Advocacy group pushes for performance report standards

In the race to attract new clients and fresh mandates, fund management companies try to get ahead by calling attention to what sets them apart from the rest. One area where uniformity would be an advantage is in performance reports. And thatÆs where the Global Investment Performance Standards (Gips) come in.

Gips are already practiced by many of the top fund management companies worldwide û Goldman Sachs Asset Management, Fidelity Asset Management, JPMorgan Asset Management, Invesco, and Templeton Asset Management to name a few. A PricewaterhouseCoopers survey of 94 global fund management companies in 2004 showed that 90% of them were Gips compliant.

The next step, GipsÆ advocate says, is to get more fund management companies to become compliant, especially among the smaller players.

ôClients of fund management companies are positive on Gips, especially institutional clients, and investment consultants. Gips allow them to take a deep breath and not have to do some of the work that they would normally have to do to verify the performance reports. Instead of them having to ask a lot of questions, all the answers are laid out,ö says Jonathan Boersma, Virginia-based executive director for Gips at the CFA Institute Centre for Financial Market Integrity, which advocates investor protection and high professional standards.

Gips serve as guidelines for fund management companies that are reporting performance to prospective clients.

For example, Gips require that a fund management company present a minimum of five years of annual investment performance that is compliant to the standards, and then an additional annual performance until it presents up to 10 years in total. There are provisions for companies that have been in existence for less than five years.

Other examples of Gips are including all actual fee-paying, discretionary portfolios in composites as well as presenting gross-of-fees returns, net-of-fees returns, and total assets.

Without Gips, a fund management company can easily manipulate performance data to show only portfolios that have been performing well or to include only years when portfolios were posting returns.

ôGips play a very important role in protecting institutional investors. When a fund management company gets a mandate from an institution, that is not as tightly regulated compared with the retail market,ö says Karl Lung, president of the Hong Kong Society of Financial Analysts (HKSFA), which is CFA InstituteÆs local partner in Hong Kong. Local partners in 26 countries worldwide have endorsed Gips and are helping educate fund management companies, regulators, and investors about the importance of such standards.

Gips come under review for a possible revision every five years, and the next one is due in 2010. Among the issues being reviewed are the provisions for real estate and private equity to see how those asset classes are addressed in the standards, looking at alternative investment strategies and issues such as performance fees and side pockets that are not specifically addressed in the standards, and working on an approach to looking at risks.

ôMeasuring risk is a difficult area because I donÆt think anybody, academics or practitioners alike, can agree on a single or a couple of risk measures that will be appropriate in every instance,ö Boersma says. ôI think we will need a flexible type of framework in dealing with that.ö

One issue in the ôvery earlyö stage of review is the possibility of requiring fund management companies to present existing clients with ongoing Gips reporting.

Recently, the HKSFA conducted a Gips survey among 41 fund management companies, independent investment advisors, bank subsidiaries and insurance company subsidiaries, and 63% responded. Among the respondents, 80% said they were already Gips compliant and the rest said they intend to comply with the standards eventually.

One sign that Gips are gaining ground in Asia is the China Securities Regulatory CommissionÆs (CSRC) recommendation that fund management companies that offer QDII adopt those standards, says Boersma. ôThatÆs a really strong statement from a regulator on the importance of Gips.ö

HKSFAÆs Lung says there is now a simplified Chinese version of Gips, and thatÆs being circulated to fund management companies, institutions and other key industry players in the mainland. Fortis Haitong Investment Management is an example of a fund management company in China that is Gips compliant.

The CFA Institute doesnÆt charge royalties or any other fees for the fund management companies to use the Gips guidelines. The cost to the companies include the man-hours devoted by their staff in preparing the reports, purchasing the Gips software from third-party vendors, and possibly hiring auditors to check the reports.

The cost of the software can be hefty, depending on the size of the firm and its needs. In Hong Kong, for example, the Gips software is available at around HK$70,000-HK$100,000 for a small firm, but it can amount to ômillionsö for a huge firm.

ôDespite the costs, the (fund management) firms see a great benefit in adopting the standards,ö Boersma says. ôThe firms say their internal operations are much more efficient and effective, they have a tighter control over portfolio management, and the integrity of the data they are using is higher.ö