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Performance Presentation Standards…They May Not Be As Inflexible as You Think

A recap of the April, 2000 speech at the IIR GICs 2000 conference, given by Iain McAra, Global Head of Performance at J.P. Morgan Investment Management and a leader in the global performance measurement industry¹

Ian McAra's talk at the recent industry conference in Palm Springs thoroughly covered many of the issues that the stable value industry faces in its performance measurement and presentation project. Given the scope and magnitude of the issues he covered, the Editorial Board of Stable Times considered a recap of his talk to be of value to the readership. His talk covered the global framework for conceiving Standards for Performance Presentation, and how they might be relevant for the Stable Value industry.

Timeline

In 1987, an initial Performance Presentation Standard (PPS) report included the following quote: "By acting now, we have an opportunity to determine proper guidelines rather than let the regulatory authorities resolve the matter for us." To champion the project, the investment management industry chose its self-regulatory body, the Association for Investment Management and Research (AIMR). After several years in development, the first edition of AIMR-PPS was released in 1993 as a 70-page document for the North American marketplace. In the meantime, half a dozen other countries began developing their own standards. AIMR agreed to sponsor the compilation of a global set of standards and established a global subcommittee in 1995. In 1997, the second edition of AIMR-PPS was released; by then it had grown to 140 pages. In 1999, we saw the approval of the Global Investment Performance Standards (GIPS), which will eventually replace AIMR-PPS².

Global Investment Performance Standards

Committee members were drawn from experts in the field, including investment managers, consultants, plan sponsors, banks and Performance Measurers. The membership included firms of all sizes and representatives from at least 28 countries.

The initial construction of GIPS was deliberately kept as straight forward as possible. The committee used the AIMR-PPS as a starting point to develop a standard that represents ONE hurdle level that is achievable. GIPS present guidelines for equity and fixed income only. The standards are expected to be dynamic and developing. GIPS do not address all the other asset classes that AIMR-PPS includes, such as real estate or private placements. The idea is that GIPS will be the common denominator, and that a GIPS "plus" concept will develop to include other asset classes and unique country issues.

Investment Performance Council

Just recently, on March 9, 2000, AIMR established the Investment Performance Council (IPC) to control PPS in all its forms. The IPC is primarily concerned with establishing GIPS as the Gold Standard, administering and promoting the investment PPS.

See Figure 1.

How does Stable Value fit in?

There is clearly potential for Stable Value to be represented as an additional asset class within the framework. The ability for Stable Value to be incorporated appears to be high. The structure recognizes the need for Technical subcommittees and expansion beyond the current asset class coverage.

Objectives of the Performance Standards

1. To create a worldwide standard with full disclosure
2. To ensure accurate and consistent presentation within a period and between periods
3. To promote fair competition globally without creating unnecessary (or unrealistic) barriers.

In other words, the objective is to create a standard that is full and fair BUT does not demand unattainable and unnecessary levels of information for some participants as long as the other objectives can be met.

Lessons Learned

1. The key is to educate the recipients as to what the standards are and how they should be approached. They are NOT a cookbook to follow an exact recipe. A number of issues are 'add to taste' (and then disclose how much!). The standards would be unwieldy if every nuance was covered with an opinion. With respect to GIPS, AIMR has set aside a significant budget for education on the standards.
2. Guidance and interpretation will be needed however well structured your standards. There is always an interpretation or nuance you did not think to cover. Don't write them in but be ready with interpretation.
3. Be concise; it makes things easy to remember. Exact detail really does confuse and makes people think of the standards as an exact recipe rather than a set of guidelines to be used. The flip side is of course that where there is room for interpretation or manipulation, disclosures (footnotes) should be provided.
   From the AIMR-PPS: "Presenters have the responsibility to include disclosures that contain material information not covered in the Standards. No portion of the Standards should be interpreted as inhibiting managers from providing supplemental information that would clarify the firm's investment results."
4. Standards are 'minimum requirements'. Do "this" and you are okay. BUT if it helps explain your circumstance, provide disclosures and / or present Supplemental Information.

There are 10 key characteristics in the standards, which we will not reproduce here. Of most relevance are the following:

Definition of Entity

Whether GIPS or AIMR-PPS, the concept of what ENTITY is implementing and adhering to the Standards is important. What constitutes that 'Entity' must be disclosed and must follow some requirements in the standards. Having determined this, the ability to claim compliance with the Standards relates to the Entity in its entirety.

