Desperate to avoid stifling legislation, investment managers are firm believers in voluntary compliance and self-regulation.
Among the numerous best practice guidelines and voluntary codes, the Global Investment Performance Standards (GIPS) represent one of the more comprehensive and dedicated efforts to harmonise performance measurement, reporting and data gathering for the benefit of the end investor (see box one below).
However, complying with the stringent GIPS standards, which were formulated by the Chartered Financial Analyst (CFA) Institute formerly the Association of Investment Management Research (AIMR), has not been an easy ride for investment managers.
“Compliance is always a difficult exercise which should not be underestimated,” says Gary Neale, head of performance measurement at Morley Fund Management. “However, with the right planning, resources, time frames and governance, it can be achieved fairly painlessly. The project is a significant piece of work which takes time and effort.”
Mr Neale reveals that Morley is in the final stages of its GIPS compliance project with a view to achieving full compliance and verification by the end of October.
“The process has been difficult and, at times, frustrating, but very rewarding in terms of process review and the amount we have achieved,” he notes.
Compliance costs
Fund managers also have to tackle the cost associated with GIPS compliance. Anthony Howland, chief executive officer of Performa, which assists fund managers in the UK with the GIPS standards, explains that investment houses may be anxious about the costs.
“The cost associated with achieving GIPS compliance is seen as the million-dollar question. For some of the larger global fund managers, that has been their overall project spend,” he reveals.
When fund managers are in the process of cost-cutting and streamlining their business operations following the extended bear market, the cost of GIPS compliance may prove too much of a drain on resources.
Mr Howland notes that some of the smaller and medium-sized fund managers are only just beginning to tackle compliance because they do not enjoy the economies of scale of the larger investment houses.
“The majority of bigger fund managers are compliant, but some of the middle and smaller sized are just starting out,” he says.
But concerns over the cost and complication of complying with GIPS is not enough to put investment managers off implementing the standards.
Indeed, many fund managers see adherence to the GIPS standards as providing a necessary competitive advantage.
Mr Neale explains: “I do not believe that GIPS can be ignored by any fund manager who is in, or wishes to move into, institutional business. Those who took up GIPS at an early stage may not have gained a competitive advantage out of early compliance, but I feel that those who are not compliant in January [in the UK], when the National Association of Pensions Funds performance standards cease to exist and are replaced by UKIPS, will be at a competitive disadvantage.”
The same competitive pressure is applicable in the US where around 86 per cent of institutional money managers are compliant. Brad Pacheco, spokesman for the $164bn (e134bn) California Public Employees’ Retirement Sys-tem, says: “When we search for investment managers we require them to be compliant with AIMR’s Performance Presentation Standards [PPS]. The PPS standards are for US firms while the GIPS are newly created to expand the standards to international firms. So we support both of these standards for our managers.”
Despite many fund managers still going through the compliance process, the CFA Institute and the Investment Performance Council (IPC), which monitors and formulates GIPS, has proposed a set of changes to the existing standards.
Gold standard
The GIPS gold standard (see box two above) aims to further standardise regulations in different jurisdictions and incorporates provisions for more asset classes including private equity and hedge funds.
Alecia Licata, vice-president of investment performance standards at the CFA Institute, says: “The proposed improvements to the GIPS standards represent an improved version of the original standards. The gold standards promote high quality performance measurement and presentation practices that firms around the world should adopt.”
As with the original GIPS, the CFA Institute is seeking feedback from the industry on the gold standards.
Ms Licata says: “As the deadline for comments on the proposal is August 1, we have only received a handful of industry comments which are generally supportive of the goals for the proposal.”
However, Ms Licata anticipates that “the gold GIPS proposal will generate many comments from the industry”.
Such feedback from investment managers is crucial to the success of the gold standards.
Performa’s Mr Howland says: “Investment managers have to be vocal if they want the standards to work for them.”
And Morley’s Mr Neale agrees: “I wholly support the growth of the standards and have actively reviewed and passed many comments on the gold GIPS draft. I would encourage anyone with an interest to do [the same] to help build and mould the standards into an industry agreed format.”
Once the gold are standards in place in 2006, it is highly likely that the IPC and CFA Institute will embark on a new phase of GIPS enhancements. Mr Howland explains that as the investment management industry changes and evolves, so the regulations and best practice guidelines must evolve too.
“Absolutely [there will be further changes to GIPS] and this is the right thing. This is an evolutionary process; the industry is evolving all the time.”
User involvement
Without cooperation and active involvement in the formulation of the GIPS standards, fund managers face the prospect of guidelines and best practice that are inappropriate or impossible to meet.
Further, to keep the credibility of self-regulation, fund managers must be keen to adhere to such standards and contribute to their creation.
The purpose of GIPS is to protect the end investor and at a time when the financial services industry is viewed with distrust and suspicion, investment houses would do well to give the standards priority.
Box 1: GIPS explained
The Global Investment Performance Standards were first introduced in 1999 by the Association for Investment Management and Research (AIMR).
AIMR created the Investment Performance Council (IPC) to serve as a formal infrastructure for GIPS and to operate as an independent think-tank for performance measurement, presentation and research, and to develop new performancestandards as needed by the industry.
AIMR, which recently changed its name to the Chartered Financial Analyst (CFA) Institute, aims “to lead the investment profession globally by setting the highest standards of education, integrity, and professional excellence”, and seeks to bring all investment standards under one global umbrella.
GIPS have several key characteristics:
- Ethical standards for investment performance presentation to ensure fair representation of an investment firm’s performance history.
- GIPS require managers to include all actual fee-paying discretionary portfolios in composites defined according to similar strategy and or/ investment objective and require firms to show GIPS-compliant history for a minimum of five years or since inception of the firm if less than five years.
- GIPS require firms to use certain calculation and presentation methods and to make certain disclosures along with performance record.
- In cases where local or country laws conflict with GIPS, the local laws apply but GIPS require a full disclosure of the conflict.
- Firms from any country may come into compliance with GIPS.
Box 2: GIPS gold standard
In February 2004, the IPC and the CFA Institute (formerly AIMR) issued a series of changes to GIPS known as the gold standard.
Some of the most significant gold GIPS enhancements are that a firm must:
- Provide a compliant list to all prospective clients;
- Have written polices and procedures used for compliance;
- Abide by all guidance and interpretations, including the GIPS handbook;
- Conduct portfolio valuations at calendar month-end;
- Disclose any discretionary use of a sub-adviser;
- Disclose a description of the investment objectives, style and strategy of the composite
- input data
- calculation methodology
- composite construction
- disclosure and presentation
- reporting
Neal: ‘compliance is a significant piece of work which takes time and effort’
Licata: ‘gold GIPS proposal will generate many comments from the industry’
