Back in 1987 the Association for Investment Management Research, a financial trade group, cranked out the first set of formal industry guidelines for reporting portfolio performance.
By Maureen Nevin Duffy
December 2000
Institutional Investor Magazine
Why? “It wasn,t that professional investing practitioners were necessarily dishonest” in the 1960s and ,70s, says Claude Rosenberg, founder of Rosenberg Capital Management and a member of AIMR. Instead, his group wanted to develop standards by which money managers would report “to others as they would have others report to them.” AIMR dubbed the offering PPS, for performance presentation standards. The guidelines, which endorsed the reporting of all of a firm,s accounts, not just the top performers, gradually became accepted industry practice.
AIMR’s current mission is to develop a global version of the U.S. standards to govern the reporting of portfolio returns around the world, from Stuttgart to Singapore. The association terms this new group GIPS, or global investment performance standards.
As a recent spate of cross-border mergers testifies, asset management is becoming more and more of a global business. As a result, uniform standards of financial reporting are increasingly valuable. “No one wants asset managers to have to conform to two sets of standards , the U.S. standard and a foreign country,s standard,” says Herbert Chain, global partner in charge of investment performance services for Deloitte & Touche. “GIPS should allow asset managers to compete for assignments and mandates anywhere in the world without having to conform to local standards.”
AIMR has produced a template for what these standards could entail. Some countries have adopted this model, while others are modifying it to fit local practice. The goal, though, is one consistent, global norm: a “gold standard,” as AIMR puts it.
Specifically, GIPS follow most of the tenets of the AIMR PPS. For example, GIPS advocate the use of a time-weighted, rather than dollar-weighted, rate of return in calculating performance, to eliminate distortions caused by cash flows. GIPS also endorse monthly, instead of quarterly, portfolio valuations and call for trade-date accounting, as opposed to settlement-date accounting, which had been allowed under PPS because of software limitations in older systems.
“Widespread acceptance of a consistent set of performance standards should be of tremendous benefit to investment managers, both in expanding opportunities to market overseas and in reducing the costs of preparing performance presentations according to different methodologies,” says Lee Price, a former governor of AIMR and chief investment officer of AnalystOnRecord, an online performance measurement company.
More than 20 countries have agreed to the basic principles of GIPS. Some, including France and Italy, accept the AIMR model as written. Others, such as Japan and Germany, use national performance standards that they plan to submit to the Investment Performance Council, an AIMR committee, which will endorse the standards as country versions of GIPS. Turkey and Ukraine, among other developing markets, have expressed interest in joining the club.
To help facilitate the adoption of GIPS, the IPC, led by London-based John Stannard, European chief operating officer for Frank Russell Co., will try to find a common ground among differing country standards.
The U.K. offers its own investment performance standards, for example, U.K.-IPS (pronounced u-kips), and Japan has the Security Analysts Association of Japan’s SAAJ-IPS. The U.K. has agreed that GIPS-compliant firms will be considered U.K.-IPS compliant, according to David MacKendrick, chairman of the European Investment Performance Council, an arm of the IPC. Meanwhile, a 1999 survey of Japanese financial institutions by PricewaterhouseCoopers found that 64 percent expected to be GIPS compliant by the end of 2000.
“We,re performing a number of GIPS implementation projects throughout the world, including Germany, France, the U.K., Poland, Scandinavia and Italy,” says Deloitte & Touche’s Chain. “For example, we just assisted Allianz Asset Management in becoming compliant as a global firm with GIPS.”
U.S. managers, who generally conform to PPS, aren,t racing to learn the new global standards just yet. But Chain and others expect that to change soon. “I believe GIPS will become more important in the U.S. when pension consultants start asking money managers about compliance,” Chain says. “U.S. firms looking to manage money for a foreign institutional investor will ultimately want to meet the GIPS guidelines.”
