PMAC & Ashland Partners GIPS 101

Transcription

1 PMAC & Ashland Partners GIPS 101 Michael Formuziewich, CFA Garvin Deokiesingh, CFA

2 What are the Global Investment Performance Standards? The Global Investment Performance Standards (GIPS ) are voluntary standards governing the calculation and presentation of investment performance based on the ethical principles of fair representation and full disclosure. The goal of the GIPS Executive Committee is to have all firms adopt the GIPS standards as the standard for investment firms to present historical investment performance information. 2

3 Why Were Performance Standards Necessary? Lack of reporting consistency Back testing Portable performance Model portfolios Survivorship Representative portfolio Lack of industry-wide comparability Lack of regulatory guidance Self-regulation of the industry 3

4 Objectives 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 4

5 Who Benefits from the GIPS standards? Investors Plan sponsors High-net-worth investors Retail investors Investment Managers Including equity, fixed income, hedge fund, private equity, and real estate investment management firms Intermediaries Consultants 5

6 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 6

7 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. 7

8 Benefits of Policies and Procedures Comprehensive and detailed Policy & Procedures (P&P) as required by the GIPS standards: Eliminates the gray areas : speeds up process, no discussion, ensures consistency Input data and Calculation methodology are part of P&P: Policies for Valuation, Pricing, Technology, Market Data Update but retain previous details as they describe the past Institutional memory; document exceptions and one-off solutions; maintain daily Best training manual P&P requested and used by regulators, internal audit, risk management 8

9 GIPS Country Sponsors Countries that have adopted the GIPS standards Countries with interest in adopting the GIPS standards 9 Revised as of January2012

10 Cherry picking performance Presenting selective time periods Survivorship bias from dropping the lost clients and their poorly performing portfolios Comparability to benchmark Anecdotal performance may or may not be accurate; not substantiated or verified 10 10

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13 The GIPS standards are a set of standardized, industry-wide ethical principles that provide investment firms with guidance on how to calculate and report their investment results to prospective clients. Key principle is to ensure fair representation and full disclosure of a firm s performance

14 Firms claiming compliance must include all actual fee-paying, discretionary portfolios in composites defined according to similar strategy and/or investment objective Firms must use certain calculation and presentation methods and make certain disclosures along with the performance record Minimum of 5 years (or since inception) history must be presented 14 14

15 A firm is defined as an investment firm, subsidiary or division held out to clients or potential clients as a distinct business entity Note: specific Guidance Statement on Definition of the Firm must be followed GIPS applies to the entire firm claiming compliance with the standards and cannot be applied selectively to only certain assets or composites 15 15

16 Total firm assets = the aggregate of the market value of all discretionary and non-discretionary assets under management within the defined firm includes both fee-paying and non-fee-paying assets includes assets assigned to a subadvisor where the firm has discretion over selection of subadvisor excludes assets within advisory-only relationship excludes assets to which standards do not apply (e.g., pieces of art or items for which market value can t be determined) 16 16

17 The firm must include all actual, fee-paying, discretionary portfolios in at least one composite. Composite return is asset-weighted average of the performance results of all the portfolios in the composite. (GIPS 3.A.1) Firms are permitted to include a portfolio in more than one composite, provided it satisfies the definition of each composite it is included in. However: watch-out for double counting of assets! 17 17

18 Composites must include only assets under management within the defined firm. Firms are not permitted to link simulated or model portfolios with actual performance 3.A.3 Composites must include new portfolios on a timely and consistent basis after the portfolio comes under management unless specifically mandated by the client Eg. assets will be deposited over long period and thus delay full implementation of strategy 18 18

19 Terminated portfolios must be included in the historical returns of the appropriate composites up to the last full measurement period that the portfolio was under management Example: If monthly inclusion used and management agreement terminated in June, then portfolio stays in composite up to end of May 3.A.5 Portfolios are not permitted to be switched from one composite to another unless documented changes in client guidelines or redefinition of composite make it appropriate. Note: portfolio s historical record prior to switch remains in previous composite 19 19

20 Stringent recordkeeping requirements: 1.A.1. All data and info necessary to support a firm s performance presentation and to perform required calculations must be captured and maintained Guidance Statement on Recordkeeping Requirements of the GIPS Standards must be followed. It states: For each performance period presented in the GIPS-compliant presentation, a firm must maintain sufficient records that allow for the recalculation of portfolio-level returns and composite level returns and data Firms must maintain all policies and procedures (both current and previous versions) that support the claim of compliance 20 20

