the fee payable to the investment management firm for the on-going management of a portfolio. Investment Management Fees are typically asset based (percentage of assets), performance based (based on performance relative to a benchmark), or a combination of the two, but may take different forms as well. the Gross-Of-Fees return reduced by the Investment Management Fee. the costs of buying or selling a security. These costs typically take the form of brokerage commissions from either internal or external

19 brokers. In many countries, accounting standards require that transaction costs be reflected in the book value of a security. Custody Fees charged per transaction should be considered Custody Fees and not direct transaction costs. Estimated Trading Expenses are not permitted

20 THE ADDITION OF FEES PROVISIONS TO THE GIPS STANDARDS SUMMARY: The Fees Subcommittee of the Investment Performance Council (IPC) was created in March 2000 to develop new provisions for the Global Investment Performance Standards (GIPS ) to address the impact of fees on investment performance. The Subcommittee established a process to identify current practices in several markets with the goal of producing a comprehensive set of globally applicable provisions that would promote the comparability of returns and increase transparency to investors. In December 2001, the Association for Investment Management and Research (AIMR ) and the IPC released for public comment proposed Fee provisions and guidance for the GIPS Standards. During the six-month public comment period, AIMR received twenty comment letters from individuals, country sponsors, and organizations in sixteen different countries. The Subcommittee reviewed the comments and revising the provisions accordingly. Below is a summary of the modifications to the Fees provisions as well as a discussion of the treatment of the comments received during the public comment period. ADDITIONAL INFORMATION: For further information on these provisions and the GIPS standards, contact AIMR s Professional Standards and Advocacy department via facsimile at , via at gips@aimr.org, or at 560 Ray C. Hunt Drive, P.O. Box 3668, Charlottesville, VA I. HIGHLIGHTS OF THE FEES PROVISIONS The Fees provisions were developed to address the presentation, treatment, and disclosure of fees and their affect on investment performance under the GIPS standards. In the global investment industry, there are varied practices relating to fees, including the use of different terminology and the calculation of fees. In order to promote comparability, it is essential that the IPC clarify and standardize the terms used when discussing the impact of fees on performance. The Fees provisions identify several new requirements and recommendations as well as modify others already contained in the GIPS standards relating to how fees are reflected in investment performance. They encourage firms around the world treat fees consistently and in a comparable manner. II. SUMMARY OF COMMENTS Below is a summary of the comments received along with the changes generated by the comments. The organization, firm, or individual making each comment is indicated using the following abbreviations: AIPS: ANON: CAPS: DBC: DICA: Australian Investment Performance Standards Editorial Committee, P-Group Anonymous Karyn D. Vincent, CFA, CAPS, Inc. Laurence J. S. Grosbaum, CPA, David L. Babson & Company Joe Dabney, Dabney Investment Consulting Associates, Inc.

21 EYSA: Ernst & Young (South Africa), GIPS Discussion Group FEG: French Experts Group HD: Heike Düpre HSIP: Hungarian Society of Investment Professionals IAIM/SIAI: Irish Association of Investment Managers & Society of Investment Analysts in Ireland KK: Ken Kivenko MAFFI: Emilio Maffi, Ernst & Young (Italy) OEVFA/VOEIG: Association for Financial Analysis and Investment Advisory Services & Austrian Association of Investment Fund Management Companies NFF: The Norwegian Society of Financial Analysts SAAJ: Security Analysts Association of Japan SBA: Swiss Bankers Association PWC: PricewaterhouseCoopers LLP UKIPC: UK Investment Performance Committee UBS: Paul Weller, UBS Global Asset Management VBA: Dutch Financial Analysts Society 1. Gross-Of-Fees and Net-Of-Fees Return Requirements and Recommendations The original proposal included a requirement for firms to present Gross-Of-Fees returns and a recommendation that firms should also present Net-Of-Fees returns. It also posed a question as to whether firms should be required to present both Gross and Net-Of-Fees returns. The GIPS standards currently include a recommendation for firms to disclose Gross-Of-Fees returns. Comment: We support the requirement for firms to present Gross-Of-Fees returns. (AIPS-EC, DBC, FEG, SBA, UBS, VBA,) Comment: It is most useful and valid for prospective clients that composite Gross-Of- Fees returns be presented together with an appropriate Fee Schedule and, if meaningful, the highest fee information. Applying the Net-Of-Fees returns approach to composite performance is not meaningful to prospective institutional clients since fees applied to existing clients vary depending on the asset size assigned to the firm as well as negotiation, and composite Net-Of-Fees returns calculated deducting such various fees would be misleading to prospective clients. In addition, a composite Net-Of-Fees return may look inconsistent with the firm s Fee Schedule disclosed together with the composite. It is questionable in practice for firms to calculate composite returns net of fees actually paid by existing clients: while Gross-Of-Fees returns is calculated based on monthly valuation, fees are charged at different timing (e.g. quarterly, semi-annually, or annually) and the adjustment to calculate monthly Net-Of-Fees returns is a problem in practice and may increase costs unnecessarily. There are easier ways to calculate composite Net-Of-Fees returns such as deducting the highest fee from the annual composite Gross-Of-Fees return. However, whether such composite returns calculated net of the highest fee is meaningful for prospective clients is a question. In particular, the method is misleading if a composite contains portfolios whose fees are determined on a performance basis. Rather, it is more useful and valid for prospective - 2 -