The concept of Entity drove the one small reference to stable value that excluded GICs in the 2^nd version of AIMR-PPS. This is because at the time, there was controversy within the stable value industry regarding the proper measurement value for these contracts (book or market value). Since AIMR found our issues difficult to deal with, they, as a band-aid, said that investment management firms, as an entity, can comply with AIMR-PPS even if they didn't follow the prescribed approach for GICs that is required for all other asset classes (specifically marking GICs to market). If it weren't for this exclusion, managers of equity and fixed income strategies that also had a GIC management business could not claim that their firms were in compliance with AIMR-PPS unless they marked their GIC portfolios to market all along.

Effective Date

To roll out new concepts, the Standards typically start with a 'recommendation' that in time will become mandatory. This provides lead-time for firms to change their methods and systems.

Different Target Audiences - a Useful Analogy

The early stable value measurement debate focused on market value versus book value reporting. After much debate, the task force concluded that the target audience for each was different, therefore different measures were appropriate for different audiences. Other industries target performance reporting to different audiences. For example, the SEC requires mutual fund performance data that is net of fees because they focus on the ultimate return for individual investors. Since AIMR is interested in presenting performance that assesses a manager's ability, AIMR requires returns that are gross of investment management fees. To be compliant with AIMR, investment managers report gross of fee results, and then to satisfy SEC they also present the net of management fee returns; neither precludes the other, they complement each other. The different sets of data are relevant to different audiences. The same concept allows for stable value managers to present Book Value returns, which are relevant to the participant and Market Value returns, which indicate the abilities of the manager with the underlying assets.

Composite Construction

AIMR requires (mandatory) that all actual (no model or hypothetical), fee-paying, discretionary accounts must be placed into Composites. What is a composite? To quote from the AIMR-PPS handbook: "a composite is an aggregation of a number of portfolios into a single group that is representative of a particular investment strategy, style or objective." This is an area that can be confusing as people think that a composite has to be at a minimum an aggregation of 2 things if not more. In the case of AIMR, a composite need only have one constituent in it; therefore a Composite 'of one' is perfectly valid.

In addition, a level of materiality should be exercised when determining the different composite definitions and what constitutes a different style and objective from another. In exercising that flexibility all you have to do is define and maintain the composites according to reasonable guidelines (which you should document), and apply the discretion and the definitions consistently across all the portfolios and composites and across time.

The full list of Composites that constitute the entity must be made available, so each composite can be placed in relation to the other composites. There are a number of other requirements relating to the number of portfolios in a composite, the percentage of assets the composite represents, etc., to paint a full picture of the specific composite in relation to the rest of the Entities business.

GIPS Presentation and Reporting Requirements

• Five year minimum reporting period
• Number of portfolios
• Assets and % of total assets under mgmt per composite
• Dispersion measure
• Composite creation date
• Relevant benchmark or explanation
• Recommended - Relevant risk measure

Effective Date

The presentation issues around effective date have caused concern for the Stable Value industry. The standards require several years of back data and the ability to mark to market, which may not necessarily have been captured by stable value managers. It would appear that the inability to comply with this precludes ability to claim compliance. However, since Stable Value would be being treated as an additional and new asset class to join the core Standards, there is potential for an effective date to accompany the incorporation of this class, i.e. a point in time from which all the necessary data is required. Prior to that date, a subset (with the appropriate disclosures) of the information will be sufficient if the totally compliant data is not available.

Relevance?

So can the standards be of use for Stable Value? Certainly they are flexible, certainly they do not preclude the inclusion of additional information. We may also be able to get the effective date we need to make the standards accessible for all managers.

Most importantly, the SVIA Task Force has done a significant amount of the 'spade-work' by drafting a set of presentation guidelines for our industry that build upon an AIMR-PPS base.

Benefits

There are a host of benefits that the stable value industry will gain by adopting PPS, including:

• A level playing field when presenting each manager's ability
• Incorporation of this significant asset class within the investment management industry
• Increased global awareness of asset class
• Better recognition by advice models

Next Steps

• Stable Value, through the work that the SVIA task force has carried out, could become one of the additional asset classes incorporated through the dynamic development of GIPS "plus" and the IPC.
• Since the IPC council is very new, we have a chance to be involved from ground zero if we make contact and have a clear idea of our requirements and goals.
• We understand that key contacts at the IPC welcome our initial contact... So let's get going…Volunteers?
• We need to begin discussion between ourselves and the relevant Standards setting committee. Potentially a new Product group can join with those already incorporated in the AIMR-PPS; then take the journey potentially to GIPS "plus" and maybe into Core GIPS.

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