News
FOCUS - Winter 2003/4
The Importance of GIPS to Third Party Performance Providers
Industry comment by Simon Wilcox, Northern Trust
GIPS compliance continues to be important for the investment management community as it strives to provide meaningful and reliable performance numbers and other relevant statistics to the investing public. In the early years of AIMR-PPS and more recently with GIPS, the marketing advantage of being in compliance and then to have an independent verification of the claim remained at the forefront of people's minds.
Much time, effort and expense has been spent on setting up firm definitions, building track records and retrieving documentation and Performa has been instrumental in supporting that process.
However, the cost of compliance and verification is expensive. What happens when organisations continue to spend money verifying numbers where performance is poor? Out-performance, rather than the reliability of the numbers themselves determines whether or not you win the business. What also happens, when the process matures and the ongoing maintenance becomes rather tedious?
More emphasis is now being placed on improved internal procedures brought about by the introduction of the Performance Standards. This can only be good news for all concerned. The investment management community has seen improved information flows between departments, examples being:
- Notification, documentation and implementation of benchmark changes
- Greater appreciation of the impact of cashflows on performance through the use of composites
- A clearer understanding and communication of investment management process changes
A natural conclusion is that third party performance providers have little interest in GIPS as there are no investment management capabilities being sold. This could not be further from the truth. Third party providers are the definitive source and provider of performance returns (for both portfolio and benchmark) and significant time is spent with the investment managers reconciling performance returns and agreeing differences in methodology.
Therefore, if the requirements and recommendations of GIPS are followed by all, at least uniformity of market values and returns can be achieved and time and effort saved in the process. As a consequence, it is vital that third party providers follow the code of the Standards and continue to remind clients about the significant advantages of an organisation presenting compliant performance results.
Attribution Standards are one of the latest topics up for discussion. Already there are mixed views on both the relevance and interest of such a set of Standards. Despite the fact that it is difficult to establish a set of guidelines for the appropriate formulae, disclosures aimed at minimising the confusion around presented results can only be seen as a positive move. Quite often with attribution results, the mathematics is sound, but the very fact that an "other" item arises or that that the excess return differs to the third party provider leads to the conclusion that everything is wrong. Hence the illusion of incompetence within a performance function starts to develop.
In conclusion, therefore, we should continue to remember the improved professionalism imposed upon our organisations and performance functions introduced through the Code and Ethics of the Performance Standards. The marketing advantage of presenting compliant results is obvious, but as more and more firms become compliant, improved internal efficiencies become the key drivers.