INVESTMENT PERFORMANCE AND THE GIPS STANDARDS Jonathan A. Boersma, CFA Head, Professional Standards Executive Director, Global Investment Performance Standards 14 March 2017
TABLE OF CONTENTS 1 Introduction to Performance 2 Performance and the Portfolio Management Process 3 Returns: Total Returns, Time-Weighted vs. Money-Weighted 4 The Need for Performance Standards 5 Overview of the Global Investment Performance Standards 6 Questions & Answers 2
INTRODUCTION TO PERFORMANCE
WHY MEASURE PERFORMANCE? Performance is what investment managers sell and how they compete Performance is what investors buy Performance is what is used to evaluate and compare investment managers Performance is what investment managers use to evaluate themselves Performance is what investors use to evaluate themselves Performance determines how much (or little) capital an investor has 4
INVESTORS CHASE PERFORMANCE
PERFORMANCE AND PORTFOLIO MANAGEMENT PROCESS
PORTFOLIO MANAGEMENT PROCESS 1. Set investment objectives/investment policy statement a. Risk tolerance b. Return objective c. Liquidity constraints d. Time horizon 2. Establish Capital Market Expectations 3. Determine Asset Allocation 4. Security Selection 5. Performance Measurement, Attribution, and Evaluation 7
PORTFOLIO MANAGEMENT PROCESS Performance and Attribution allow us to: - Evaluate/adjust capital market assumptions - Evaluate/adjust asset allocation - Test portfolio against Investment Policy Statement - Evaluate alpha hypothesis 8
MEASURING RETURNS
TOTAL RETURNS ROI = Capital Return + Income Example: Price (t=0) Price (t=1) Income Return - Stock 1 100 108 5 13% - Stock 2 100 110 0 10% - Which stock would you buy? Total return represents what the investor earned on the investment Benchmark must also include income for a fair comparison 10
TIME-WEIGHTED RETURN (TWR) REMOVES THE IMPACT OF CASH FLOWS AND ALLOWS RETURNS TO ACCRUE UNEVENLY 1 Jan 1 May 1 Sep 31 Dec * Market Value after deposit or withdrawal Market Value* $1,000,000 $1,100,000 $1,300,000 Cash Flow $200,000 Calculate Sub-Period Returns $1,100, 000 $200, 000 $1, 000, 000 rjan $1,000,000 10.00% r Feb, Mar $1,300,000 0 $1,100,000 18.18% $1,100, 000 Chain-Link Sub-Period Returns (1 + r Jan )(1 + r Feb,Mar ) 1 = (1 0.10)(1 + 0.1818) 1 = 6.36% 11
TIME-WEIGHTED RETURNS VS. MONEY-WEIGHTED RETURNS Portfolio 1 Initial Investment = 1,000 Month 1 return = 100% Ending portfolio value = 2,000 Portfolio 2 Initial Investment = 1,000 Month 1 return = 100% Ending portfolio value = 2,000 Client cash flow = +1,000 Month 2 return = -50% Ending portfolio value = 1,500 ----------------------------------------- Time-weighted return = 0% Internal rate of return = -18% Client cash flow = -1,000 Month 2 return = -50% Ending portfolio value = 500 ------------------------------------------ Time-weighted return = 0% Internal rate of return = 37% IRR is dependent on the timing of the cash flows client specific! IRR is not comparable unless cash flows are identical. 12
NEED FOR PERFORMANCE STANDARDS
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EVALUATING PERFORMANCE 160 140 120 100 80 60 40 Asset Manager (Total) Benchmark (Price)
EVALUATING PERFORMANCE 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Asset Manager Benchmark
EVALUATING PERFORMANCE 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -5.00% Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Manager A Benchmark Composite
CELEBRATING 30 YEARS! 19
CURRENT STATE OF COMPLIANCE Key Highlights of Firm Notification Data as of 31 December 2015: 1608 firms submitted their claim of compliance. 86% of the firms have indicated that they have been independently verified. A comparison with the Cerulli database revealed that 24 of the Top 25 Global Asset Management Firms claimed compliance with the GIPS standards for some or all of their business as of 31 December, 2015. Source: Cerulli Associates
THE GLOBAL INVESTMENT PERFORMANCE STANDARDS
LOOK FOR GIPS COMPLIANCE What are the Global Investment Performance Standards (GIPS)? - Voluntary standards governing the calculation and presentation of investment performance based on the ethical principles of fair representation and full disclosure. Purpose of the GIPS Standards - Ensure accurate and consistent data - Obtain worldwide acceptance of standards for calculating and presenting performance - Promote fair, global competition among investment firms - Promote industry self-regulation on a global basis http://gipsstandards.org
WHAT DO GIPS COVER? Select Components of GIPS - Return Calculations - Composite Construction - Disclosure Requirements - Presentation/Advertising - Asset Class Variations - Private equity - Real Estate
STEPS TO COMPLIANCE Definition of the firm Definition of discretion Create composites Calculate returns Presentation and disclosure Must maintain records and policies and procedures covering all aspects of performance and compliance. 24
WHAT IS A GIPS REPORT? Year Composite Gross Return (%) Composite Net Return (%) Sample 1 Investment Firm Balanced Growth Composite 1 January 2002 through 31 December 2011 Custom Benchmark Return (%) Composite 3-Yr St Dev (%) Benchmark 3-Yr St Dev (%) Number of Portfolios Internal Dispersion (%) Composite Assets ($ M) Firm Assets ($ M) 2002 10.5 11.4 11.8 31 4.5 165 236 2003 16.3 15.1 13.2 34 2.0 235 346 2004 7.5 6.4 8.9 38 5.7 344 529 2005 1.8 0.8 0.3 45 2.8 445 695 2006 11.2 10.1 12.2 48 3.1 520 839 2007 6.1 5.0 7.1 49 2.8 505 1,014 2008 21.3 22.1 24.9 44 2.9 475 964 2009 16.5 15.3 14.7 47 3.1 493 983 2010 10.6 9.5 13.0 51 3.5 549 1,114 2011 2.7 1.7 0.4 7.1 7.4 54 2.5 575 1,236 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 2010. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firmwide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.
GIPS REPORT (CONT)
GIPS 20/20 Project to update standards to make them more applicable to all types of asset managers, strategies, and investment vehicles Addressing pooled funds where a composite it not appropriate Needed to achieve GIPS mission 27
GIPS HANDBOOK, 3 RD EDITION Released December 2012 Most comprehensive review and revisions to date - 449 pages - Free download - PDF and ebook - Purchase hardcopy 28
RESOURCES The gipsstandards.org website: - Complete list of Guidance Statements - New Q&A database - Brochures and webcasts - Newsletter archive The GIPS Handbook Helpdesk (gips@cfainstitute.org) Twitter: @GIPS Certificate in Investment Performance Measurement (CIPM) www.gipsstandards.org 29
QUESTIONS
Jonathan A. Boersma, CFA Head, Professional Standards and Executive Director, Global Investment Performance Standards CFA Institute jonathan.boersma@cfainsitute.org jonathanboersma @jonathanboersma