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Performance Measurement: Contemplating AIMR Compliance

In the intensively competitive world of institutional money management, where money manager performance is measured to the basis point, returns logged by stable value funds have long been an issue of secondary importance. Safety and preservation of principal come first. (See "What Plan Sponsors Want")

Even when stable value returns have been held up to review, they've always been evaluated in accordance with the industry's unique book-value accounting methodology, which allows shareholders to withdraw their account balances at book value regardless of the market value of the securities in the fund itself.

Now, though, some members of the stable value community are pushing for stable value managers to report their performance on a total return basis, just like managers in other sectors of the market. Their argument is that without those numbers, plan sponsors can't accurately evaluate their fund's success, nor determine whether its results can be attributed to the fund's specified investment policy, manager expertise in executing that policy, or luck in the form of favorable interest rate levels.

Addressing attendees at the Stable Value Investment Association's 2000 National Forum in Washington, D.C., Victoria Paradis, a vice president with J.P. Morgan Investment Management and member of the SVIA Task Force on performance measurement, said the task force is prepared to recommend that the industry adopt total return performance reporting for plan sponsors, while continuing to offer book-value reporting for plan participants. Doing so, she said, would help to insure that stable value remains a vital investment option for defined contribution plans.

Paradis also argued that stable value managers should seek to comply with the performance presentation standards (PPS) developed by the Association for Investment Management and Research (AIMR) - the standards that have been embraced by most institutional money managers in other sectors of the marketplace.

"We're walking down the sidewalk (toward total return reporting) and about to ring the doorbell," Paradis said. "The question is, do we move in (with AIMR), or build a house next door?"

Iain McAra, global head of performance measurement for J.P. Morgan Investment Management, and a member of the AIMR-PPS Verification Subcommittee, said the technical difficulties associated with assigning market values to stable value assets available to shareholders at book value can be overcome. (See "The ABCs of Measuring Stable Value Performance" in the Third Quarter 2000 issue of Stable Times).

McAra also said the timing for aligning with AIMR could not be better, since that organization is in the midst of reconciling the PPS standards it has developed for U.S. money managers with the Global Investment Performance Standards (GIPS) it has developed for global money managers.

One challenge the industry will have to hurdle, McAra conceded, is the requirement that return data be available from January 1, 1993, forward, before a money manager can claim compliance with AIMR PPS. Attempting to recreate stable value performance data that far back now, he said, could be a problem—and all the more reason for the industry to begin working with AIMR now to arrive at a solution.

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