Issue: June/August 09
Editorials

PERFORMANCE RANKINGS

Apples and pears

The meaningless comparisons will stop if the moves by Asisa, for widespread Gips compliance, gain traction. It’s in the interests of retirement funds that they do.

Hey presto! No sooner had the warts in the rankings of investment performance been highlighted than the Association for Savings & Investment SA jump-started essential remedial action. If the endeavour receives the cooperation it deserves, the warts will be excised. For the warts are far from benign, given the way that these rankings surveys are used and abused to facilitate short-cut decisions in the selection of fund managers (TT March-May ’09).

In truth, the timing is coincidental. Asisa has obviously been working hard, and for some time, to launch the adoption of Global Investment Performance Standards (Gips) in SA. Endorsed internationally by the institute of certified financial analysts, Gips is a set of ethical principles to achieve full disclosure and fair representation of investment performance.

Put bluntly, it’s to avoid asset managers from cherry picking amongst their funds that they submit for performance rankings – leading to lopsided surveys that can mislead investors and potential investors by subordinating data accuracy to marketing temptation. It’s made worse by an obscurity of guidelines and absence of verification that defeat comparisons of like with like.

Put nicely, the objectives of Gips are to

  • Ensure accurate and consistent data;
  • Obtain worldwide acceptance of standards for calculating and presenting results;
  • Promote fair, global competition amongst investment firms, and
  • Promote industry self-regulation globally.

The Gips standards are intended to benefit the investing public by

  • Enhanced ability to compare performance between firms and strategies;
  • Consistency in calculation and presentation of performance results, e.g. frequency of valuation, treatment of large cash flows and handling of accruals;
  • Full disclosure of important details on performance data presented e.g. fees, composite construction criteria and dispersion of returns;
  • Recognising firms for adherence to industry best practice;
  • Strengthened internal processes and controls;
  • Improved risk management.

Gips represents an attempt at industry selfregulation, offering guidelines on how to calculate performance rather than impose standards, points out Sunette Mulder of Asisa which is the Gips country sponsor for SA. It will place an additional load onto asset managers, she acknowledges, and it won’t come cheaply because they’ll need to put in place the teams, processes and systems for implementation. Why then should the go for it?

There’re at least two main reasons, suggests Mulder. For one, it will improve the firms’ internal processes. For another, some can’t be seen not to be adopting the standards when others are. “Trustees of retirement funds must ask for it,” she advises, and it will take off. “We must get to the point where investors demand Gips compliance as a condition to give asset managers their business.”

Gips requires, amongst other things, verification of data. This could normally be done by auditors, or by consulting actuaries, so long as they’re familiar with the standards. Also required, for proper comparison, is the grouping of data into appropriate composites. For example, a fund with a core equity composition whose benchmark is the JSE capped or shareholder-weighted index should be grouped in that particular composite.

The full Gips standards are reviewed five-yearly. A review is presently underway (see box). It closes for public comment on July 1, after which the comments are considered for finalisation by year-end and publication in January. So that asset managers have a year to align themselves with the new standards, they’ll be effective from January 2011.

KEY ISSUES IN GIPS 2010

Proposed revisions include:

  • Investment firms will need to disclose, as part of the compliance statement, whether their data have been verified;
  • Firms are to report portfolio performance based on fair value accounting;
  • Disclosure, as part of the composite description, must include sufficient information to allow a prospective client to understand the relevant risks of the composite strategy;
  • The scope and purpose of verification, and well as the required verification procedures, are clarified to increase the understanding and consistency of verification.