22 clients that composite Gross-Of-Fees returns be presented together with an appropriate Fee Schedule and, if meaningful, the highest fee information. (SAAJ) Comment: Mandating Gross-Of-Fees returns will cause problems for most mutual funds that attempt to comply with the Standards. Mutual funds (and other unitized funds) generally calculate a net asset value (NAV) that is net of fees. Requiring the presentation of Gross-Of-Fees returns would require the computation of a separate gross NAV. Since many investment managers sub-contract out the price calculation of unit products to third parties, this will have the effect of significantly driving up costs in the industry, to the ultimate disadvantage of the client. In addition, most mutual fund fees are not negotiable, in which case the Net-Of-Fees return is the most representative. (IAIM/SIAI, OEVFA/VOEIG, NFF, PWC, SAAJ) Comment: We do not support that both gross- and Net-Of-Fees returns be required, but would prefer flexibility (i.e., firms could chose either gross- or Net-Of-Fees returns with disclosure). In many cases the decision is driven by the local regulator. Whichever alternative is chosen, the method should be clearly disclosed. (CAPS, DBC, DICA, EYSA, HSIP, MAFFI, OEVFA/VOEIG, PWC, SAAJ, UKIPC) Comment: Ideally firms should be required to present both net and gross, but this would depend on the continued allowance of Net-Of-Fees returns being calculated on the highest fee. (UBS) Comment: Net-Of-Fees composite returns should only be included as a recommendation. (FEG, IAIM/SIAI, NFF, SBA, UKIPC, VBA) Comment: We do not agree that GIPS should recommend that firms report Net-Of-Fees returns. Although the provision would only be a recommendation, the IPC has acknowledged that Gross-Of-Fees returns are most appropriate for presenting to prospective clients. The relevance and applicability of Net-Of-Fees returns is questionable in light of the diversity and complexity of fee schedules offered by fund managers. (AIPS-EC, FEG) The IPC agrees that firms should not be required to present both Gross and Net-Of-Fees returns. Instead, firms should be granted some flexibility in the presentation of returns that are presented to prospective clients (i.e., gross- or Net-Of-Fees) with the goal of achieving a return that is most representative and appropriate for each situation. For example, in the case of retail mutual funds where the fee is not negotiable, Net-Of-Fees results are generally the most appropriate return to present. Firms should also disclose if additional fees are also included (e.g., custody) in the Net- Of-Fees return. In general, presenting Gross-Of-Fees returns shows the firm s expertise in managing assets without the impact of the firm s or client s negotiating skills; therefore, the GIPS standards will maintain the current recommendation that encourages firms to present Gross-Of-Fees results (GIPS Standard 5.B.1.a)