21 Recordkeeping Guidance states: All records deemed necessary by the firm must be maintained for each year that is presented in a GIPS-compliant presentation Electronically-stored records/reports are acceptable if maintained on an operable system If your firm presents a 25-year track record of the Large Cap Value Equity strategy in the GIPS-compliant presentation, you would need to maintain sufficient records for the full 25-year period. If the composite has a 25-year track record and only 15 years are presented in the compliant presentation, you must maintain records to support the 15 years presented. Records for non-marketed composites must also be maintained and these composites must appear on firm s list 21 21

22 Firms must calculate all returns after the deduction of the actual trading expenses incurred during the period. Estimated trading expenses are not permitted Must calculate time-weighted total returns, including income as well as realized and unrealized gains and losses Calculation method chosen must represent returns fairly, must not be misleading, and must be applied consistently 22 22

23 Composite returns must be calculated by asset weighting the individual portfolio returns (min. monthly) using beginning-of-period values or a method that reflects both beginning-of-period values and external cash flows The aggregate return method, which combines all the composite assets and cash flows to calculate composite performance as if the composite were one portfolio, is acceptable as an asset-weighted approach 5.A.6 Total return of the benchmark(s) that reflects the investment strategy or mandate represented by the composite must be presented for each annual period 23 23

24 Presentation and reporting requirements are specified in GIPS provisions 5.A.1 to 5.B.3 Disclosure requirements are specified in GIPS provisions 4.A.1 to 4.B.3. Examples: 4.A.1 Firms must disclose the definition of firm used to determine total firm assets and firmwide compliance 4.A.17 Firms must disclose that additional information regarding policies for calculating and reporting returns is available upon request 4.A.19 Firms must disclose all significant events that would help a prospective client interpret the performance record 24 24

25 All GIPS-related guidance was reviewed and considered for potential inclusion as a requirement or recommendation. Don t assume all recommendations will become requirements. Recommendations should be viewed as best practice. But they may not be appropriate or attainable for everyone

26 The 6 E s Evolve: Develop interpretations and guidance on the application of the GIPS standards Expand: Add new content to the GIPS standards as needed Engage: Increase the involvement of investors and regulators Evaluate: Review governance structure and positioning Extend: Increase the depth and breadth of the reach of the GIPS standards, both geographically and by asset class/investment type Educate: Provide on-going educational materials and training 26

27 Key Strategic Priorities Pooled Funds and Retail Products Risk Guidance Supplemental Information Overlay Strategies Portability Guidance 27

28 GIPS Strategic Plan: Evolve Develop interpretations and guidance on the application of the GIPS standards GIPS standards Handbook Revised/updated Guidance Statements and Q&A s Develop guidance for alternative strategies and structures Develop guidance on applying the GIPS standards to retail products Develop guidance on the risk-related provisions Expand guidance on portability: mergers and acquisitions Review and update guidance on supplemental information Develop guidance on the calculation and proper use of IRR Develop guidance on multiple asset portfolios Develop guidance on applying the GIPS standards to pension plans and other asset owners 28

29 GIPS Strategic Plan: Expand Add new content to the GIPS standards as needed Examine feasibility of application to transition management Examine feasibility of developing attribution guidelines Examine feasibility of a global after-tax framework Examine feasibility of developing provisions for: Infrastructure Commodities 29

30 GIPS Strategic Plan: Engage Increase the involvement of investors and regulators Develop plan to engage investors, including sovereign wealth funds, and investment consultants Develop plan for engaging regulators with goal of harmonization Evaluate participation of country sponsors and develop plan for improving participation 30

31 GIPS Strategic Plan: Evaluate Review governance structure and positioning On-going review of organizational structure and governance Explore options for tracking compliance rates and gathering market data Explore feasibility of verifier oversight 31

32 GIPS Strategic Plan: Extend Increase the depth and breadth of the reach of the GIPS standards, both geographically and by asset class/investment type Focus outreach efforts on firms, industry groups, consultants, and asset owners Increase number of country sponsors, specifically focusing on the Middle East, Latin America, China, and India Increase compliance rates in private equity, real estate, hedge fund, and retail industries 32

33 GIPS Strategic Plan: Educate Provide on-going educational materials and training Develop focused materials for sales and marketing professionals and RFP teams Enhance resources available on the GIPS standards website Develop plan for providing education to country sponsors Develop plan for providing education to asset owners and consultants Develop guidance for firms initially becoming compliant Develop guidance for firms in developing markets 33

34 Interpretations & Support The GIPS standards website: Complete list of Guidance Statements Q&A Database The GIPS standards Handbook Helpdesk Alert List RSS Feed: gipsstandards.org/rss/ Twitter: gipsstandards 34