23 Revision: Remove requirement to present Gross-Of-Fees returns. Modify guidance to allow firms to select most appropriate return (Gross- or Net-Of-Fees) for each situation. 2. Deducting the Highest Investment Management Fee To Calculate Net-of-Fee Returns The original proposal included a question asking whether firms should be allowed to deduct the highest Investment Management Fee charged to portfolios within the composite, either to simplify the calculation or because the actual fees were not known. Comment: We agree with allowing the deduction of the highest fee. (DBC, OEVFA/VOEIG, PWC, UBS, UKIPC) Comment: If actual fees are not available, we believe that deducting the highest fee is acceptable. (EYSA) Comment: In general this would be misleading as fees vary from client to client. If Net- Of-Fees performance is presented, it should be the effective composite Net-Of-Fees return. No assumption should be made on the fee. Some performance measurement systems can deliver gross-of-fee returns only and then the question arises of how to adjust the gross-of-fee performance to the net -of-fee performance. A recommended approach would have to adjust the gross performance by the weighted average fee of all accounts within the composite; if this is not feasible, a firm should have the opportunity of adjusting the performance by using a single fee rate; the most prudent solution would then be to apply the highest fee rate. (SBA) Comment: Allowing the highest fee appears to be illogical from the standpoint of a manager s motivation and potentially misleading to all but the smallest clients by market value. It does, however, underline our general concerns that the provision of Net-Of-Fees returns is open to abuse. The principle should be that Net-Of-Fees returns should only be provided where the fees deducted are in keeping with that which the prospective client may have reasonably expected to have suffered over the reported period. (IAIM/SIAI) Comment: When presenting Net-Of-Fees returns, using the actual management fees are the most ethical method. However, for commercial reasons, investment management firms will be inclined not give those real fees. Therefore we recommend that using the indicative fee levels from the composite fee schedule and basing that on a reasonable average portfolio size, should be allowed. (VBA) Comment: Firms that are only able to calculate the gross return and attempt to derive a Net-Of-Fees return by adding back the fees should NOT be permitted to use the highest fee. (DICA, VBA) Comment: We believe that a firm should have the option to deduct the highest fee when calculating performance. We also recommend that detailed guidance be provided as to how a firm can interpret the meaning of the highest fee. It is our experience that there is no consensus as to how the highest fee is determined. (CAPS) - 4 -

24 Comment: We do not think it is appropriate to incorporate the proposal to allow the deduction of the highest fee when calculating composite Net-Of-Fees returns. Instead, we support composite Gross-Of-Fees returns being presented together with the highest fee information, if appropriate, in addition to the Fee Schedule. (SAAJ) Comment: I think that this practice would be misleading as, if the Firm wants to present Net-of-fee returns, all effective fees applied to portfolios have to be considered; moreover, the gap between Gross-of-fee and Net-of-fee returns could be presented by the Firm as a mere effect of the netting methodology, keeping clients unaware of the Firm s real fee income. In my opinion, applying this criterion would be equivalent to estimated fee figures, a practice different from the GIPS aim of fair representation of a firm s performance. (MAFFI) The use of the highest Investment Management Fee is permitted only in cases where firms choose to present Net-Of-Fees performance results and the actual fees charged to one or more portfolios included in the composite are not available. In some cases (particularly when initially compiling a compliant track record), the actual fees charged to portfolios under management are not available. In these cases, the use of the highest fee paid by portfolios in the composite is an acceptable alternative when calculating a Net-Of-Fees return. It is not permissible to use the highest Investment Management Fee to add to the Net-Of-Fees return in order to obtain a Gross-Of-Fees return. Adding back the highest fee would result in overstating the Gross-Of-Fees returns. When adjusting from Net-Of-Fees to Gross-Of-Fees performance, firms must use either the actual fees or the weighted-average fee for the composite. Revision: Modify Guidance to permit the use of the highest Investment Management Fee paid by the portfolios within the composite to calculate Net-of fees returns when the actual Investment Management Fees are not available. 3. Disclosure Of A Fee Schedule The original proposal included a requirement for firms to disclose the fee schedule appropriate to the prospective client and composite. The current GIPS standards include this disclosure as a recommendation. Commentors were specifically asked to indicate their support to upgrade this recommendation to a requirement. Comment: We agree with the requirement for firms to disclose a fee schedule. (CAPS, DBC, DICA, EYSA, FEG, IAIM/SIAI, NFF, PWC, SAAJ, SBA, UKIPC, OEVFA/VOEIG, VBA) Comment: We favor disclosure of a fee scale appropriate to the prospective client in receipt of the compliant presentation. (AIPS-EC, IAIM/SIAI) Comment: In our opinion, the requirement should be changed so the disclosure of a fee schedule appropriate to the composite is required rather than the schedule appropriate to the prospective client, as it is not possible to verify prospective disclosures. We are - 5 -